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Labor Income Dynamics and the Insurance from Taxes, Transfers, and the Family

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Author Info

  • Blundell, Richard

    ()
    (University College London)

  • Graber, Michael

    ()
    (University College London)

  • Mogstad, Magne

    ()
    (University of Chicago)

Abstract

What do labor income dynamics look like over the life-cycle? What is the relative importance of persistent shocks, transitory shocks and heterogeneous profiles? 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 different education levels have a separate income process; and within each skill group, we allow for non-stationarity in age and time, heterogeneous experience profiles, and shocks of varying persistence. We find that the income processes differ 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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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 7916.

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Length: 46 pages
Date of creation: Jan 2014
Date of revision:
Publication status: forthcoming in: Journal of Public Economics.
Handle: RePEc:iza:izadps:dp7916

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Keywords: life cycle inequality; insurance; income dynamics;

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References

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  1. Michael Baker & Gary Solon, 1999. "Earnings Dynamics and Inequality among Canadian Men, 1976-1992: Evidence from Longitudinal Income Tax Records," NBER Working Papers 7370, National Bureau of Economic Research, Inc.
  2. Blundell, Richard & Pistaferri, Luigi & Saporta-Eksten, Itay, 2014. "Consumption inequality and family labor supply," Working Paper Series, European Central Bank 1656, European Central Bank.
  3. Greg Kaplan, 2011. "Inequality and the Lifecycle," PIER Working Paper Archive, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania 11-014, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
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  7. Storesletten, Kjetil & Telmer, Chris I. & Yaron, Amir, 2001. "The welfare cost of business cycles revisited: Finite lives and cyclical variation in idiosyncratic risk," European Economic Review, Elsevier, Elsevier, vol. 45(7), pages 1311-1339.
  8. Mark Huggett & Gustavo Ventura & Amir Yaron, 2011. "Sources of Lifetime Inequality," American Economic Review, American Economic Association, American Economic Association, vol. 101(7), pages 2923-54, December.
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  13. Richard Blundell & Luigi Pistaferri & Ian Preston, 2008. "Consumption Inequality and Partial Insurance," American Economic Review, American Economic Association, American Economic Association, vol. 98(5), pages 1887-1921, December.
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  16. 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.
  17. Fatih Karahan & Serdar Ozkan, 2013. "On the Persistence of Income Shocks over the Life Cycle: Evidence, Theory, and Implications," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 16(3), pages 452-476, July.
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Cited by:
  1. Andreas Fagereng & Charles Gottlieb & Luigi Guiso, 2013. "Asset Market Participation and Portfolio Choice over the Life-Cycle," EIEF Working Papers Series 1326, Einaudi Institute for Economics and Finance (EIEF), revised Oct 2013.
  2. 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, Banco de Portugal, Economics and Research Department.
  3. Dahl, Gordon B. & Loken, Katrine Vellesen & Mogstad, Magne & Salvanes, Kari Vea, 2013. "What Is the Case for Paid Maternity Leave?," IZA Discussion Papers 7707, Institute for the Study of Labor (IZA).
  4. 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, University of Western Ontario, CIBC Centre for Human Capital and Productivity 20142, University of Western Ontario, CIBC Centre for Human Capital and Productivity.
  5. 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.

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