Life course changes in income: An exploration of age- and stage effects in a 15-year panel in the Netherlands

This paper describes life course changes in income in the Netherlands. Life course changes are distinguished in ‘age’ effects and ‘stage’ effects. Age effects are the changes in income that occur when people grow older. Stage effects are changes in income that people experience after demographic events such as entering marriage, having children and getting divorced. Previous analyses of such effects were often based on cross-sectional data. This paper uses new panel data to analyze income dynamics. The panel consists of annual tax records for a large sample of individuals over a 15-year period (1989-2004). Tax records were matched with individual information from the (municipal) registers on respondents’ ages and living arrangements. Using age-cohort analyses as well as fixed-effects regression models, we observe that the age-income pattern is less pronounced when it is analyzed in a real dynamic perspective. There is indeed an income increase during the early adulthood stage, but the subsequent ‘child valley’ or life cycle squeeze is less pronounced than has been believed. Moreover, the decline in income during old age is less pronounced than cross-sectional studies have suggested. We also see, however, that the form of the age patterns is sensitive to the way in which period effects are taken into account. We further observe positive effects on income of marriage, and negative effects of children and divorce— but these effects are to a large extent due to the economies of scale of living together and to the (assumed) costs of children, and less to real changes in income. There is also no real increase in income after the children leave home, only the costs of a household decline. We end with a critical discussion of the role of equivalence scales in income dynamics, and argue that more research is needed on the consumption side of household income dynamics.