Income mobility, persistent inequality and age, recent experiences from Finland

We use a very large register based Finnish income panel data with detailed information on the composition of income over a ten year time period, 1995–2004 to examine Finnish income mobility. We use measures of income mobility which are based on the degree of income reduc-tion over time (Shorrocks 1978). There is significant income mobility in the Finnish income distribution and mobility is decreasing with age and with a further drop near retirement age. We find a decrease in income mobility if the late 1990’s are compared with early 2000’s. The drop in mobility is largest among the youngest age groups and the probability of staying in the lowest income decile has also increased. Permanent income inequality has increased in five year cumulated incomes. The results suggest that distribution of lifetime income has widened. Since there has a general downward trend in mobility affecting the working age groups the income mobility in the groups 50–54 and 55–59 years old are currently at the same level as in the age group 60–64 old. Decompositions of cumulated incomes by income components reveal that the increase in annual values of income inequality has been transformed almost one-to-one into an increase in permanent inequality. Capital income although it represents in our data less than 5 percent of the total equivalised disposable income has increased its contribution to overall inequality equally to that of labour income which represents for about 95 percent of disposable income. Similar analysis of gross income reveals that the recent decline in the progressivity of taxation seems to be permanent and not due to temporal year to year variation.