Serdar Ozkan, Jae Song, Fatih Karahan
We study the determinants of lifetime earnings (LE) inequality in the U.S. by focusing on latent heterogeneity in job ladder dynamics and on-the-job learning as sources of wage growth differentials. Using administrative data, we find (i) more frequent job switches among lower LE workers, mainly driven by nonemployment spells, (ii) little heterogeneity in average annual earnings growth of job stayers in the bottom two-thirds of the LE distribution, and (iii) an earnings growth for job switchers that rises strongly with LE. We estimate a structural model featuring a rich set of worker types and firm heterogeneity. We find vast differences in ex-ante job ladder risk—job loss, job finding, and contact rates—across workers. These differences account for 75% of the lifetime wage growth differential among the bottom half of the LE distribution. Above the median, almost all lifetime wage growth differences are a result of Pareto-distributed learning ability.
Fatih Guvenen, Serdar Ozkan, Rocio Madera
Recent empirical studies document that the distribution of earnings changes displays substantial deviations from lognormality: in particular, earnings changes are negatively skewed with extremely high kurtosis (long and thick tails), and these non-Gaussian features vary substantially both over the life cycle and with the earnings level of individuals. Furthermore, earnings changes display nonlinear (asymmetric) mean reversion. In this paper, we embed a very rich “benchmark earnings process” that captures these non-Gaussian and nonlinear features into a lifecycle consumption-saving model and study its implications for consumption dynamics, consumption insurance, and welfare. We show four main results. First, the benchmark process essentially matches the empirical lifetime earnings inequality—a first-order proxy for consumption inequality—whereas the canonical Gaussian (persistent-plus-transitory) process understates it by a factor of five to ten. Second, the welfare cost of idiosyncratic risk implied by the benchmark process is between two-to-four times higher than the canonical Gaussian one. Third, the standard method in the literature for measuring the pass-through of income shocks to consumption—can significantly overstate the degree of consumption smoothing possible under non-Gaussian shocks. Fourth, the marginal propensity to consume out of transitory income (e.g., from a stimulus check) is higher under non-Gaussian earnings risk.
Elin Halvorsen, Hans A. Holter, Serdar Ozkan, Kjetil Storesletten
This paper examines whether nonlinear and non-Gaussian features of earnings dynamics are caused by hours or hourly wages. Our findings from the Norwegian administrative and survey data are as follows: (i) Nonlinear mean reversion in earnings is driven by the dynamics of hours worked rather than wages since wage dynamics are close to linear, while hours dynamics are nonlinear—negative changes to hours are transitory, while positive changes are persistent. (ii) Large earnings changes are driven equally by hours and wages, whereas small changes are associated mainly with wage shocks. (iii) Both wages and hours contribute to negative skewness and high kurtosis for earnings changes, although hour-wage interactions are quantitatively more important. (iv) When considering household earnings and disposable household income, the deviations from normality are mitigated relative to individual labor earnings: changes in disposable household income are approximately symmetric and less leptokurtic.
Elin Halvorsen, Serdar Ozkan, Sergio Salgado
Using administrative data, we provide an extensive characterization of labor earnings dynamics in Norway. Some of our findings are as follows. (i) Norway has not been immune to the increase in top earnings inequality seen in other countries. (ii) The earnings distribution compresses in the bottom 90% over the life cycle but expands in the top 10%. (iii) The earnings growth distribution is left skewed and leptokurtic, and the extent of these nonnormalities varies with age and past income.
Serdar Ozkan
I show that while the rich spend more on healthcare early in life, the poor outspend them by 25% from middle to old age in the US. Furthermore, the poor seek medical care less frequently but face higher risks of extreme expenses when they do. I develop a life-cycle model, incorporating physical and preventive health capital, along with features of the US healthcare system. Preventive health capital governs the distribution of health shocks, thereby controlling life expectancy. The model suggests that the rich spend more on preventive care due to lower marginal utility of consumption, resulting in milder health shocks and lower curative expenses in old age. Public insurance– covering large curative expenditures– inadvertently widens the life expectancy gap by hampering the poor’s incentives to invest in preventive health. Policy experiments suggest that expanding insurance coverage and subsidizing preventive care to encourage the poor to use healthcare early in life yield substantial welfare gains.
Aaron Hedlund, Kieran Larkin, Kurt Mitman, Serdar Ozkan
This paper examines the impact of mortgage market structures on shaping economic responses to the unprecedented interest rate and inflation dynamics of 2021-2024. We first empirically document that economies with a larger share of variable-rate mortgages exhibit stronger responses in house prices to monetary policy shocks. We then develop and calibrate a structural model of the housing market to demonstrate that these mortgage structures can account for a substantial portion of the divergent house price paths observed across the U.S., Canada, Sweden, and the U.K. during the Great Inflation. Our analysis reveals that early pandemic mortgage rate cuts drove 45% of the U.S. house price boom. Economies dominated by adjustable-rate mortgages (ARMs) show greater price sensitivity to monetary tightening, while fixed-rate mortgage (FRM) regimes exhibit more pronounced path dependence due to a lock-in effect. These dynamics have significant distributional consequences, with low-income homeowners benefiting most from the initial low-rate environment, especially in FRM regimes. Finally, we show that the preferred monetary tightening path is regime-dependent, as a policy counterfactual reveals that FRM-dominant economies benefit more from a shorter and sharper tightening schedule.
Joachim Hubmer ⓡ Mons Chan ⓡ Serdar Ozkan ⓡ Sergio Salgado ⓡ Guangbin Hong
Are larger firms more productive, more scalable, or both? We use firm-level panel data from thirteen countries and employ a broad set of methods to estimate factor elasticities—capturing returns to scale (RTS)—and total factor productivity (TFP). We find substantial RTS heterogeneity within industries, with larger firms exhibiting higher RTS driven by greater intermediate input elasticities. TFP, by contrast, rises with firm size only up to the top decile before declining. The RTS–size gradient primarily reflects persistent, ex-ante differences in production technologies across firms rather than non-homothetic variation along a common production function. Incorporating RTS heterogeneity into a standard model of entrepreneurship more than doubles the efficiency losses from financial frictions compared with a conventional calibration with only TFP differences.
Aakash Kalyani and Serdar Ozkan
We develop a novel measure of firm-level marginal labor cost and investigate its inflation pass-through. We apply textual analysis to earnings calls to identify labor discussions. Leveraging cost-minimization theory that firms equate marginal revenue products across variable inputs, we regress intermediate input revenue shares on labor discussion intensity to recover marginal labor cost shocks. This theory-based approach aggregates multidimensional qualitative information into a single measure. Our aggregate index outperforms conventional slack variables in forecasting inflation. Industry-level pass-through to prices is heterogeneous: highest for services, near-zero for manufacturing, where firm-level data reveal automation mitigates labor cost pressures.
Joachim Hubmer ⓡ Elin Halvorsen ⓡ Sergio Salgado ⓡ Serdar Ozkan
We study the lifecycle dynamics of wealth inequality using 1993-2019 Norwegian administrative panel data on wealth and income. Employing a novel budget-constraint approach, we decompose the excess wealth of the top 0.1% households relative to the median between ages 45 and 64 into higher saving rates (36%), inheritances (31%), returns (28%), and labor income (5%). One-quarter of the wealthiest—the “New Money”—start with negative wealth on average but accumulate rapidly through high labor income and exceptionally high saving rates and returns. The “Old Money” inherit substantial wealth and grow it through above-average though more modest saving and returns. We use these dynamic facts to evaluate five standard wealth inequality models. Although these models match cross-sectional wealth concentration, they fail to reproduce the distinct dynamics of New and Old Money. A heterogeneous entrepreneurship model with decreasing returns to scale technology and nonhomothetic preferences is consistent with the observed dynamics.