Income and Consumption Risk: Evidence from France

In this paper, we draw life cycle inequality profiles for cohorts born between 1921 and 1975 and observed from 1974 to 2005 from a pseudo-panel of French households. While cross-sectional inequality has not changed much over the period, the within cohort inequality increases substantially with age. Using the interplay between income and consumption, we decompose the change in inequality into a permanent and a transitory component. The former, called income risk, measures shocks affecting income which are transmitted to consumption levels, while the latter affects income but can be smoothed and thus does not have an impact on the consumption distribution. We find that income risk increases with age while transitory shocks remain broadly constant over the lifetime. The decomposition sheds lights on the diverging trends over time between income and consumption inequality. Consumption inequality has increased since the middle of the nineties because the population ages and permanent shocks increase with age, while income inequality has not changed much because of negative transitory shocks that compensated the permanents shocks.