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



Major non-Canadian studies that provide excellent treatment of mobility
in terms of underlying basic issues and policy relevance include Atkinson,
Bourguignon and Morrison (1992); Duncan, Smeeding and Rodgers (1994);
Gottschalk and Moffitt (1994); OECD (1993, 1996); Buchinsky and Hunt
(1996); and Burkhauser, Holtz-Eakin and Rhody (1997). The one early
Canadian study we are aware of is Kennedy (1989) which uses a Canada
Pension Plan administrative file on earnings of middle-aged men over the
period 1966-83. Baker and Solon (1999) study earnings dynamics of men
over the 1976-92 interval using regression-based variance-decomposition
techniques. And several papers by Finnie (1997a, b, c, d) all use the LAD
file, but employ a narrow definition of earnings (essentially wage and salary
income) and look at earnings quintile shares (rather than median-based
population shares).

The main findings of this paper are as follows. First, there have indeed
been major cyclical changes in earnings polarization and distributional shifts,
and these have been most markedly concentrated in the recessions, par-
ticularly the 1990-92 interval, and show relative stasis during the observed
periods of expansion. Second, the general distributional pattern observed for
men as a whole holds across all age groups, and the general pattern for
women as a whole also holds across all age groups (except for entry-age
workers), but the strength of these effects differs considerably across age
groups. Third, earnings mobility significantly decreases for men during
recessions by reducing the probability of moving up the distribution and
increasing the probability of moving down about equally, thus markedly
decreasing the net probability of moving up. Fourth, for men, the cyclical
sensitivity of transition probabilities decreases monotonically with age, so that
cross-sectional age-earnings profiles become steeper in recessions and flatter
over economic expansions as the earnings of entry-age and younger workers
show the greatest cyclical variation.

The paper is organized as follows. The next section describes the main
features of the LAD data set used in this study and defines the estimation
sample generating the results. The following two sections look at distribu-
tional changes from a cross-sectional perspective treating each year as if it
were a separate cross-section. This allows one to look at the cyclical
fluctuations in the distribution of workers, the polarization of earnings, and
the degree of upward or downward shift in the earnings distribution by sex
and age group. The fifth section then exploits the longitudinal aspect of the
LAD file more fully by examining various measures of earnings mobility,
again by sex and age group, and analyzing their cyclical sensitivity. The final
section summarizes and concludes.

Cyclical Changes in Short-Run Earnings Mobility in Canada

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