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Permanent and transitory earnings dynamics and lifetime income inequality in Sweden

Author

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  • Gustafsson, Johan
  • Holmberg, Johan

Abstract

This paper studies the role of permanent- and transitory earnings variability for lifetime income inequality in Sweden. We fit a permanent–transitory error component model to the autocovariance structure of earnings using administrative data for 2002–2015 and minimum distance estimation. We find that permanent earnings inequality increased during the first decade and that the financial crisis of 2008 temporarily heightened earnings volatility. Using this model, we simulate pension entitlements and study lifetime income inequality conditional on the pre- and post-1990s pension system. We find that permanent earnings differences generally contribute the most to lifetime income inequality. We conclude that the Swedish pension system provides some insurance against earnings risk, but accentuates the role of permanent earnings differences in explaining lifetime inequality.

Suggested Citation

  • Gustafsson, Johan & Holmberg, Johan, 2023. "Permanent and transitory earnings dynamics and lifetime income inequality in Sweden," Labour Economics, Elsevier, vol. 85(C).
    • Handle: RePEc:eee:labeco:v:85:y:2023:i:c:s0927537123001124
    DOI: 10.1016/j.labeco.2023.102437
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    More about this item

    Keywords

    Earnings dynamics; Inequality; Pensions;
    All these keywords.

    JEL classification:

    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J62 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Job, Occupational and Intergenerational Mobility; Promotion
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
    • I24 - Health, Education, and Welfare - - Education - - - Education and Inequality

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