Permanent and transitory earnings dynamics and lifetime income inequality in Sweden

Johan Gustafsson and Johan Holmberg

Labour Economics, 2023, vol. 85, issue C

Abstract: This paper studies the role of permanent- and transitory earnings variability for lifetime income inequality in Sweden. We fit a permanent–transitory error component model to the autocovariance structure of earnings using administrative data for 2002–2015 and minimum distance estimation. We find that permanent earnings inequality increased during the first decade and that the financial crisis of 2008 temporarily heightened earnings volatility. Using this model, we simulate pension entitlements and study lifetime income inequality conditional on the pre- and post-1990s pension system. We find that permanent earnings differences generally contribute the most to lifetime income inequality. We conclude that the Swedish pension system provides some insurance against earnings risk, but accentuates the role of permanent earnings differences in explaining lifetime inequality.

Keywords: Earnings dynamics; Inequality; Pensions (search for similar items in EconPapers)
JEL-codes: H55 I24 J31 J62 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:labeco:v:85:y:2023:i:c:s0927537123001124

DOI: 10.1016/j.labeco.2023.102437

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