Does inequality of labor earnings emerge in young days or later? Labor earnings dynamics and learning about individual ability in heterogeneous society

This paper examines the evolution of labor earnings inequality in an environment, where individuals learn about their own ability (productivity) from wage realizations. It is shown that innate ability heterogeneity and idiosyncratic income shock variance have distinct effects on the emergence of earnings inequality through changes in learning speed and effort decisions. Therefore, given endogenous changes in individual perception, we are able to explain different patterns of labor earnings inequality evolution in differently endowed societies, actually observed in UK, US, Germany and Japan. Simulations illustrate inequality emergence patterns and earnings mobility in different environments. (C) 2001 Elsevier Science B.V. All rights reserved.