Earnings Dynamics and Profile Heterogeneity: Estimates from Japanese Panel Data

The recent empirical work on earnings processes using US panel data finds that ignoring heterogeneity in earnings profiles among individuals leads to an upward bias in the autoregressive parameter of earnings shocks. It then argues that the existing assumptions in incomplete markets and heterogeneous-agent models, almost all of which require highly persistent earnings shocks and no individual-specific and group-specific differences in earnings growth rates, may be inappropriate. This paper investigates the applicability of this US data-based debate to other developed countries by using a panel of Japanese male earnings. The results indicate that it is possible to corroborate the recent US arguments, despite some differences in the estimates.