Use of panel data in applications of income dynamics

By using panel data, the paper aims to (1) describe changes in the income of households and to (2) present an econometric model for explaining short-term changes in income. The data are derived from the income distribution statistics compiled by the Central Statistical Office of Finland. The panel feature has been a part of the statistics since 1982. According to the results, the income of households varies considerably from year to year. The explanatory power of the econometric model was satisfactory. The income level of the previous year turned out to be the best regressor: the panel data show that income differences level out regardless of what cross-section data may indicate. The next best regressors turned out to be changes in the socio-economic status and the composition of the household. On the basis of the results, use of panel data can be recommended for research on income and on other applications ofeconomics. In the present study, the duration of the panel was only one year, which is why the application of the data is more limited than would be the case with longer panels. Long panels, on the other hand, suffer from a reduction in data due to nonresponse and overcoverage.