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  5. Macro and Micro Perspectives on Inequality
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Macro and Micro Perspectives on Inequality

Paper Session

Saturday, Jan. 8, 2022 10:00 AM - 12:00 PM (EST)

Hosted By: Society for Economic Dynamics & Society for Economic Dynamics
  • Chair: Kyle Herkenhoff, University of Minnesota

Nonlinear Income Dynamics and Heterogeneity

Manuel Arellano
,
Center for Monetary and Financial Studies
Richard Blundell
,
University College London
Stephane Bonhomme
,
University of Chicago
Jack Light
,
University of Chicago

Abstract

The empirical analysis of income dynamics has an important place in a number of key areas of economic research and policy design, most obviously in understanding income persistence, income inequality and income volatility. The nature of income dynamics is also center stage in research on household savings behavior and consumption inequality, as well as in related work on the determinants of lifetime inequality. In public finance, the persistence and distribution of shocks to earned income has been shown to play a major role in the design of optimal tax and social insurance systems. Recent research has shown that individual income dynamics feature nonlinearities that matter for economic decisions and for the measurement of inequality. In particular, Arellano, Blundell and Bonhomme (2017, ABB) found evidence that the persistence of past earnings varies substantially with the sign and magnitude of shocks across the past earnings distribution. Thus, ex ante identical individuals may have experienced a very different propagation of a past shock into their income depending on their history of subsequent shocks. However, we know from the literature that ex-ante heterogeneity across households can also matter. ABB did allow for age-dependent dynamics and a flexible distribution of initial income, but only allowed observable household differences to affect the log income mean, and did not allow for unobservable heterogeneity in their income process. The purpose of this paper is to provide a framework for incorporating unobserved heterogeneity in nonlinear models of income dynamics. This is an important step to take because omitted heterogeneity can generate spurious nonlinearity. Moreover, individual uncertainty and cross-sectional heterogeneity have very different economic implications for individual decisions and aggregate outcomes.

The Great Micro Moderation

Nicholas Bloom
,
Stanford University
Fatih Guvenen
,
University of Minnesota
Luigi Pistaferri
,
Stanford University
John Sabelhaus
,
Federal Reserve Board
Sergio Salgado
,
University of Pennsylvania
Jae Song
,
Social Security Administration

Abstract

This paper documents that individual income volatility in the United States has declined in an almost secular fashion since 1980—a phenomenon that we call the “Great Micro Moderation.” This finding contrasts with the conventional wisdom, based on studies using survey data, that income volatility—a simple measure of uncertainty—has increased substantially during the same period. The finding of declining volatility is consistent with a handful of recent papers that use administrative data. We substantially extend the existing empirical findings of declining volatility using data from both administrative and survey-based data sets. A key contribution of our paper is to link patterns of income volatility on the worker side to outcomes (and volatility) on the firm/employer side. With the information revealed by these linkages, we investigate several potential drivers of this trend to understand if declining volatility represents a broadly positive development—declining income risk and uncertainty—or a negative one, i.e., declining business dynamism.

Assortative Mating and Wealth Inequality

Andreas Fagereng
,
BI Norwegian Business School
Luigi Guiso
,
Einaudi Institute for Economics and Finance
Luigi Pistaferri
,
Stanford University

Abstract

Population data on capital income and wealth holdings for Norway allow us to measure asset positions and wealth returns before individuals marry and after the household is formed. Using these data we establish a number of novel facts. First, there is assortative mating on the basis of own wealth. Second, assortative mating on own wealth dominates, and in fact statistically annihilates, assortative mating on parental wealth. Third, there is evidence of assortative mating on returns to wealth. Finally, post-marriage returns on family wealth are largely explained by the return of the spouse with the highest pre-marriage return. This suggests that family wealth is largely managed by the spouse with the highest capacity for wealth accumulation. We use simulations to evaluate the effects of assortative mating on wealth, assortative mating on returns, and post-marriage allocation of wealth management tasks on wealth inequality and wealth concentration. Assortative mating on wealth is the dominant force explaining wealth concentration at marriage. Returns heterogeneity resulting from mating on returns and post-marriage allocation of wealth management between spouses plays a dominant role for explaining changes in wealth inequality as couples move through their life cycle.

Changing income risk across the US skill distribution: Evidence from a generalized Kalman filter

Carter Braxton
,
University of Wisconsin
Kyle Herkenhoff
,
University of Minnesota
Jonathan L. Rothbaum
,
U.S. Census Bureau
Lawrence Schmidt
,
Massachusetts Institute of Technology

Abstract

For whom has earnings risk changed, and why? To answer these questions, we develop a filtering method that estimates parameters of an income process and recovers persistent and temporary earnings for every individual at every point in time. Our estimation flexibly allows for first and second moments of shocks to depend upon observables as well as spells of zero earnings (i.e., unemployment) and easily integrates into theoretical models. We apply our filter to a unique linkage of 23.5m SSA-CPS records. We first demonstrate that our earnings-based filter successfully captures observable shocks in the SSA-CPS data, such as job switching and layoffs. We then show that despite a decline in overall earnings risk since the 1980s, persistent earnings risk has risen for both employed and unemployed workers, while temporary earnings risk declined. Furthermore, the size of persistent earnings losses associated with full year unemployment has increased by 50\%. Using geography, education, and occupation information in the SSA-CPS records, we refute hypotheses related to declining employment prospects among routine and low-skill workers as well as spatial theories related to the decline of the Rust-Belt. We show that rising persistent earnings risk is concentrated among high-skill workers and related to technology adoption. Lastly, we find that rising persistent earnings risk while employed (unemployed) leads to welfare losses equivalent to 1.8\% (0.7\%) of lifetime consumption, and larger persistent earnings losses while unemployed lead to a 3.3\% welfare loss.
JEL Classifications
  • E0 - General
  • J3 - Wages, Compensation, and Labor Costs