Income Dynamics and the Life Cycle

John A. Rigg and Tom Sefton

Published February 2004

This paper argues that our understanding of income and poverty dynamics benefits from taking a life cycle perspective. A person¿s age and family circumstances ¿ the factors that shape their life cycle ¿ affect the likelihood of experiencing key life events, such as partnership formation, having children, or retirement; this in turn affects their probability of experiencing rising, falling, or other income trajectories. Using ten waves of the British Household Panel Survey, we analyse the income trajectories of people at different stages in their lives 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 or falling trajectories, but that there is considerable heterogeneity in income trajectories following these different events. Typically, individuals experiencing one of these life events are around twice as likely to experience a particular income trajectory, but most individuals will not follow the trajectory most commonly associated with that life event. This work improves our understanding of the financial impact of different life events and provides an indication of how effectively the welfare state cushions people against the potentially adverse impact of certain events.