What Explains Lifetime Earnings Differences across Individuals?
Expected lifetime earnings are a key factor in many individual decisions, such as whether or not to go to college and what kind of occupation to pursue. However, lifetime earnings differ widely across individuals, and uncovering the factors that explain these differences can be challenging. Some characteristics, such as race and sex, are observable. But other intangible characteristics, such as work performance, are more difficult to quantify. To what degree observable characteristics explain lifetime earnings is an empirical question.
José Mustre-del-Río and Emily Pollard use a unique data set combining administrative and survey data to assess how much variation in lifetime earnings across individuals can be explained by observable characteristics such as sex, race, education, and labor market experience. They find that labor market experience—that is, the fact that some individuals work more years than others—accounts for roughly 40 percent of the difference in earnings. Standard demographic characteristics such as sex, race, or education alone explain about 15 percent of these differences. In total, observable characteristics account for a little more than half of lifetime earnings differences.