Income mobility, dynamics and risk over the working life: income insurance from taxes and cash transfers in 2001–2008

Register based Finnish panel data are used to examine income risk in the working age population. The paper considers the extent of risk reduction due to the tax-benefit system which is measured by successive differences between risk premia of factor, gross and disposable household income. Income risk has been estimated using a forward looking dynamic model for income mobility (deviations of log income from sub-population means) over a population strata by age, educational and socio-economic status. The population groups having relatively high labour/factor market risk seem to benefit most from the implicit income insurance provided by the public sector. The role of direct taxes is substantially lower than that of public cash transfers. The results based on the dynamic model are quite similar to those which are based on observed ex post values. The findings are qualitatively robust to a particular value of the degree of risk aversion assumed.

Keywords: Risk-premium, social protection, redistribution, age
Published: 4.2.2016
JEL: D31, D63, H24, H55
ISBN: 978-952-209-144-4 (pdf)
ISSN: 1795-1801 (pdf)
Publication (PDF)