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Labor income dynamics and the insurance from taxes, transfers and the family

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  • Richard Blundell

    ()
    (Institute for Fiscal Studies and University College London)

  • Michael Graber

    ()
    (Institute for Fiscal Studies)

  • Magne Mogstad

    (Institute for Fiscal Studies)

Abstract

What do labor income dynamics look like over the life-cycle? What is the relative importance of persistent shocks, transitory shocks and heterogeneous profi les? To what extent do taxes, transfers and the family attenuate these various factors in the evolution of life-cycle inequality? In this paper, we use rich Norwegian data to answer these important questions. We let individuals with di fferent education levels have a separate income process; and within each skill group, we allow for non-stationarity in age and time, heterogeneous experience profi les, and shocks of varying persistence. We find that the income processes diff er systematically by age, skill level and their interaction. To accurately describe labor income dynamics over the life-cycle, it is necessary to allow for heterogeneity by education levels and account for non-stationarity in age and time. Our findings suggest that the progressive nature of the Norwegian tax-transfer system plays a key role in attenuating the magnitude and persistence of income shocks, especially among the low skilled. By comparison, spouse's income matters less for the dynamics of inequality over the life-cycle.

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Paper provided by Institute for Fiscal Studies in its series IFS Working Papers with number W14/01.

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Date of creation: Jan 2014
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Handle: RePEc:ifs:ifsewp:14/01

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  8. Jason DeBacker & Bradley Heim & Vasia Panousi & Shanthi Ramnath & Ivan Vidangos, 2013. "Rising Inequality: Transitory or Persistent? New Evidence from a Panel of U.S. Tax Returns," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 46(1 (Spring), pages 67-142.
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Cited by:
  1. Fagereng, Andreas & Gottlieb, Charles & Guiso, Luigi, 2013. "Asset Market Participation and Portfolio Choice over the Life Cycle," CEPR Discussion Papers 9691, C.E.P.R. Discussion Papers.
  2. Gordon B. Dahl & Katrine V. Løken & Magne Mogstad & Kari Vea Salvanes, 2013. "What Is the Case for Paid Maternity Leave?," NBER Working Papers 19595, National Bureau of Economic Research, Inc.
  3. Nuno Alves & Carlos Martins, 2014. "Household Income Mobility in the European Union and in Portugal: an Analysis of Labor Market and Demographic Events," Economic Bulletin and Financial Stability Report Articles, Banco de Portugal, Economics and Research Department.
  4. SOLOGON Denisa & VAN KERM Philippe, 2014. "Earnings dynamics, foreign workers and the stability of inequality trends in Luxembourg 1988-2009," CEPS/INSTEAD Working Paper Series 2014-03, CEPS/INSTEAD.
  5. Lance Lochner & Youngki Shin, 2014. "Understanding Earnings Dynamics: Identifying and Estimating the Changing Roles of Unobserved Ability, Permanent and Transitory Shocks," University of Western Ontario, CIBC Centre for Human Capital and Productivity Working Papers 20142, University of Western Ontario, CIBC Centre for Human Capital and Productivity.

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