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

46 Pages Posted: 1 Feb 2014

See all articles by Richard W. Blundell

Richard W. Blundell

UCL; IFS; IZA Institute of Labor Economics; Centre for Economic Policy Research (CEPR)

Michael Graber

University College London

Magne Mogstad

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.

Keywords: income dynamics, insurance, life cycle inequality

JEL Classification: C33, D3, D91, J31

Suggested Citation

Blundell, Richard W. and Graber, Michael and Mogstad, Magne, Labor Income Dynamics and the Insurance from Taxes, Transfers, and the Family. IZA Discussion Paper No. 7916, Available at SSRN: https://ssrn.com/abstract=2389284

Richard W. Blundell (Contact Author)

UCL ( email )

Department of Economics
Gower Street
London, WC1E 6BT
United Kingdom
+44 20 7504 5863 (Phone)
+44 20 7916 2773 (Fax)

HOME PAGE: http://www.ucl.ac.uk/~uctp39a/

IFS

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London, WC1E 7AE
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HOME PAGE: http://www.ifs.org.uk

IZA Institute of Labor Economics

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Bonn, D-53072
Germany

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Michael Graber

University College London ( email )

Gower Street
London, WC1E 6BT
United Kingdom

Magne Mogstad

University of Chicago ( email )

1101 East 58th Street
Chicago, IL 60637
United States

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