Age-income Profiles Research Articles

The Relationship between Age at First Birth and Mother's Lifetime Earnings: Evidence from Danish Data.

BackgroundHaving children creates career interruptions and reductions in labor income for women. This study documents the relation between the age at first birth (AFB) and women’s labor income. We study these dynamics in the short run (i.e. ratio between labor income at AFB and two years prior to AFB) and long run (i.e., positive/negative differences in total lifetime labor income).MethodsUsing unique Danish administrative register data for the entire Danish population, we estimate the age-income profiles separately for college and non-college women conditional on marital status, and mothers’ age at first birth (AFB). We compute the lifetime labor income differentials by taking the differences between the labor income of women with and without children at each AFB.ResultsThe short-run loss in labor income, defined as the difference in percentages between the income earned two years prior to AFB and income earned at AFB, ranges from 37% to 65% for college women and from 40% to 53% for non-college women. These losses decrease monotonically with respect to AFB for both education groups. Our results on the lifetime labor income differentials between mothers and women without children also show a net effect that is monotonic (from negative to positive) in AFB. With AFB<25, the lifetime labor income loss for college women is -204% of their average annual labor income and this figure is -252% for non-college women. There are lifetime labor income gains with AFB>31. The largest gains for college women are 13% of their average annual income and this figure is 50% for non-college women.ConclusionWomen have a large and unambiguous short-run reduction in labor income at their AFB. In terms of lifetime labor income, both college and non-college women, compared to childless women, are associated with lower income of more than twice their respective average annual income when bearing a child at AFB<25. In other words, women with AFB<25 are associated with a lower lifetime income of more than two years of annual labor income. The lifetime labor incomes for college and non-college women associated with AFB>31 are relatively higher.

Population ageing and the growth of income and consumption tax revenue

This paper investigates the implications of population ageing and changes in labour force participation rates for projections of revenue obtained from personal income taxation and a consumption tax (in the form of a broad-based goods and services tax). A projection model is presented, involving changing age–income profiles over time for males and females. The model is estimated and applied to New Zealand over the period 2011–2062.

Unemployment and portfolio choice: Does persistence matter?

Households can rely on private savings or on public unemployment insurance to hedge against the risk of becoming unemployed. These hedging mechanisms are used differently across countries. In this paper, we use a life cycle model to study the effects of unemployment on the portfolio choice of households in the US and in Germany. We distinguish short- and long-term unemployment and find that, in case of short-term unemployment, unemployment insurance offsets the negative impact of unemployment risk on households’ equity holdings. When incorporating long-term unemployment, the US-equity share drops. This negative effect of unemployment is mainly driven by its high expected duration. In Germany, however, long-term unemployment does not significantly alter portfolio decisions. We show that different responses of portfolios to unemployment risk can be attributed to both differences in social security payments and different age-income profiles.

The emigration of immigrants, return vs onward migration: evidence from Sweden

This study analyzes emigration propensities for natives and immigrants delineating among immigrant emigrants between return and onward migration. Results indicate that emigrants are positively selected in terms of upper education. Well-educated immigrants have a higher probability of leaving for third-country destinations than returning to countries of origin. Predicted age–income profiles for immigrants show that return migrants have higher adjusted mean income levels than non-emigrants up to the age of 40. Onward migrants have lower predicted income levels across the age distribution due to this group’s composition and relatively low employment levels in Sweden. Separate estimations by region of origin indicate that within each group, onward migrants are more positively selected then return migrants in terms of income.

Distributive implications of an aging society

The paper reviews recent research on the impact of an aging population on the distribution of income. After briefly discussing the demographic conditions responsible for population aging, a short account is given of demographic trends in the industrialized world. In order to disentangle the many potential channels by which an aging society affects the dispersion of income, several levels of aggregation are distinguished. The paper differentiates between intra- and intergenerational issues, between direct and indirect demographic inequality effects, and between the distribution of current and lifetime income. It emphasizes the critical role of age-related redistributive tax-transfer systems, like public pension schemes and health care systems. Sources of distributional policy conflicts are identified at both the cross-section level and the lifetime level of income inequality. The institutional design of intergenerational burden sharing, individual disincentive reactions, shifts in age-income profiles related to cohort size, and politico-economic repercussions are shown to drive the relation between population aging and income distribution in distinct and partially opposite ways.

Age-Adjustment of Income Inequality Trends: A Methodological Critique

This article re-examines standard methodology used to eliminate the impact of changes in age composition and age-income profiles on trends in income inequality. Attempts at such adjustment rely primarily on the approach developed in Paglin (1975) or on subsequent refinements of the Paglin measure (Formby et a!., 1989). The present study identifies fundamental shortcomings in the approach and, hence, in associated estimates. To illuminate the degree of imprecision asso­ ciated with the Paglin-type measure, the paper employs an alternative age-adjustment procedure based on an Entropy measure of dispersion discussed in Shorrocks (1980) and Mookherjee and Shorrocks (1982). The Entropy measure overcomes the problems with Paglin's approach and al­ lows age-related changes to be accurately identified. Comparing age-adjusted inequality changes between 1980 and 1986 calculated in Formby et a!. (1989), which are based on the Paglin-type measure, with those based on the Entropy measure reveals that the former approach overstates the importance of age by over 60 percent.

Age Clienteles Induced by Liquidity Constraints

Lifetime consumption-portfolio rules are analyzed for individuals with nonmarketable income. Future income for which liquidity constraints are not binding is effectively and is capitalized, while other income is not capitalized. If the age-income profile is humped, then, for a given level of marketable wealth, relative risk aversion to gambles in marketable wealth is low for the middle-aged and high for the retired, in the special case of isoelastic utility. The existence of these clienteles suggests that equilibrium security prices are determined, in part, by the distribution of wealth over age groups in the economy. The existence of nonmarketable income has profound and puzzling consequences for an individual's consumption/portfolio choice. Consequently a model of lifetime policies in the presence of liquidity constraints provides a wealth of opportunities to explain interesting phenomena. The desirability of an elegant model is even greater when income from human capital is systematically related to age. With a realistic age profile of nonmarketable income one can provide intuition for behaviors that are common within age cohorts. Unfortunately the analysis of optimal policies, as in Samuelson (1969), is difficult after liquidity constraints are introduced. Portfolio choice is not separable from the consumption choice, and the propensity to consume is not independent of wealth, even when preferences are time-additive and exhibit constant relative risk aversion to gambles in consumption (CRRA). One must work considerably harder to understand the implications of a model once nonmarketable income is added. Yet it is this complexity that makes the model rich in behavioral implications. This paper analyses an individual's lifetime problem in the presence of liquidity constraints. A finite length of life is assumed and optimal choices are described as functions of lifetime patterns of income. In particular, when income patterns used in numerical solutions of the lifetime problem mimic (cross sectional) age-income profiles and CRRA utility is assumed, the elderly are relatively risk averse in their portfolio choice, the middle-aged are risk tolerant and the young adults are in the middle range. Furthermore, the marginal propensity to consume from wealth is a bowl-shaped function of age; in some circumstances young adults optimally consume all of their income upon receipt. The specification of liquidity constraints in a model of consumption/portfolio

The Impact of Federal Income Taxes and Cash Transfers On the Distribution of Lifetime Household Income, 1969-1981

This study uses a longitudinal sample of stable households to assess the impact of federal taxes and transfers on the distribution of household income during the period 1969-1981. After controlling for the upward movement in age-income profiles across birth year cohorts, earned lifetime incomes are found to be more equally distributed than earned annual incomes. The overall tax and transfer system is found to have a larger redistributive effect on lifetime incomes. While taxes are relatively more important than transfers in reducing lifetime income inequality among married couples, the opposite is true for single-headed households. Taxes and transfers also redistribute lifetime income from married couples to single-headed households.

Human capital and job levels: Explaining the age-income funnel

In a previous paper on optimal human capital investment [Theeuwes et al. (1985)] we derived earnings functions based on a lifetime wealth maximization assumption. A Cobb-Douglas specification for the human capital production function resulted in a non-linear estimation equation in which earnings were explained as a function of years of experience. In the present paper we re-estimate this model using individual instead of aggregate data and extend the model with job level information as a contribution to the explanation of the age-income funnel. The latter refers to the increasing variance of the age-income distribution for older age brackets. Assignment to job levels over the life cycle contributes significantly to the variance of the ageincome profile.

An Empirical Study of the Life-Cycle Hypothesis with Respect to Alumni Donations

It has been shown through the life-cycle hypothesis that as age increases so does consumer spending. We propose to relate this hypothesis to the specific case of charitable contributions at a small liberal arts college. This study is similar to one done previously by James H. Grant and David L. Lindauer (4). However, our model specification and econometric treat ment differ somewhat from their study. Tax treatment of charitable donations plays an important role in the size of donations. Many previous studies have assessed this relationship and found it to be positive.1 Grant and Lindauer go on however to say that more than just income and marginal tax rates determine the level of alumni contributions. The results of their study demonstrate that although the growth rate of alumni donations does eventually become nega tive, this point does not coincide with the retirement age. This suggests that the level of contributions is not entirely dependent on the income profile of the donor. Our results were not consistent with this finding. Instead of a diverging pattern of contribution level, we discovered that the growth rate of donations coincided with the age-income profile and became negative at the retirement age.

Measuring the redistributive impact of public pensions

In this paper a formula is introduced for measuring the redistributive impact of public pensions over the life cycle of different income classes. This measure takes account of redistributions of lifetime incomes within a generation, but not of redistributions which are purely intertemporal for one individual and can be used for different pension systems. An empirical application is given with data on the Dutch income distribution. It appears that the redistributive impact of the public pension is determined by the form of the age-income profile, economic growth, the real rate of interest and the length of the working life for different income classes.

Population growth, life-cycle saving, and international differences in steady-state optimal saving rates

Life-cycle savings theories have been a seminal development in analyses of the relationship between rational savings patterns for individuals and the accumulation of wealth or capital at the level of the society as a whole. Applications of the theories in industrialized countries never investigated the significance of large differences in birth and death rates across societies. The strong demographic components of life-cycle saving analysis are here the center of focus. Illustrative general numerical applications of a modified version of the life-cycle approach suggest that mortality differentials comparable to those presently encountered among nations are consistent with very large differentials in steady-state optimal ratios of wealth-to-income. Specific application to Peru of the model estimated by Tobin for the United States indicates that high levels of mortality, current Peruvian birth rates, and Peruvian age-income profiles imply optimal rational savings rates far below those of the United States.

Income Distribution in Canada: A Reply to Needleman and Shedd

Our reply to Lionel Needleman is in two parts. The first is a direct reply to the points he has raised. The second is an elaboration of the theory on which our analysis was based. Although the Needleman paper is very critical in its tone, its facts and arguments do not refute the points made in our paper, or even cause them to need modification. For the sake of clarity of organization, we address the four points in Needleman's summary, dealing first with his second and third points since our comments on them are brief. Needleman says that the separate effect of the changing age-mix on inequality has been negligible. We mentioned this change only because Love and Wolfson (1976) had shown that it would have increased the Lorenz-Gini coefficient by about 2 per cent. All we needed for our argument was that such a change had caused no substantial decrease in the coefficient, and Needleman agrees that it hadn't. His third point is that the reduction in inequality within age-groups has been tiny in absolute terms. We didn't separate the within-age-group inequality from the rest of the inequalityI in the Paglin-Gini coefficient because it wasn't needed for our argument. However, once the inequality has been segmented into components which are vastly different in size, changes in any component should be measured as percentage changes. By Needleman's calculation, this within-group inequality has decreased by 7.5 per cent, which is a respectable decrease. His fourth point is that the more uneven age-income profiles since 1951 have had only a small effect on total inequality. In this, Needleman agrees with our main point since we also said that the changes had had little effect on the Lorenz-Gini coefficient. As we pointed out, and as Needleman emphasizes in his Table 1, this stability was the effect of two offsetting changes. The acceptable inequality, caused by increased curvature of the age-income profile, increased, while the undesirable inequality, measured by the Paglin-Gini part of the Lorenz-Gini, decreased. Finally we come to the first of Needleman's four points that the Paglin (1976) approach

Age-income profiles, income distribution and transition proportions

This paper presents a model to link age-income profiles, income distribution, and transition proportions. Transition proportions play a central role in the Markov-chain approach to income distribution. This stochastic model is much criticized, but it is shown in the paper that its most attractive characteristic can be maintained, while at the same time integrating it with a micro-economic foundation of age-income profiles. These profiles are inferred from capability development and individual choice. The model also analytically generates an income distribution.

Boekbespreking

An Econometric Model of Age‐Income Profiles, M. M. G. Fase. The Chi‐squared Disstribution, H. O. Lancaster. The Single Server Queue, J. W. Cohen. Emperical Econometrics, J. S. Cramer.