Earnings risk, government policy and household welfare

This project will use a new, non-parametric research method to uncover new facts on earnings dynamics in the UK and to study their implications for consumption, wealth inequality, and welfare under the current UK tax and transfer systems. It will also assess whether the insurance implied by the current UK tax and transfer structure can be modified to improve household welfare. 

A key secondary output of the study will be a toolkit to enable researchers to carry out the same analysis on data from other countries.

Previous studies on earnings dynamics have assumed earnings processes that are both symmetric (i.e. positive and negative shocks are equally likely) and linear (i.e. shocks have the same persistence independently of their magnitude and of the individual’s age and earnings history). However, the availability of large longitudinal data sets and new methodologies have allowed recent studies to demonstrate the presence of substantial asymmetries and non-linearities in the earnings processes of both the US and Norway.

This project will extend this analysis to the UK, using the New Annual Survey Panel Dataset (NESPD), which contains representative earnings data on around 170,000 individuals for the period 1975-2014. The research team will consider the implications of the findings for consumption and wealth, and thus for the welfare benefits of different tax and social security programmes.  

The findings will inform the public debate and policy-making process on the characteristics of UK earnings dynamics, and on the determinants of consumption, income, and wealth inequality. They will also provide evidence for potential changes to tax and social insurance policies, such as Working Tax Credits.