Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/192708 
Year of Publication: 
2012
Series/Report no.: 
Discussion Papers No. 726
Publisher: 
Statistics Norway, Research Department, Oslo
Abstract: 
Standard theory of intertemporal choice predicts that people smooth out life-cycle changes in income by borrowing and saving, such that their standard of living in any given year depends more on lifetime income than on that year's income. Yet, contemporary empirical studies of income inequality are typically based on observations of income for one or a few years. This empirical simplification is due to the simple fact that researchers seldom have access to data on long-run or lifetime income. In this paper, we exploit a unique data set with nearly career-long income histories to provide novel evidence on inequality in current and lifetime income. We apply these results to assess the role of so-called life-cycle bias in empirical analysis of income inequality that uses current income variables as proxies for lifetime income. Our results suggest that income inequality increases over the working lifespan, and inequality in current income at age 60 is more than twice the inequality in lifetime income. Another key finding is that inequality in lifetime income is much lower than what cross-sectional estimates of inequality suggest. This means that we may need to reconsider how unequal individuals' living standard actually is.
Subjects: 
Income inequality
lifetime income
current income
life-cycle
JEL: 
D31
I31
Document Type: 
Working Paper

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