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Home > Research and Studies > Bank of Japan Working Paper Series, Review Series, and Research Laboratory Series > Bank of Japan Working Paper Series 2006 > Nonlinear Income Variance Profile and Consumption Inequality over the Life Cycle
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In an economy with a seniority wage system, elderly workers are subject to greater income risks when they lose their jobs than young workers are. This paper investigates: (1) whether we can observe the age dependence of idiosyncratic income risks; and (2) the importance of age dependecne for the evolution of inequalities in consumption using Japanese micro data. Our estimation of the income process demonstrates a strong age dependence of income risks; at the age of 48, the variance of permanent income shocks begins to increase, which creates a nonlinear age?variance profile of income. This paper also uses structural estimation of a precautionary savings life cycle model to demonstrate that the nonlinearity in the income process is crucial for understanding the evolution of the consumption inequalities over age.
JEL Classification Number: D12, D31, D52, E21
Income risk, buffer stock savings, consumption inequality, method of simulated moments.