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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.

This paper studies the effects of favorable marginal tax treatment of older workers on their optimal life-cycle labor supply, retirement timing, and savings. I develop a structural model in continuous time where the life cycle of a representative agent is divided into three distinct phases: pre-treatment, post-treatment, and retirement. Solutions for consumption/savings, labor supply/leisure, and retirement timing are then obtained by solving the model as a salvage value problem. I then calibrate the model to Swedish earnings data and find that the increased extensive margin labor supply is partially offset by a reduction in hours worked during the pre-treatment period. The total effect is however an increase in life-cycle labor supply and consumption.

Alternative structures of public pension programs have distinct implications for the trade-offs that determine economic behavior over the life cycle. This paper studies these implications in terms of labor supply and economic inequality to characterize the equity–efficiency trade-off between a redistributive (Beveridgean) and an earnings-based (Bismarckian) benefit formula. The economy is modeled as a continuous-time overlapping generations model with endogenous labor supply, savings, and human capital formation. Individuals differ in ability, and they are free to choose how much to work at each period in time and when to enter and exit the labor market. Numerical simulations provide the qualitative insights that a redistributive pension system introduces opposite effects on the incentives to retire for high- and low-skilled individuals, which leads to an increased earnings inequality. This effect can, in turn, dominate the reduced pension inequality such that lifetime and population-wide income inequality increases. Ultimately, it appears that the equity–efficiency trade-off is difficult to characterize when accounting for endogenous labor supply on both the intensive and extensive margins.

This paper explores the effects of pension illiteracy on aggregate labor supply and the redistributive performance of public pension systems. I consider an overlapping generations model in continuous time populated with individuals who differ in labor productivity and pension literacy. Agents suffering from pension illiteracy fail to fully account for the structure of the pension system when planning their economic behavior over the life cycle. In particular, I assume that myopic agents treat changes to replacement income as exogenous in the active--retired trade-off and contributions to the pension system as a pure labor income tax. I find that pension illiteracy can negatively impact aggregate labor supply and increase earnings inequality and lifetime income inequality. This suggests that pension illiteracy may limit the efficiency gains of increasing the correlation between individual contributions and benefits, making the equity--efficiency trade-off difficult to characterize in the context of pension reforms.