2 Review of the literature

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Based on the U.S. Panel Study of Income Dynamics (PSID), Gottschalk and Moffitt (1994) found that both a growing instability of earnings and a widening dispersion of permanent earnings of White, male workers contributed to the increasing degree of wage inequality that occurred from the late 1970s to the 1980s, although the latter element was about twice as large. Using a different methodology applied to the same dataset, Haider (2001) found that the transitory component increased during the 1970s, while the variation in permanent earnings increased substantially during the early 1980s among U.S. males. He determines that the persistent variation is only mildly counter-cyclical, while earnings instability is strongly counter-cyclical. In an updated study drawing from the PSID and employing a different methodology, Moffitt and Gottschalk (2002) discern a secular rise in the permanent component until 1997, and note a rather dramatic increase in the transitory component during the 1980s, which is followed by a decline after 1991.

The Canadian literature on earnings variability is fairly sparse, largely due to (until recently) a lack of longitudinal data that are required for analysis of earnings dynamics. Consequently, the only existing work is based on administrative data files. ² Baker and Solon (2003) and Morissette and Ostrovsky (2005) are the closest Canadian work involving the decomposition of earnings variation. Baker and Solon (2003) employ data merged from the Canada Revenue Agency's T-1 tax forms (filed by individuals) and T-4 Supplementary Tax Files (submitted by employers) covering the period from 1976 to 1992, and they include only male workers having positive earnings for at least nine consecutive years. Using a parametric time-series econometric methodology, they estimate the covariance structure of the time series processes generating the earnings data. One of their empirical results is point estimates of total-earnings variation, as well as the permanent and transitory components. Morissette and Ostrovsky (2005) also use the Longitudinal Administrative Database file to look at the instability of family earnings and total income over the separate periods 1986-to- 1991 and 1996-to-2001. They also find that permanent earnings inequality among families widened considerably between these two periods.

Despite sharing a common theme of decomposition of the variation of earnings with Baker and Solon (2003), our objectives and methodology are different. The underlying statistical methodology that we employ for the decomposition process is relatively simple in its specification of inter- temporal earnings changes. Our analysis includes both genders and consists of break-downs into different age groups, and our dataset covers a later period, specifically from 1982 to 2000. We also seek to estimate empirical relationships between the variance components and the macroeconomic indicators.

 

² The Survey of Labour and Income Dynamics is another relatively recent available longitudinal database, but it has not been used as yet to address the issues covered in this paper. Its first cohorts date to 1993, and individuals are rotated out of the sample after no more than six years.