Earnings, labor market dynamics, and inequality in Sweden

In this paper, we develop a comprehensive model of earnings and labor market dynamics, where employment and job change are endogenous. The model is estimated by applying the method of indirect inference on Swedish register data and then used to carry out some policy experiments. There are three key conclusions from these experiments. First, employment shocks early in life can to a larger extent be mitigated before retirement compared to employment shocks occurring later. Second, we find that idiosyncratic productivity shocks, unobserved heterogeneity, and education contribute substantially to life cycle earnings inequality. Finally, we find that transitory shocks to employment risk have negative effects on earnings and employment in the short run but may increase labor market fluidity in the medium run.