Labor Income Dynamics in Chile

Abstract

This paper provides an empirical analysis of individual earnings using data from the personal income survey Encuesta Suplementaria de Ingresos. We find that the predictable component of income is humpshaped over the life-cycle, and that there are strong effects from education. The unpredictable component of income can be described by a very persistent permanent shock and a transitory shock. Our estimates are built from a panel of cohorts, so we use US data from the Panel Study of Income Dynamics (PSID) to provide a magnitude for the underestimation of variances. Surprisingly, we find that the variance of the permanent shock in Chile is around one fourth of the variance in the US, a result, perhaps, of the relative rigidity of the Chilean labor market.