There has been a significant flattening (slower growth) of life-cycle earnings profiles for successive cohorts of American men entering the labor market since the late 1960s and a significant upward shift in the profiles of occupational mobility for more recent cohorts. Despite the importance of this observation for public as policy as well as for household savings and labor supply decisions, the phenomenon has not been seriously studied. Using a novel stochastic dynamic general equilibrium model, this research will measure what fraction of the change in the life-cycle profiles of earnings and earnings inequality is accounted for by the economic forces that drive the increase in occupational mobility. The key idea of the theory is that a substantial fraction of the rise of average life-cycle profile of earnings is explained by rising average occupational experience over the life-cycle of a cohort. Preliminary results suggest that an exogenous increase in occupational mobility leads to lower average occupational experience over the cohorts life-cycle and a flatter life-cycle earnings profile. This mechanism remains important in an equilibrium model that allows for endogenous occupational mobility. The data for this research will come from the Social Security Administration.
The (i) discovery of a new fact that uniquely characterizes changes in the US labor market over the last three decades, (ii) an innovative research strategy of studying cohort based life-cycle profiles of earnings, while most of the literature has focused on investigating changes in cross-sectional profiles, (iii) providing a theory that simultaneously accounts for three important changes in the labor market over the last three decades: a sharp increase in the within-group earnings dispersion, a significant flattening of the life-cycle profiles of earnings, and a substantial increase in occupational mobility, characterize the scientific merit of this research project. This research will provide a new empirical evidence important for distinguishing between various theories of changes in the wage structure as well as develop and calibrate a new and innovative model of the labor market. The results of this research can be used to study the effectiveness of government policies to aid workers adapt better to labor market changes. The research will inform the debate on the causes of the increase in wage dispersion. The research project will substantially advance our understanding of the labor market and public policies towards the labor market.
