Cyclical Changes in Short-Run Earnings Mobility in Canada, 1982-1996

may expect, there are evidently major trends on-going in these various
aspects of distributional change (Beach and Finnie, 2000). In the present
paper, we analyze cyclical patterns in the above distributional features.
Alternatively viewed, to what extent are distributional changes in workers’
earnings and the related pattern of earnings mobility in Canada concentrated
in periods of economic recession, and what effects do strengthening or weak-
ening labour markets have on these different dimensions of distributional
change in earnings in Canada?

The study focuses on earnings rather than total income because widening
inequality and polarization and declining real incomes over the period have
been principally attributes of labour markets, and we wish to abstract from
government transfers and other sources of income. By short-run distribu-
tional change, we mean year-to-year changes in order to be comparable to
conventional studies of annual cross-sectional data (such as the SCF in
Canada or CPS in the United States). Much of the discussion also focuses on
the mobility of workers’ earnings because this is a relatively novel con-cept
on which to have data for Canada and because longitudinal-based mobility
measures do a better job at indicating how individual workers’ earnings
actually change over time than cross-sectional-based estimates.

Cyclical variation in earnings mobility is of interest for several reasons.
Mobility and inequality can be viewed as distributional complements. For a
given degree of inequality of earnings, more earnings mobility corresponds to
securing greater labour market opportunity (Shorrocks, 1978). Cyclical
variation in earnings mobility thus shows how changes in labour market
opportunity vary over the business cycle. Numerous studies have analyzed
cyclical changes in inequality; this is the first to focus on cyclical variation of
income or earnings mobility for Canada. This will be useful for better
understanding how earnings mobility may be expected to be affected by the
current economic slowdown in Canada. Identifying cyclical variation in
workers’ earnings is also critical to the formal statistical modelling of
individuals’ earnings changes (e.g., Abowd and Card, 1989) and to the
econometric analysis of changes in wage structure and earnings inequality
(Katz and Autor, 1999). For example, to identify possible labour market and
distributional effects of a Free Trade Agreement of the Americas in 2005
requires us to understand underlying cyclical effects already present in
workers’ earnings mobility and their labour market opportunities. Finally,
macro aggregates such as consumption and housing expenditures likely
depend on workers’ expectations of labour markets and income changes, so
that earnings mobility measures may provide input to cyclical fluctuation in
household expenditure expectations.

Charles M. Beach and Ross Finnie

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