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Abstract:
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We use a unique time-series of administrative tax return data over 2005-2014 to estimate the life cycle profile of income. Tax data reduces measurement error in income, allowing us to accurately measure income uncertainty. We estimate an income process with a permanent and a transitory shock. We then link the administrative data directly to the wealth and portfolio information of the Irish Household Finance and Consumption Survey. We further study the characteristics of households who were more affected by the crisis in Ireland than others, and we derive income profiles for three education groups. Finally, we analyse the impact of permanent and transitory income shocks on households' financial behavior. We find that earnings inequality has increased over the years 2005-2014. For market income this is the case because earnings fell dramatically over the entire distribution during the recession but in particular for lower incomes. When adding social transfers to income, the fall in earnings is mitigated. Households with more volatile incomes tend to hold significantly larger wealth buffer stocks, specifically larger holdings of liquid financial assets.
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