On the basis of one and the same basic economic model, namely the one contained in Chapter 2, a third distribution level can also be explicitly analysed: that of lifetime earnings.

In fact an examination of the lifetime earnings distribution suggests itself – Chapter 2 is after all concerned with a life-cycle model. The aim of every individual was to maximise the present value of his disposable annual earnings, therefore his disposable lifetime earnings, and the question obviously occurs as to the distribution of this target value. Simultaneously, by way of concentration on lifetime income, the distortion effect induced by the age structure of the population is eliminated (cf. Section 4.4.3).

In contrast to the two previous chapters, the present chapter will no longer restrict itself to snapshots of the distribution situation, but will use the total earnings phase of the economic subjects as the basis for considering inequality issues. This method of observation is of great normative significance. The range of questions treated here can be found in the general outline in the introduction of this book.

The basic set-up

In accordance with the economic model drafted in Chapter 2, every individual j behaves as though he wanted to maximise the value Wj of his disposable annual earnings discounted from the time of his economic birth. In order to obtain the optimal value of his disposable lifetime earnings so defined, the individual must solve a two-stage optimisation problem whose structure the reader may like to visualise with the help of Fig. 7.