Discussion Papers no. 726

Inequality in current and lifetime income

Standard theory of intertemporal choice predicts that people smooth out life-cycle changes in income by borrowing and saving, such that their standard of living in any given year depends more on lifetime income than on that year’s income.

Standard theory of intertemporal choice predicts that people smooth out life-cycle changes in income by borrowing and saving, such that their standard of living in any given year depends more on lifetime income than on that year’s income. Yet, contemporary empirical studies of income inequality are typically based on observations of income for one or a few years. This empirical simplification is due to the simple fact that researchers seldom have access to data on long-run or lifetime income. In this paper, we exploit a unique data set with nearly career-long income histories to provide novel evidence on inequality in current and lifetime income. We apply these results to assess the role of so-called life-cycle bias in empirical analysis of income inequality that uses current income variables as proxies for lifetime income. Our results suggest that income inequality increases over the working lifespan, and inequality in current income at age 60 is more than twice the inequality in lifetime income. Another key finding is that inequality in lifetime income is much lower than what cross-sectional estimates of inequality suggest. This means that we may need to reconsider how unequal individuals’ living standard actually is.

Om publikasjonen

Tittel

Inequality in current and lifetime income

Ansvarlige

Rolf Aaberge, Magne Mogstad

Serie og -nummer

Discussion Papers no. 726

Utgiver

Statistics Norway

Emne

Discussion Papers

ISSN

1892-753X

Antall sider

19

Målform

Engelsk

Om Discussion Papers

Discussion papers comprise research papers intended for international journals and books. A preprint of a Discussion Paper may be longer and more elaborate than a standard journal article as it may include intermediate calculations, background material etc.

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