Umeå Economic Studies,
Umeå University, Department of Economics

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 pensions and study lifetime income inequality. We find that permanent earnings differences generally contributes 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: Permanent-transitory; Income pension entitlements; earning dynamics; life-cycle inequality

JEL-codes: H55; I24; J31; J62

Language: English

33 pages, May 24, 2022

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