The Rising Instability of US Earnings

The inequality of earnings and of family incomes in the United States has increased since the late 1970s. The large rise in earnings inequality between the 1970s and the 1990s could reflect either a rise in disparity of permanent incomes, a rise in earnings instability, or some portion of both. In this paper, we provide longitudinal measures that separate changes in income inequality into changes that permanently change income to new levels and those that only reflect transitory change. We refer to the latter as changes in "income instability" and discuss how the instability of individual earnings and family income in the United States has evolved - as a whole as well as for different types of individuals and families - over the last quarter century. We consider alternative definitions of instability that have been proposed, and establish that all studies find that instability is considerably higher today than in the mid-1970s. This increase in instability is not a recent phenomenon. Earnings instability rose sharply in the late 1970s and early 1980s, then stabilized at these high levels through the recent period, although it may be increasing once again. We also discuss the factors that may be driving this increase in instability.