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Life cycle inequality dynamics

Subject Area Statistics and Econometrics
Economic Policy, Applied Economics
Term from 2019 to 2024
Project identifier Deutsche Forschungsgemeinschaft (DFG) - Project number 430271414
 
Final Report Year 2025

Final Report Abstract

Concerns about inequality have re-entered the public arena. Our project covers a research agenda that focuses, from a life-course perspective, on the causes of inequalities in and fluctuations of economic resources, and their implications for welfare and policy, as well as the rigorous measurement of inequalities over the life-course that also accounts for risks and the inherent multidimensionality of well-being. One strand of our research focuses on the determinants of income and wealth at a certain point in the life course. We show that entrepreneurship, self-employment, and inherited company assets are strong predictors of being in the top 1% of income and wealth. The findings support the concept of intergenerational entrepreneurship as a key route to the top. This narrows the field of potential policy interventions: rather than broad skill- or education-based approaches, tackling inequality at the top may require more direct interventions in inheritance taxation and capital market access. Complementary, another strand of our research focuses on lifecycle dynamics. We examine, for the first time, lifetime earnings not just for continuously employed individuals but also for those with non-linear careers—including women, civil servants, and the self-employed. Key earnings determinants are found at three life stages: initial conditions (e.g., family background), adolescent factors (e.g., education), and adult choices (e.g., fertility). The findings underscore the compounded effects of early-life advantages and adult decision-making. We also explore family dynamics and relocation decisions. While men experience earnings gains post-relocation, women’s earnings stagnate or decline—especially when children are involved. This tied-mover penalty explains part of the persistent gender earnings gap. In other research, we show that working hours and their covariance with wages matter. Had workers realized preferred hours, inequality would have grown more slowly. This constraint binds particularly low-wage and female workers, who often work fewer hours than desired due to caregiving or limited flexibility. A third strand focuses on labor market and saving decisions. Earnings volatility discourages investment in risky assets. Higher-educated and risk-averse individuals are especially sensitive to wage risk, highlighting the need for tailored financial planning tools. Lifetime income is also shaped by shocks to wages and hours. Progressive taxation reduces cross-sectional inequality but provides limited lifetime insurance. Using sick days and hospitalizations, we construct indicators for transitory vs. persistent health shocks—crucial for social policy design. Finally, we propose a unifying framework to measure inequality over the life course, based on a dynamic social evaluation function. The resulting multivariate index is decomposable and accounts for time, risk, and multiple dimensions.

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