Characterising life-cycle dynamics of annual days of work, wages, and cross-covariances

Abstract

This study investigates the dispersion in days worked and wages using a novel semi-parametric specification that minimises assumptions about life-cycle labour income dynamics. After the age of 50, data in Italy show a substantial increase in the dispersion of percentage changes in income, which is remarkably driven by variations in days worked rather than wages. The results demonstrate that the rise is caused by highly persistent changes in the number of days worked. The study also presents an empirical strategy to decompose the cross-covariances of wages and working days to estimate the joint dynamics between the changes in permanent (transitory) wages and days worked. At the age of 28, a 1% increase in permanent wages increases permanent days worked by 0.45%; at the age of 55, the increase is approximately 0.25%. Despite the strong response of days of work to wage shocks early in careers, the correlation coefficients are weak, indicating that wages only explain a small share of variation in permanent days worked.