Scandinavian Working Papers in Economics

SSE/EFI Working Paper Series in Economics and Finance,
Stockholm School of Economics

No 7: Earnings Mobility and Distribution: Comparing Statistical Models on Swedish Data

Mårten Palme ()
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Mårten Palme: Dept. of Economic Statistics, Stockholm School of Economics, Postal: Stockholm School of Economics, P.O. Box 6501, 113 83 Stockholm, Sweden

Abstract: There are at least two instrumental motives for studying earnings mobility. First, to extend the analysis of income distribution to more than one time period. Second, to predict future individual earnings. For both these motives, adequate models of earnings mobility are needed. This study compares the usefulness of different statistical models (human capital and stochastic models), previously used to estimate earnings mobility, in predicting future individual earnings and earnings distributions. Special attention is given to the effect of considering individual heterogeneity. A 20- year panel, collected from the Swedish Level of Living Survey, of 651 employed men is used. The models are estimated on 17 periods and predictions are made for 3. It is found that a dynamic human capital model gives the best predictions of individual earnings.

Keywords: Life cycle earnings; lifetime earnings distribution; random coefficient models

JEL-codes: J30; J31; J24

36 pages, January 1994

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