Trends in the Transitory Variance of Earnings in the United States

We decompose the rise in cross-sectional variance of male annual earnings in the United States from 1969 to 1996 into permanent and transitory components. We find that the variance of permanent earnings began rising in the the late 1970s and has continued to rise in the 1980s. The variance of transitory earnings also rose in the 1980s but declined in the 1990s. There are lags in the earnings process which require a structural model to pinpoint the exact calendar times at which the changes in trends occurred. Copyright Royal Economic Society 2002.