Income Dynamics and the Life Cycle

This paper argues that our understanding of income and poverty dynamicsbenefits from taking a life cycle perspective. A person’s age and familycircumstances – the factors that shape their life cycle – affect the likelihood ofexperiencing key life events, such as partnership formation, having children, orretirement; this in turn affects their probability of experiencing rising, falling, orother income trajectories. Using ten waves of the British Household PanelSurvey, we analyse the income trajectories of people at different stages in theirlives in order to build a picture of income dynamics over the whole life cycle.We find that particular life events are closely associated with either rising orfalling trajectories, but that there is considerable heterogeneity in incometrajectories following these different events. Typically, individuals experiencingone of these life events are around twice as likely to experience a particularincome trajectory, but most individuals will not follow the trajectory mostcommonly associated with that life event. This work improves ourunderstanding of the financial impact of different life events and provides anindication of how effectively the welfare state cushions people against thepotentially adverse impact of certain events.[...]