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In this paper, we develop a comprehensive model of earnings and labor market dynamics, where employment and job change are endogenous. The model is estimated by applying the method of indirect inference on Swedish register data, and then used to carry out some policy experiments. There are three key conclusions from these experiments. First, employment shocks early in life can, to a larger extent, be mitigated before retirement compared with employment shocks occurring later. Second, we find that idiosyncratic productivity shocks, unobserved heterogeneity, and education contribute substantially to life-cycle earnings inequality. Finally, we find that transitory shocks to employment risk have negative effects on earnings and employment in the short run but may increase labor market fluidity in the medium run.

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 pension entitlements and study lifetime income inequality conditional on the pre- and post-1990’s pension system. We find that permanent earnings differences generally contribute 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.

In this paper, we present a life-cycle earnings dynamics model including endogenous employment and job change. The model is estimated with the method of indirect inference using Swedish register data. By simulating data from this microeconomic model, we study the macroeconomic consequences of transitory shocks to unemployment risk. The results show that transitory aggregate shocks to unemployment risk have long-lasting negative effects on employment, income, and increases earnings volatility. By studying how unemployment at different ages affects the accumulation and distribution of pension entitlements, we find that becoming unemployed at 40 has the largest effect on pension accumulations. Furthermore, unobserved individual heterogeneity contributes substantially to the observed life-cycle earnings inequality for both men and women in Sweden.

In this paper, we present a life-cycle earnings dynamics model including endogenous employment and job change. The model is estimated with the method of indirect inference using Swedish register data. By simulating data from this microeconomic model, we study the macroeconomic consequences of transitory shocks to unemployment risk. The results show that transitory aggregate shocks to unemployment risk have long-lasting negative effects on employment, income, and increases earnings volatility. By studying how unemployment at different ages affects the accumulation and distribution of pension entitlements, we find that becoming unemployed at 40 has the largest effect on pension accumulations. Furthermore, unobserved individual heterogeneity contributes substantially to the observed life-cycle earnings inequality for both men and women in Sweden.

This paper deals with optimal nonlinear taxation of labor and entrepreneurial income and extends the recent study of Scheuer (2014) to accommodate equilib- rium unemployment. We find that even if employment is endogenous, the govern- ment can achieve redistribution of income through taxation without distorting production efficiency. This is possible if the government taxes entrepreneurial and labor income separately. The results also show that including involuntary unem- ployment creates an incentive to tax entrepreneurial income at lower marginal rates and labor income at higher marginal rates than otherwise.

Chapter [I] analyses the dynamic properties of life-cycle earnings of men and women in Sweden by fitting a model to the covariance structure of earnings. We find that the financial crisis of 2008 did not have any major impact on the variability of earnings and that the upward trend in permanent earnings inequality observed in Sweden during the 1990s does not continue in the 2000s. Using the model to simulate the accumulation of income pension entitlements, we find that college-educated workers have smaller variations in pension entitlements than workers with less education.

Chapter [II] presents a life-cycle earnings dynamics model that includes endogenous employment and job change. The model is estimated on Swedish register data using indirect inference. By simulating data from this model, we study the macroeconomic consequences of transitory shocks to unemployment risk, how unemployment at different ages affects the accumulation of pension entitlements, and analyze how different factors contribute to earnings inequality. We find that transitory aggregate shocks to unemployment risk have long-lasting negative effects on employment and earnings, that becoming unemployed at age 40 has a large negative effect on pension accumulations, and that unobserved individual heterogeneity contributes substantially to the observed life-cycle earnings inequality for both men and women in Sweden.

Chapter [III] presents a model of earnings dynamics that includes transitions in and out of employment and business cycle fluctuations. The model is estimated using indirect inference and a mix of Swedish register, survey and macro data. We find that the transitions from unemployment to employment are more sensitive to business cycle fluctuations than the probability of remaining employed. By simulating data from the model, we find that the business cycle has a relatively small impact on earnings inequality in Sweden and that young workers are more sensitive to business cycle fluctuations than older workers.

Chapter [IV] deals with optimal nonlinear taxation of income and profits in a general equilibrium model with frictional unemployment. We find that the government can achieve redistribution of income through taxation without distorting production efficiency. This outcome is possible if the government uses two nonlinear tax instruments, taxing profits and labor income separately. The results also show that including involuntary unemployment creates an incentive to tax entrepreneurial income at lower marginal rates and labor income at higher marginal rates than otherwise.

This paper analyzes the dynamics of earnings over the life-cycle, based on Swedish data, and the evolution of permanent and transitory earnings inequality for 2002-2015. We use data on earnings from administrative records gathered in the ASTRID database. We find that features of the data does not match the predictions of the heterogeneous or restricted income profile models commonly applied in the earning dynamics literature and estimate an alternative permanent- transitory (PT) error components model. Analyzing the covariance structure of both male and female earnings, controlling for educational background, we find that the upward trend in permanent earnings inequality observed in Sweden during the 1990s does not seem to continue during the 2000s, and the financial crisis of 2008 did not have any major impact on the variability of earnings. We further simulate the accumulation of income pension entitlements and find that variations in pension entitlements is smaller among college educated workers.