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AbstractTrends in the Transitory Variance of Male Earnings in the U. S., 1970-2004 We estimate the trend in the transitory variance of male earnings in the U.S. using the Michigan Panel Study of Income Dynamics from 1970 to 2004. Using both an error components model as well as simpler but only approximate methods, we find that the transitory variance started to increase in the early 1970s, continued to increase through the mid-1980s, and then remained at this new higher level through the 1990s and beyond. Thus the increase mostly occurred about thirty years ago. Its increase accounts for between 31 and 49 percent of the total rise in cross-sectional variance, depending on the time period.
1A substantial literature has accumulated on trends in various measures of instability in individual earnings and family income in the US over the last thirty or so years, with many studies finding increases in instability (Gottschalk and Moffitt, 1994;Moffitt and Gottschalk, 1995;Dynarski and Gruber, 1997;Cameron and Tracy, 1998;Haider, 2001;Hyslop, 2001;Stevens, 2001;Moffitt and Gottschalk, 2002;Dynan et al., 2008;Keys, 2008;Jensen and Shore, 2010;Shin and Solon, 2010). Increases have also been found in Canada (Baker and Solon, 2003;Beach et al., 2003Beach et al., , 2010Ostrovsky, 2010) and the UK (Dickens, 2000). Interest in trends in instability, particularly instability that comes from an increase in the transitory variance of earnings, has arisen for many reasons. One reason is that Friedman (1957) argued in his classic treatise that transitory fluctuations should hav...