Inequality in current and lifetime income

Arbeitspapier

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.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Discussion Papers ; No. 726

Classification and Topics

• Classification: Wirtschaft ; Personal Income, Wealth, and Their Distributions ; General Welfare; Well-Being
• Subject: Income inequality ; lifetime income ; current income ; life-cycle

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Aaberge, Rolf ; Mogstad, Magne
• Event: Veröffentlichung
• (who): Statistics Norway, Research Department
• (where): Oslo
• (when): 2012

Further information

• Handle: http://hdl.handle.net/10419/192708
• Last update: 10.03.2025, 11:45 AM CET