Characterizing Life-Cycle Dynamics of Annual Days of Work,Wages, and Cross-Covariances

Abstract

This paper investigates the dispersions in days worked and wages by adapting a novel semi-parametric specification that minimizes assumptions about life-cycle labor income dynamics. Data for Italy shows a substantial increase in income inequality after age 50 for males over the time span from 1985 to 2012, which is remarkably driven by the variations in days worked rather than wages. Results show that this increase is determined by permanent changes in the number of days worked. I also introduce an empirical strategy to decompose the cross-covariances of wages and working days to quantify the permanent and transitory responses of days worked to wage shocks. A one-percent increase in permanent wages increases the permanent days worked by 0.8% at the age of 28, while this increase is about 0.3% at the age of 55. Despite the strong reaction of days of work to wage shocks early in careers, the correlation coefficients are small, indicating that only a small share of variation in permanent days worked -which shapes the permanent income inequality -is explained by the changes in wages.