The Dynamics and Inequality of Italian Male Earnings: Permanent Changes or Transitory Fluctuations?

This paper looks at longitudinal aspects of changes in Italian male earnings inequality since the late 1970s by decomposing the earnings autocovariance structure into its persistent and transitory parts. Cross-sectional earnings differentials are found to grow over the period. The longitudinal analysis shows that such growth is determined by the permanent earnings component and is due both to a divergence of earnings profiles over the working career and an increase in overall persistence during the first half of the 1990s. Moreover, when allowing for occupation-specific components in the parameters of interest, the bulk of growing permanent differentials arises from the earnings distribution of non-manual workers. This evidence indicates that labor market changes in favour of more skilled workers drove observed aggregate patterns.