Income distribution and income dynamics in the United Kingdom

In this paper, we propose a model of income dynamics which takes account of mobility both within and between jobs. The model is a hybrid of the mover- stayer model of income dynamics and a geometric random walk. In any period, individuals face a discrete probability of 'moving' in which case their in come is a random drawn from a stationary recurrent distribution. Otherwise, they 'stay' and incomes follow a geometric random walk. The model is estim ated on income transition data for the United Kingdom from the British Hous ehold Panel Survey (BHPS) and provides a good explanation of observed non-l inearities in income dynamics. The steady-state distribution of the model p rovides a good fit for the observed, cross-sectional distribution of earnin gs. We also evaluate the impact of tertiary education on income transitions and on the long-run distribution of incomes. Copyright (C) 2001 John Wiley & Sons, Ltd.