Anatomy of earnings mobility in Britain: evidence from the BHPS, 1991-1995

Abstract

This paper draws on the first four waves of data of the British Household Panel Survey (BHPS) to analyse the statics and dynamics of the earnings distribution in the early nineties. Motivated by the wide range of concerns which mobility is viewed to serve, I analyse mobility under three complementary headings: (i) predictability or state dependence; (ii) movement; and (iii) welfare implications and find that mobility is rather low. When mobility is modelled as a discrete stochastic process, earnings are best described by a second order Markov chain. Using the first five waves of the British Household Panel Survey (1991-5) I analyse male earnings mobility within and between population subgroups defined by age, education and employment status. I find that mobility occurs mainly within those groups. There is evidence of greater mobility amongst the young, part-time workers and the self-employed. However, mobility is lower for more highly educated individuals. Job mobility does not only lead to improving the relative earnings position of individuals but also to downward transitions. Observed earnings movement are not solely due to transitory changes in earnings but there is also 'permanent' earnings differences.