Scandinavian Working Papers in Economics

Umeå Economic Studies,
Umeå University, Department of Economics

No 963: Earning dynamics in Sweden: The recent evolution of permanent inequality and earnings volatility

Johan Gustafsson () and Johan Holmberg ()
Additional contact information
Johan Gustafsson: Department of Economics, Umeå University, Postal: Department of Economics, Umeå University, S 901 87 Umeå, Sweden
Johan Holmberg: Department of Economics, Umeå University, Postal: Department of Economics, Umeå University, S 901 87 Umeå, Sweden

Abstract: This paper analyzes the dynamics of earnings over the life-cycle, based on Swedish data, and the evolution of permanent and transitory earnings inequality for 2002-2015. We use data on earnings from administrative records gathered in the ASTRID database. We find that features of the data does not match the predictions of the heterogeneous or restricted income profile models commonly applied in the earning dynamics literature and estimate an alternative permanent- transitory (PT) error components model. Analyzing the covariance structure of both male and female earnings, controlling for educational background, we find that the upward trend in permanent earnings inequality observed in Sweden during the 1990s does not seem to continue during the 2000s, and the financial crisis of 2008 did not have any major impact on the variability of earnings. We further simulate the accumulation of income pension entitlements and find that variations in pension entitlements is smaller among college educated workers.

Keywords: Permanent-transitory; Income pension entitlements; earning dynamics; life-cycle inequality

JEL-codes: D31; H55; J30

48 pages, October 22, 2019

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