Quantitative Economics
Journal Of The Econometric Society
Edited by: Stéphane Bonhomme • Print ISSN: 1759-7323 • Online ISSN: 1759-7331
Quantitative Economics: Jul, 2012, Volume 3, Issue 2
Labor income profiles are not heterogeneous: Evidence from income growth rates
Idiosyncratic labor incomes are typically modeled either by stochastic processes
with heterogeneous income profiles (HIPs) or restricted income profiles (RIPs).
The HIP assumes that individual labor income grows deterministically at an unobserved
rate and contains a persistent but stationary component, while the RIP
assumes that income contains a random walk, a stationary component, and no
unobserved deterministic growth-rate component. I show that if idiosyncratic labor
income contains a persistent component, a deterministic household-specific
trend, and a random-walk component, then all of the components can be identified
in small unbalanced panels. Using data on idiosyncratic labor income growth
from the Panel Study of Income Dynamics, I find that the estimated variance of
deterministic income growth is zero, that is, the HIP model can be rejected. The
RIP model with a permanent component cannot be rejected. This result is important
for an appropriate choice of modeling the heterogeneity in individual incomes
and calibrating/estimating macromodels with incomplete insurance markets
and heterogeneous agents.
Keywords. Idiosyncratic income processes, heterogeneity, labor income risk.
JEL classification. J31, D91, E21.
with heterogeneous income profiles (HIPs) or restricted income profiles (RIPs).
The HIP assumes that individual labor income grows deterministically at an unobserved
rate and contains a persistent but stationary component, while the RIP
assumes that income contains a random walk, a stationary component, and no
unobserved deterministic growth-rate component. I show that if idiosyncratic labor
income contains a persistent component, a deterministic household-specific
trend, and a random-walk component, then all of the components can be identified
in small unbalanced panels. Using data on idiosyncratic labor income growth
from the Panel Study of Income Dynamics, I find that the estimated variance of
deterministic income growth is zero, that is, the HIP model can be rejected. The
RIP model with a permanent component cannot be rejected. This result is important
for an appropriate choice of modeling the heterogeneity in individual incomes
and calibrating/estimating macromodels with incomplete insurance markets
and heterogeneous agents.
Keywords. Idiosyncratic income processes, heterogeneity, labor income risk.
JEL classification. J31, D91, E21.
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Supplemental Material
Supplement to "Labor income profiles are not heterogeneous: Evidence from income growth rates"
Journal News
March 5, 2024
Announcing the New Journal Editors
The terms of the Editors of the Econometric Society's three journals end June 30, 2025. We are pleased to announce the incoming Editors and to thank the outgoing Editors for their excellent and continuing service.
Econometrica: Since 2019, Guido Imbens has served as the 14th Editor of Econometrica. On July 1, 2025, Marina Halac will become the Editor.
Quantitative Economics: Stéphane Bonhomme has been the Editor of Quantitative Economics since 2021. His successor will be Bernard Salanié.
Theoretical Economics: The Editor of Theoretical Economics since 2021 has been Simon Board. Taking over for him in July 2025 will be Federico Echenique.
Guido, Stéphane, and Simon have been outstanding Editors. We are grateful to them for the work they have done and will continue to do, and we look forward to further congratulating them next year. We believe Marina, Bernard, and Federico will be outstanding successors and we thank them in advance for their service.
Finally, we are grateful to Larry Samuelson for chairing all three search committees, and we thank the search committee members for their hard and fruitful work:
Econometrica: Christian Dustmann, Lars Hansen, Alessandro Lizzeri, George Mailath, Ariel Pakes, Helene Rey, and Elie Tamer.
QE: Kate Ho, Michael Keane, Felix Kubler, Whitney Newey, and Frank Schorfheide.
TE: Jeff Ely, Johannes Horner, Gilat Levy, Meg Meyer, and Ran Spiegler.
