This study quantified the sources of lifetime inequality, which is defined as the increase in the within-age-group wage income inequality by age. First, the degree of the lifetime wage income inequality in Korea was estimated by using the wage income data in the Korea Labor Income Panel Survey (KLIPS) from 2002 to 2015. Second, the sources of lifetime wage income inequality were analyzed based on the life cycle model that reflects the endogenous human capital accumulation of Huggett et al. (2011). Specifically, this study quantified whether lifetime income inequality is due to the differences in the initial conditions at the time of entry into the labor market (human capital, assets, and learning ability), or an exogenous change in labor productivity during the life cycle. Then, an analysis was conducted to examine which initial conditions of human capital, assets and learning abilities have a more significant impact on lifetime income inequality.
According to the analysis, the difference in the initial conditions (66.9%) at the time of entry into the labor market had a greater impact on the lifetime wage income inequality than the exogenous labor productivity change during the life cycle (33.1%). In particular, it was found that the difference in the amount of human capital in the initial conditions was most important. These results are consistent with the findings of Huggett et al. (2011) who studied the US’ case. The results in this study suggest that the government should improve the quality of secondary school and college education in order to alleviate lifetime income inequality. It also suggests that policy efforts should be made to improve human capital in regards to low-income students by widening educational opportunities through welfare programs.
Additionally, the analysis found that the difference in human capital at the beginning stage of entry into the labor market was an important factor in lifetime wage income inequality, but the impact of the changes in labor productivity during the life cycle was non-negligible. Considering the specificity and viability of policies, those that reinforce social safety nets for income risks in the labor market such as unemployment benefits, vocational training and health insurance can be more effective policy instruments to mitigate lifetime income inequality in the short-term.