Introducing Unobserved Heterogeneity in Earnings Mobility

Abstract

This paper introduces and describes unobserved heterogeneity in earnings quintiles transitionmatrices in the US. Unobserved heterogeneity is found to play a crucial role in earnings mobility.Each individual is attracted, given his characteristics, towards a specific zone of the distribution.At the stationnary equilibrium, the earnings quintiles distribution is thus segmented. Interestingly,while the level of earnings mobility has remained quite stable since 1970, the width of thesezones has decreased, such that this segmentation was more pronounced in the 80’s and the 90’sthan in the 70’s, especially in the middle of the quintiles distribution.