The measurement of structural and exchange income mobility

Chakravarty, Dutta and Weymark (1985) present operational axioms for an ethical index of income mobility that are best suited for a two period world. This paper suggests a decomposition of this index into two terms: (i) an index of structural or snapshot mobility, which captures the welfare effect of differences in the inequality of the cross-section income distributions; and (ii) an index of exchange or rerankings mobility, which captures the welfare impact of rank reversals between the first- and the second-period income distributions. Income inequality reductions and rank reversals are always welfare enhancing. The properties of all the income mobility concepts introduced in the paper do not require any new value judgements beyond the traditional ones.     

CONSOLIDATING THE EVIDENCE ON INCOME MOBILITY IN THE WESTERN STATES OF GERMANY AND THE UNITED STATES FROM 1984 TO 2006

The cross‐national intragenerational literature has often analyzed income mobility within short time periods over which mobility might reasonably be thought of as invariant. Here, we argue that a great social transformation—German reunification—abruptly and permanently altered mobility. Using standard measures (with panel data for the western states of Germany and the United States) over the period 1984–2006, we find the conventional result that income mobility is greater in Germany. But when we cut the data into 5‐year windows, we find that income mobility declines significantly over the years immediately following reunification in Germany but not in the United States, using both measures. (JEL J1, J6)     

INEQUALITY AND TRUST: NEW EVIDENCE FROM PANEL DATA

We estimate the causal link from income inequality to generalized trust by reconsidering the country‐level evidence on this issue. First, we exploit the panel dimension of the data, thus controlling for any country unobservable time‐invariant variables, and find a negative relationship between the two variables that holds only for developed countries. Second, we focus on these advanced economies and provide instrumental variable estimates using the predicted exposure to technological change as an exogenous driver of inequality. According to our findings, the negative causal effect of inequality on trust is even larger than that coming from ordinary least squares estimation. We also provide new insights on the effects of different dimensions of inequality, exploiting measures of both static inequality—such as the Gini index and top income shares—and dynamic inequality—proxied by intergenerational income mobility. (JEL D31, O15, Z13)     

WHAT DRIVES SECOND GENERATION SUCCESS? THE ROLES OF EDUCATION,CULTURE, AND CONTEXT

I explore differences in intergenerational income mobility among second generation Australians—why do some communities do better or worse than would be expected from first generation incomes alone? I present a new decomposition of this exceptional income mobility, finding exceptional educational mobility drives many of these differences. Drawing on rich survey and test score data, I provide evidence that educational mobility partly reflects a role for culture—but also the wider context of migration. In particular, migrants facing higher first generation income penalties tend to aspire to and acquire more education, and see it as more important to success. (JEL J62, F22, I2)     

THE COLLAPSE AND RECOVERY OF THE CAPITAL SHARE IN EAST GERMANY AFTER 1989

After the 1990 unification, East Germany's capital income share plunged to 15.2% in 1991, then increased to 37.4% by 2015. To account for these large changes in the capital share, I model an economy that gains access to a higher productivity technology embodied in new plants. As existing low productivity plants decrease production, the capital share varies due to the nonconvex production technology: plants require a minimum amount of labor to produce output. Two policies—transfers and government‐mandated wage increases—have opposite effects on output growth, but contribute to lowering the capital share early in the transition. (JEL E20, E25, O11)     

FINANCE-INEQUALITY NEXUS: THE LONG AND THE SHORT OF IT

Financial development affects income inequality differently in the short and in the long term. Investigating OECD countries from 1870–2011, we find in the short run, an improvement in financial development tends to reduce inequality, while in the long run, more finance contributes to more inequality. The short-run effect concurs with theories advocating financial development increases the availability of financial services, primarily for the poor. However, this effect becomes nil within a few years. Results thus imply that policies aimed at reducing inequality through improving access of the poor to finance need to be carefully designed to ensure longevity of impact. (JEL O15, O16, D31, G20, E44)     

The influence of earnings on income distribution in the United States

This article discusses whether the so called “skill-biased technological change” hypothesis is able to explain the individual earnings inequality in the U.S. during the period 1968–2000. Using the statistic information supplied by the Census Bureau and the Bureau of Labor Statistics, the article analyzes the earnings evolution, explaining the reasons why earnings inequality has increased, and the relation of this increase with the household income distribution. The main conclusions are the following: (a) changes on labor productivity are not the main cause of the increase in earnings’ inequality, and (b) this earnings’ inequality is not the only reason for the increase of the households’ income inequality.     

POLITICAL ECONOMY AND THE SOCIAL MARGINAL COST OF PUBLIC FUNDS: THE CASE OF THE MELTZER‐RICHARD ECONOMY

In previous studies on the social marginal cost of public funds (SMCF), the existing tax system has been assumed to be either arbitrary or optimal. This note explores another possibility: the existing tax system itself represents a political equilibrium. Our exploration proceeds in Meltzer and Richard’s (1981) political economy of redistributive taxation. An interesting feature of our finding is that the degree of income inequality as measured by the ratio of mean to median income can play an important role in estimating the SMCF and judging whether the level of redistribution is excessive or inadequate. (JEL D61, D72, H21)     

THE GREAT OVERESTIMATION: TAX DATA AND INEQUALITY MEASUREMENTS IN THE UNITED STATES, 1913–1943

Historical measures of income inequality in the United States must grapple with the challenge of data quality. We examine one such problem affecting the well-known estimates of income inequality produced by Piketty and Saez (2003) using the records of the Internal Revenue Service (IRS). Prior to 1943, incomes were self-reported. Combined with lax enforcement on the part of the IRS, self-reporting of incomes could provide a misleading portrait of the income distribution. To test the accuracy of IRS records, we compare them to independently tabulated state income tax returns between 1919 and 1945 from states with more comprehensive and rigorously enforced tax collection procedures. State income tax records show lower overall levels of income inequality than IRS records. However, we still find that top income concentrations declined across the period between 1929 and World War II. These findings attest to the sensitivity of distributional estimation to the reporting selectivity and economic quality of underlying tax data, suggesting that the existing IRS-derived series systematically overstates top-income concentration in the interwar period. (JEL H2, N32, D31, E01)     

THE QUANTITATIVE IMPORTANCE OF OPENNESS IN DEVELOPMENT

This paper deals with a classic development question: how can the process of economic development—transition from stagnation in a traditional technology to industrialization and prosperity with a modern technology—be accelerated? Lewis (1954) and Rostow (1956) argue that the pace of industrialization is limited by the rate of capital formation which in turn is limited by the savings rate of workers close to subsistence. We argue that access to capital goods in the world market can be quantitatively important in speeding up the transition. We develop a parsimonious open‐economy model where traditional and modern technologies coexist (a dual economy in the sense of Lewis 1954). We show that a decline in the world price of capital goods in an open economy increases the rate of capital formation and speeds up the pace of industrialization relative to a closed economy that lacks access to cheaper capital goods. In the long run, the investment rate in the open economy is twice as high as in the closed economy and the per capita income is 23% higher. (JEL O11, F43, O14)     

TAX POLICY AND INCOME INEQUALITY IN THE UNITED STATES, 1979–2007

This paper assesses the effects of U.S. tax policy reforms on inequality over around three decades, from 1979 to 2007. It applies a new method for decomposing changes in government redistribution into (1) a direct policy effect resulting from policy changes and (2) the effects of changing market incomes. Over the period as a whole, the tax policy changes increased income inequality by pushing up the income share of high‐income earners (the top 20%). (JEL H23, H31, H53, P16)     

INCOME INEQUALITY: THE CONSEQUENCES OF SKILL‐UPGRADING WHEN FIRMS HAVE HIERARCHICAL ORGANIZATIONAL STRUCTURES

During the last three decades, most developed countries have experienced increasing income inequality. Using Danish register data from 1992 to 2007 for all private‐sector employees, we confirm that income inequality has increased in Denmark. We also observe an increase in the relative employment of highly educated individuals, as well as differential income growth rates across employee subgroups where, in particular, managers experienced significant real income progression. We use an equilibrium search framework with on‐the‐job search to study the interplay between skill‐upgrading, management compensation, and income inequality. In this model we can determine the management and education premia. We can also show that when our model is exposed to skill‐upgrading, it is capable of producing income dynamics similar to those observed in the Danish income distribution. (JEL J3, J6, M5)     

SOCIAL BACKGROUND,EDUCATION, AND INEQUALITY

The role parents' education plays for the educational achievements of children is a source of unequal opportunities. Through this channel the number of educated affects the options of future cohorts, creating a social multiplier effect making improvements in education self‐reinforcing. Policies to compensate for inequalities of opportunities—public education or transfers—have very different implications. Transfers not only reduce inequality on impact but also reduce social mobility, while public education—even if a perfect substitute to private education—works in the opposite direction. Social impediments to education are similar to a market imperfection, and publicly provided education may lead to a Pareto improvement. (JEL D3, I2, H2, H4)     

IQ IN THE PRODUCTION FUNCTION: EVIDENCE FROM IMMIGRANT EARNINGS

We show that a country’s average IQ score is a useful predictor of the wages that immigrants from that country earn in the United States, whether or not one adjusts for immigrant education. Just as in numerous microeconomic studies, 1 IQ point predicts 1% higher wages, suggesting that IQ tests capture an important difference in cross‐country worker productivity. In a cross‐country development accounting exercise, about one‐sixth of the global inequality in log income can be explained by the effect of large, persistent differences in national average IQ on the private marginal product of labor. This suggests that cognitive skills matter more for groups than for individuals. (JEL J24, J61, O47)     

TIME PREFERENCE AND THE DISTRIBUTIONS OF WEALTH AND INCOME

This paper examines the connection between time preference heterogeneity and economic inequality in a deterministic environment. Specifically, we extend the standard neoclassical growth model to allow for (1) heterogeneity in consumers' discount rates, (2) direct preferences for wealth, and (3) human capital formation. The second feature prevents the wealth distribution from collapsing into a degenerate distribution. The third feature generates a strong positive correlation between earnings and capital income across consumers. A calibrated version of the model is able to generate patterns of wealth and income inequality that are very similar to those observed in the United States. (JEL D31, E21, O15)     

FDI AND INCOME INEQUALITY: EVIDENCE FROM A PANEL OF U.S. STATES

This study employs state‐level panel data to explore the relationship between inward foreign direct investment (FDI) and income inequality in the United States. Using panel cointegration techniques that allow for cross‐sectional heterogeneity and cross‐sectional dependence, we find that, in the long run, FDI exerts a significant and robust negative effect on income inequality in the United States. This result for the United States as a whole does not imply that FDI narrows income gaps in each individual state. There is considerable heterogeneity in the long‐run effects of FDI on income inequality across states, with some states (21 out of 48 cases) exhibiting a positive relationship between FDI in income inequality.(JEL F21, D31, C23)     

ACCOUNTING FOR URBAN CHINA'S RISING INCOME INEQUALITY: THE ROLES OF LABOR MARKET,HUMAN CAPITAL,AND MARRIAGE MARKET FACTORS

This paper analyzes China's rising family income inequality since the early 1990s when the urban labor market started its transformation from a centrally controlled to a market‐driven one. We document the trends in income inequality over the period of 1992–2009 using the Urban Household Survey data, and adopt the approach recently proposed by Eika et al. (2014) to decompose changes in income inequality. We find that labor market factors accounted for about three‐quarters of the overall increases in income inequality while falling marriage rate contributed the other quarter. Changes in human capital levels and marital assortativeness have not contributed to the rising inequality. (JEL D31, I26, J12)     

THE EFFECT OF DIRECT DEMOCRACY ON INCOME REDISTRIBUTION: EVIDENCE FOR SWITZERLAND

In political economics, the impact of institutions on income redistribution is mainly studied by comparing different forms of representative democracy. In this article, we analyze the influence of direct democratic institutions on redistribution first focusing on welfare and nonwelfare spending using yearly panel data for Swiss cantons. Then, we estimate a model, which explains the determinants of actually achieved redistribution measured by Gini coefficients. While our results indicate that less public funds are used to redistribute income, inequality is not reduced to a lesser extent in direct than in representative democracies for a given initial income distribution. (JEL D7, D78, I30, H75, H11)     

THE POLITICAL ECONOMY OF INTERGENERATIONAL INCOME MOBILITY

The intergenerational elasticity of income is considered one of the best measures of the degree to which a society gives equal opportunity to its members. While much research has been devoted to measuring this reduced‐form parameter, less is known about its underlying structural determinants. Using a model with exogenous talent endowments, endogenous parental investment in children, and endogenous redistributive institutions, we identify the structural parameters that govern the intergenerational elasticity of income. The model clarifies how the interaction between private and collective decisions determines the equilibrium level of social mobility. Two societies with similar economic and biological fundamentals may have vastly different degrees of intergenerational mobility depending on their political institutions. We offer empirical evidence in line with the predictions of the model. We conclude that international comparisons of intergenerational elasticity of income are not particularly informative about fairness without taking into account differences in politico‐economic institutions. (JEL E24, J62, J68, P16)     

WHY DOES CHILD LABOR PERSIST WITH DECLINING POVERTY?

We develop a dynamic overlapping generations model to highlight the role of income inequality in explaining the persistence of child labor under declining poverty. Differential investment in two forms of human capital—schooling and health—in the presence of inequality gives rise to a nonconvergent income distribution in the steady state characterized by multiple steady states of relative income with varying levels of education, health, and child labor. The child labor trap thus generated is shown to preserve itself despite rising per capita income. Policy recommendations include public provision of education targeted toward reducing schooling costs for the poor or raising the efficacy of public health infrastructure. (JEL I1, J2, O1, O2)