Essays on unemployment spell duration and life cycle earnings.

Abstract

The two essays in this dissertation concern cyclical fluctuations in the duration of unemployment spells and the covariance structure of individuals' life cycle earnings, respectively. The analysis of the first essay indicates considerable cyclical sensitivity in the unemployment continuation probabilities of a variety of economic and demographic sub-populations of the unemployed, over the period 1979 through 1988. As a consequence, little support is found for sorting theories of fluctuations in spell duration, which maintain that the probabilities of such groups are relatively invariant to the business cycle and that movements in average duration result from changes in the composition of inflows to unemployment. Also, the relationship between changes in the composition of entrants and resulting changes in the composition of all the unemployed is examined. In the second essay, a characterization of the stochastic process for individual earnings over the life cycle is provided. A 20 year panel of earnings drawn from the University of Michigan's Panel Study of Income Dynamics is analyzed. The preferred specification for the stochastic process for the data in levels includes: (1) individual specific intercepts and slopes on the experience/earnings profile, and (2) a first order autoregressive error component with, possibly, heteroskedastic innovations. A reconciliation of the first result with previous research, on earnings growth rates, which finds no individual specific variation in the slope of the experience/earnings profile, is developed. Although the results directly obtained from the first differenced data indicate a number of important extensions to this project, it is possible to conclude that the inference of previous research is at best premature.