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Measuring the Variance-Age Profile of Lifetime Income

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  • Benjamin Eden
  • Ariel Pakes

Abstract

This paper presents an operational meaning to the concept of the variance in lifetime income in terms of the discounted variance of T mutually uncorrelated, sequentially realized, random variables. It is then shown how the logical implications of the lifecycle consumption model can be used to estimate this series of variances, called the variance-age profile of lifetime income, and we refer to an earlier paper by Eden (1977) to show how this variance-age profile can be used to compare the riskiness of alternative labor income paths. Finally the estimation technique is applied to Israeli data in order to compare the riskiness of the earnings path of those who attended college with that of those who terminated their education at the high school level in that economy, and to consider data requirements and estimation problems in greater depth.

Suggested Citation

  • Benjamin Eden & Ariel Pakes, 1979. "Measuring the Variance-Age Profile of Lifetime Income," NBER Working Papers 0350, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:0350
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    References listed on IDEAS

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    1. Hall, Robert E, 1978. "Stochastic Implications of the Life Cycle-Permanent Income Hypothesis: Theory and Evidence," Journal of Political Economy, University of Chicago Press, vol. 86(6), pages 971-987, December.
    2. Eden, Benjamin, 1980. "Stochastic Dominance in Human Capital," Journal of Political Economy, University of Chicago Press, vol. 88(1), pages 135-145, February.
    3. Milton Friedman, 1957. "A Theory of the Consumption Function," NBER Books, National Bureau of Economic Research, Inc, number frie57-1, February.
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