Scandinavian Working Papers in Economics
Working Paper Series,
Stockholm University, Swedish Institute for Social Research
No 4/2005: Life-Cycle Variations in the Association between Current and Lifetime Income: Country, Cohort and Gender Comparisons
Matthew J. Lindquist () and Anders Böhlmark ()
Additional contact information
Matthew J. Lindquist: Swedish Institute for Social Research, Stockholm University, Postal: SOFI, SE-106 91 Stockholm, Sweden
Anders Böhlmark: Swedish Institute for Social Research, Stockholm University, Postal: SOFI, SE-106 91 Stockholm, Sweden
Abstract: This study applies Haider and Solon’s (2005) generalized errors-in-variables model to Swedish income tax data in order to produce estimates of the association between current and lifetime income. Our estimates of this association demonstrate strong life-cycle patterns. This implies that the widespread use of current income as a proxy for lifetime income (following the standard errors-in-variables model) leads to inconsistent parameter estimates (a.k.a. life-cycle bias). Estimates for comparable cohorts of Swedish and American men demonstrate surprising similarities. There are, however, significant gender and cohort differences in this association which, in turn, lead to statistically significant and quantitatively meaningful differences in life-cycle biases. The results from this study can aid the applied researcher in analyzing and correcting for life-cycle bias.
Keywords: errors-in-variables model; life-cycle bias; lifetime income
48 pages, August 29, 2005
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