Educational Heterogeneity in Labor Income Profiles

ABSTRACT Utilizing the correct form of labor income process as an ingredient in the macro‐labor framework might pave the way for explaining the income and wealth inequalities observed in the data. Using the Panel Study of Income Dynamics, this paper employs the minimum distance estimation method to decompose labor income profiles into ex ante and ex post components for different education groups. The results present no ex post heterogeneity but substantial ex ante heterogeneity between college and noncollege graduates. The intercept, linear, and quadratic heterogeneity for college graduates are around 1.5, 2.5, and 3 times as high as those for noncollege graduates, respectively.