Estimating Lifetime Earnings Distributions Using Copulas∗

In this paper we illustrate both the usefulness of copulas as a statistical technique for modelling dependence in earnings across the lifecycle, as well as contrast it with more traditional approaches for modelling earnings dynamics that appear in the literature. Our model can be estimated using a two-period panel on earnings, in contrast to more traditional approaches which generally require a panel of at least three periods for identification. We show that this is not at the expense of any of the richness inherent in such models, by illustrating how our method captures the same features of the dynamics of earnings that show up in traditional linear models. We then go on to apply our method to the estimation of lifetime earnings distributions in the UK for four groups characterised by education and gender. ∗Preliminary please do not quote without authors’ permission. †Institute for Fiscal Studies, London. ‡Institute for Fiscal Studies, London §Institute for Fiscal Studies, London. ¶New York University and Institute for Fiscal Studies, London.