Journal
JOURNAL OF ECONOMIC BEHAVIOR & ORGANIZATION
Volume 84, Issue 1, Pages 364-381Publisher
ELSEVIER
DOI: 10.1016/j.jebo.2012.04.012
Keywords
Anderson-Darling test; Diffusion processes; Fokker-Planck equation; Kolmogorov-Smirnov test; Laplace distribution; Mincer equation; Power law
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Conditional on education and experience, the distribution of personal labor income appears to be double Pareto, a distribution that obeys the power law in both the upper and lower tails. In particular, the error term of the classical Mincer equation appears to be Laplace, or double exponential. This double power law is not rejected by goodness-of-fit tests. I compare two diffusion processes (one mean-reverting, the other unit root) with a stationary double Pareto distribution as a model of income dynamics. The data favors the mean-reverting process for modeling income dynamics over the unit root process. (C) 2012 Elsevier B.V. All rights reserved.
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