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Earnings Dynamics of Men and Women in Finland: Permanent Inequality versus Earnings Instability

Kässi, Otto (2011): Earnings Dynamics of Men and Women in Finland: Permanent Inequality versus Earnings Instability.

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Abstract

I decompose the variance of earnings of Finnish male and female work- ers to its permanent and transitory components using the approach of Baker (1997) and Haider (2001). I find that the increasing earnings in- equality of men and women is driven by both transitory and permanent components of earnings. In addition, I find considerable differences in earnings dynamics between men and women that have been largely ne- glected in previous studies of earnings dynamics. The inequality among men is dominated by the permanent component. Conversely, permanent and transitory components are of comparable magnitudes to women. As a corollary, men face more stable income paths but with larger perma- nent earnings differences. Women, on the other hand, face more unstable earnings profiles but have smaller permanent differences in earnings. The correlation between initial earnings inequality and its growth is found to be positive for both sexes, implying a divergence of earnings profiles to- wards end of the working career. In addition, earnings instability has risen for both sexes.

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