SFB 303 Discussion Paper No. A - 118

Author: Weizsäcker, Robert K. von
Title: Age Structure and Income Distribution Policy
Abstract: The major stylized fact of observed life-earnings patterns is that earnings rise at a decreasing rate with age. A simple microeconomic model of educational choice, being consistent with this observation, is designed. The model lends itself readily to aggregation over individuals and age groups. Thus, relations can be established between economic variables influencing the aggregate distribution of labour incomes and demographic variables determining the age structure of the population. Among the results are the following two:

- Overall earnings inequality is shown to be an increasing function of life expectancy and a decreasing function of fertility.

-The effectiveness of redistributive policies is sensitive to the age composition. In particular, the inequality-reducing effect of a one percent income tax rise is shown to be the smaller the older the population.

The present study of interrelations between age structure differentials, income inequality and distribution policy generally suggests that existing models of income dispersion should be extended to include age composition as an explanatory variable. Otherwise, the extent of economic inequity and the impact of redistributive government actions may be misjudged.
Creation-Date: April 1987
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