Nonlinear Income Variance Profile and Consumption Inequality over the Life Cycle

Naohito Abe and Tomoaki Yamada
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Naohito Abe: Hitotsubashi University

No 06-E-1, Bank of Japan Working Paper Series from Bank of Japan

Abstract: In an economy with a seniority wage system, elderly workers are subject to greater income risks when they lose their jobs than young workers are. This paper investigates: (1) whether we can observe the age dependence of idiosyncratic income risks; and (2) the importance of age dependecne for the evolution of inequalities in consumption using Japanese micro data. Our estimation of the income process demonstrates a strong age dependence of income risks; at the age of 48, the variance of permanent income shocks begins to increase, which creates a nonlinear age?variance profile of income. This paper also uses structural estimation of a precautionary savings life cycle model to demonstrate that the nonlinearity in the income process is crucial for understanding the evolution of the consumption inequalities over age.

Keywords: Income risk; buffer stock savings; consumption inequality; method of simulated moments (search for similar items in EconPapers)
JEL-codes: D12 D31 D52 E21 (search for similar items in EconPapers)
Date: 2006-02
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Citations: View citations in EconPapers (3)

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Related works:
Journal Article: Nonlinear income variance profiles and consumption inequality over the life cycle (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:boj:bojwps:06-e-1

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