| This dissertation contributes to two areas in economics: the understanding of the distribution of earned income and to Bayesian analysis of distributional data. Recently, physicists claimed that the distribution of earned income is exponential (see Yakovenko, 2009). The first chapter explores the perspective that the economy is a statistical mechanical system and the implication for labor market outcomes is considered critically. The robustness of the empirical results that lead to the physicists' claims, the significance of the exponential distribution in statistical mechanics, and the case for a conservation law in economics are discussed. The conclusion reached is that physicists' conception of the economy is too narrow even within their chosen framework, but that their overall approach is insightful. The dual labor market theory of segmented labor markets is invoked to understand why the observed distribution may be a mixture of distributional components, corresponding to different generating mechanisms described in Reich et al. (1973). The application of informational entropy in chapter II connects this work to Bayesian analysis and maximum entropy econometrics. The analysis follows E. T. Jaynes's treatment of Wolf's dice data, but is applied to the distribution of earned income based on CPS data. The results are calibrated to account for rounded survey responses using a simple simulation, and answer the graphical analyses by physicists. The results indicate that neither the income distribution of all respondents nor of the subpopulation used by physicists appears to be exponential. The empirics do support the claim that a mixture with exponential and log-normal distributional components ts the data. In the final chapter, a log-linear model is used to fit the exponential to the earned income distribution. Separating the CPS data by gender and marital status reveals that the exponential is only an appropriate model for a limited number of subpopulations, namely the never married and women. The estimated parameter for never-married men's incomes is significantly different from the parameter estimated for never-married women, implying that either the combined distribution is not exponential or that the individual distributions are not exponential. However, it substantiates the existence of a persistent gender income gap among the never-married.;References: Reich, M., D. M. Gordon, and R. C. Edwards (1973). A Theory of Labor Market Segmentation. Quarterly Journal of Economics 63, 359-365. Yakovenko, V. M. (2009). Econophysics, Statistical Mechanics Approach to. In R. A. Meyers (Ed.), Encyclopedia of Complexity and System Science. Springer. |
