Earnings dynamics in Canada: an econometric analysis

This paper reports the results of an empirical analysis of earnings dynamics in the Canadian labour market based on earnings data based drawn from tax returns between 1982 and 1994. Individuals' movements up and down quintiles of the earnings distribution are analysed using a hazard model approach. This represents one of the first studies for any country which models mobility across the entire distribution of earnings, including the middle and upper ranges as well as the lower ranges. The effects on transitions between quintiles are analyzed for the following variables: elapsed time spent in a given quintile (i.e., duration dependence effects), age, sex, geographical region, area size of residence, family status, language and overall macroeconomic conditions. One principal finding is that the conditional probability of transiting up or down the earnings distribution depends negatively on the elapsed time that an individual has spent in a given quintile. The earnings mobility patterns appear to be cyclical and exhibit some tendency of reversion to the mean, whereby the conditional probability of upward (downward) mobility is higher for those individuals presently situated in the lower (higher) quintiles.