Drawing on and extending the theory of human capital, a comprehensive life-cycle model of individual earnings is designed. The approach taken permits an isolated analysis of three interconnected levels of aggregation (intra-cohort distribution, overall distribution, and lifetime distribution) within the same dynamic microeconomic model of educational choice. In this way, interrelated economic, demographic, and fiscal effects on earning inequality are established. The paper reveals that reallocation reaction of optimizing individuals, combined with population heterogeneity by productive endowments, learning abilities and working age, can destroy simple relationships between the standard of living, current earnings inequality, and public distributional policy.
Lifetime Earnings Inequality in Germany