Nonlinear Earnings Dynamics and Inequality over the Life Cycle: Evidence from Japanese Municipal Tax Records

This paper examines life-cycle earnings risk and income inequality in Japan using municipality administrative tax records covering 2011–2021. We estimate an age-dependent quantile model that decomposes idiosyncratic earnings shocks into persistent and transitory components, allowing shock persistence to vary with earnings history and age. We find significant nonlinear persistence. the predictive power of past earnings is high for shocks consistent with an individual’s position but drops sharply for `reversal’ shocks that may represent career transitions. While individual inequality rises monotonically with age, households effectively smooth risk, as evidenced by lower income variance and a J-shaped inequality profile for equivalized household income. However, our impulse response analysis reveals that this smoothing does not apply to all types of shocks. Estimating the earnings process separately for different income measures, we find that a persistent shock at a given percentile has a larger impact on total household income than on household head earnings, suggesting positively correlated shocks to spousal earnings.

Discussion Paper

RIETI Discussion Paper Series 25-E-081, 2025.