Age structure and income distribution policy

The dependence of earnings on age is a firmly established empirical fact. A simple microeconomic model of educational choice, being consistent with this observation, is designed. The model lends itself readily to aggregation over individuals and age groups. Thus, relations can be set up between economic variables influencing the aggregate distribution of labor incomes and demographic variables determining the age structure of the population. The main results of the present study are: 1) overall earnings inequality is shown to be an increasing function of life expectancy and a decreasing function of fertility. 2) The effectiveness of redistributive policies is sensitive to the age composition. In particular, the inequality-reducing effect of a 1% income tax rise is shown to be smaller the older the population.