Income mobility, income risk and age – Finnish experiences in 1995–2008

A large register based Finnish income panel data with detailed information on the composition of income over a 14 year time period, 1995–2008 is used to examine Finnish income mobility and income risk. This paper first considers measures of income mobility which are based on the degree of inequality (Gini coefficient) reduction over time (Shorrocks 1978). Mobility in disposable income is decreasing with age, and with a further drop near retirement age. One observes a decrease in income mobility if the late 1990’s are compared with 2000’s. Permanent income inequality has increased in five year cumulated disposable incomes but not in factor incomes. If mobility is measured in absolute terms, there is little change, and the decrease in income mobility seems to be related to the rise in the inequality in cumulated incomes. In estimating relative risk premiums in average income, the education level, socioeconomic status and age are controlled for. Old age people have more stable incomes but contrary to conventional wisdom are exposed to some income risk. The paper presents estimates on the redistribution effect by age using differences between Gini coefficients of equivalised factor and disposable household income. Certainty equivalent income concepts are utilised to get some information on redistribution of risk. Young adults, 15–29 years old and elderly near retirement age 55–59 years old, seem to benefit most from implicit income insurance by public sector. But all age groups, including old age people gain from redistribution in certainty equivalent income relative to unadjusted redistribution of cash. Finding reduced income redistribution over the sample period is robust to a particular value of the degree of risk aversion assumed. It seems safe to conclude that the observed decrease in mobility in disposable household income which is attributed to reduced redistribution and could have shown as lowered income risk has not off-set the decrease in redistribution in cash. The results suggest that distribution of lifetime income has widened.

Published: 1.4.2012
JEL: D31, D63, H24, H55, I31, J14
ISBN: 978-952-209-102-4 (pdf)
ISSN: 1795-1801 (pdf)
Publication (PDF)