(joint with Peter Haan and Victoria Prowse)
We show how taxes and three transfer programs—unemployment insurance, social assistance and disability benefits—affect the inequality of lifetime income, and we explore how well taxes and transfer programs mitigate lifetime income risk due to labor market frictions. Calculations based on income trajectories generated from a dynamic life-cycle model show that taxes and transfer programs eliminate about 20% of the inequality of lifetime personal income as measured by the Gini coefficient. Social assistance is the most cost-effective transfer program for reducing lifetime income inequality followed by unemployment insurance; disability benefits are generally received by individuals in the middle of the lifetime income distribution and, therefore, are not strongly redistributive on a lifetime basis. Social assistance eliminates the majority of the lifetime income risk due to labor market frictions. Meanwhile, taxes become less progressive as frictions increase meaning that taxes do nothing to mitigate friction-driven lifetime income risk.