February 2009

Fluctuations in Individual Labor Income: A Panel VAR Analysis

Ivan Vidangos

Abstract:

This paper studies variation in individual labor income over time using a panel vector autoregression (PVAR) in income, the wage rate, hours of work, and hours of unemployment. The framework is used to investigate how much of the residual variation in labor income is due to residual variation in the wage rate, work hours, and unemployment hours. I also explore the dynamic effects of unanticipated changes in each of the variables in the system, investigate their interactions, and assess their contribution to short-run and long-run income movements. The model is estimated on a sample of male household heads from the Panel Study of Income Dynamics (PSID). I find that innovations in the wage rate and work hours (conditional on unemployment) are about equally important in the short run. Wage innovations are very persistent, while the effect of changes in hours is mostly transitory. As a result, the wage rate is much more important in the determination of income movements in the long run. Innovations in unemployment have a relatively small, but very persistent effect on income which operates through the wage rate.

Full paper (Screen Reader Version)

Keywords: Earnings dynamics, income determination, wage shocks, unemployment

PDF: Full Paper

Disclaimer: The economic research that is linked from this page represents the views of the authors and does not indicate concurrence either by other members of the Board's staff or by the Board of Governors. The economic research and their conclusions are often preliminary and are circulated to stimulate discussion and critical comment. The Board values having a staff that conducts research on a wide range of economic topics and that explores a diverse array of perspectives on those topics. The resulting conversations in academia, the economic policy community, and the broader public are important to sharpening our collective thinking.

Back to Top
Last Update: September 18, 2020