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

  • Blundell, Richard


    (University College London)

  • Graber, Michael


    (University College London)

  • Mogstad, Magne


    (University of Chicago)

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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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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  1. Richard Blundell & Luigi Pistaferri & Ian Preston, 2004. "Consumption inequality and partial insurance," IFS Working Papers W04/28, Institute for Fiscal Studies.
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  6. Fatih Guvenen, 2007. "An Empirical Investigation of Labor Income Processes," NBER Working Papers 13394, National Bureau of Economic Research, Inc.
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  8. Heathcote, Jonathan & Storesletten, Kjetil & Violante, Giovanni L, 2004. "Two Views of Inequality Over the Life-Cycle," CEPR Discussion Papers 4728, C.E.P.R. Discussion Papers.
  9. Meghir, Costas & Pistaferri, Luigi, 2011. "Earnings, Consumption and Life Cycle Choices," Handbook of Labor Economics, Elsevier.
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  11. Ostrovsky Yuri, 2010. "Long-Run Earnings Inequality and Earnings Instability among Canadian Men Revisited, 1985-2005," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 10(1), pages 1-34, March.
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