Household Earnings Mobility and Inequality: The Role of Heterogeneous Macro Effects

We examine the dynamics of household earnings mobility and earnings inequality in the aftermath of recessions, both in the short term and over the life cycle, using panel data on cohorts of Korean and U.S. households. We observe an increase in short-term earnings mobility for the Korean households following the Asian financial crisis, and a moderate change in short-term mobility for the U.S. households after recessions. We find that a standard benchmark model of income dynamics matches the time series of earnings inequality for both panels. However, this model overestimates earnings mobility over an intermediate horizon of several years. We generalize the benchmark model by allowing for heterogeneous effects of macro factors and find that the generalized model provides a better fit for both earnings inequality and earnings mobility. Moreover, we find that the heterogeneous macro effects identified in the generalized model accelerate earnings mobility and reduce earnings inequality for both the Korean and U.S. households. JEL Classification: D31 , E25