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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.

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.