Cross-sectional Inequality Research Articles

The decline in long-term earnings mobility in the U.S.: Evidence from survey-linked administrative data

The growth in cross-sectional inequality has sparked concern about its consequences for long-run economic outcomes. We use survey-linked administrative data to estimate trends in long-term earnings mobility in the U.S. since 1980 focusing on differential trends by gender, education, and race-ethnicity. We find that long-term earnings mobility has declined since the 1980s. Declines in upward mobility have occurred for both men and women, reversing a trend prior to 1980 of increasing long-run mobility for women. The largest declines in mobility are for women and college-educated workers, which is driven both by increases in the rank of earnings early in prime earning years and growing persistence in ranks across the earnings distribution.

Rising Earnings Inequality and Optimal Social Security

Cross-sectional earnings inequality has risen sharply since the late 1970s in the United States. It remains an open question how this development has affected the insurance and income redistribution roles played by Social Security. The paper's first question is: How have the government preferences over insurance and redistribution evolved during the past four decades? I answer this question quantitatively by constructing a rich overlapping generations model. My findings indicate that the government has become less willing to provide insurance to young workers and redistribute from high-ability to low-ability households. Simultaneously, it has become more willing to tolerate income redistribution from workers toward retired households. To quantify the welfare consequences of the shift in government preferences, I ask the second question: How should Social Security have responded to inequality had the government preferences remained unchanged? Compared to the optimal policy, the current system induces a welfare loss equal to 1.2 percent in consumption equivalent terms. Finally, I show that the effectiveness of the existing policy depends on a particular driving source of cross-sectional inequality.

Inequality in Egypt: Age-adjusted Gini coefficient

Egypt’s current ‘youth bulge’ constitutes the majority of its population, which implies that growth in the working-age population is faster than the overall population growth rate. With a fast-growing young population in Egypt, it is important to understand whether this demographic composition has an impact on the current inequality measures, since an individual’s stage in life deems detrimental for understanding his or her wealth holdings. In this light, this paper departs from the basic life-cycle impact on wealth inequality measures, and alternatively proposes an empirical method to adjust for age-effects in cross-sectional inequality for Egypt. The resulting Age-adjusted Gini coefficient (AG), eliminates wealth inequality that is attributed to age, yet it perpetuates inequality arising from other wealth-generating factors. By using wealth equalising measures, results of the Age-adjusted Gini coefficient show that age and household characteristics have no impact on wealth accumulation in Egypt, however, wealth is greatly influenced by increasing levels of education, making way for possible movement up the mobility scale.

Income inequality in New Zealand: Why conventional estimates are misleading

Considerable attention is currently being paid to establishing the extent of inequality in New Zealand and whether it has risen in recent years. This paper offers some insights into the inequality measures and interpretations that commonly feature in those debates. These typically relate to cross-sectional inequality, such as annual Gini coefficients for various income definitions, or comparisons of income growth rates across income deciles. But failure to take into account the longitudinal dimension of inequality can lead to misinterpretations of inequality data and measures. The paper shows that examining longitudinal income data for the same individuals over time strongly contradicts cross-sectional inequality evidence. For example, some recent cross-sectional inequality measures suggest that the incomes of initially low-income households grew at slower rates than those with initially higher-incomes. This has been interpreted as the poorest earners being ‘left behind’. But recent longitudinal data, at least for individuals, reveals evidence of much faster-than-average growth among initially lower, compared to higher, income earners. Thus, ‘regression to the mean’ is a dominant feature of the longitudinal data.

On the Intergenerational Transmission of Economic Status.

We present a model in which human capital investments occur over the life cycle and across generations, à la Becker and Tomes. The human capital technology features multiple stages of childhood investments, college, and life cycle accumulation. The model can explain a wide range of intergenerational relationships while remaining empirically consistent with cross-sectional inequality. Much of the latter is determined by early investments in children, so that borrowing constraints faced by young parents are important for understanding the persistence of economic status across generations. Education subsidies, especially early on, can significantly reduce the intergenerational persistence of economic status.

A Theory of Intergenerational Mobility

We study the link between market forces, cross-sectional inequality, and intergenerational mobility. Emphasizing complementarities in the production of human capital, we show that wealthy parents i...

New Evidence on Earnings Volatility in Survey and Administrative Data

Despite the rise in cross-sectional inequality since the late 1990s, there is little consensus on trends in earnings volatility during this period. Using consistent samples and methods in administrative earnings data matched to the Survey of Income and Program Participation (SIPP GSF) and survey data from the Panel Study of Income Dynamics (PSID), we examine earnings volatility for men from 1978 through 2011. In contrast to the apparent inconsistency in trends across administrative and survey data in the existing literature, we find recent increases in volatility in the SIPP GSF and the PSID, though increases are larger in the PSID.

Discussion

Discussion

Intergenerational Earnings Persistence and Economic Inequality in the Long-Run: Evidence from French Cohorts, 1931-1975

This paper analyzes long-term trends in intergenerational earnings persistence in France for male cohorts born between 1931 and 1975. This time period has witnessed important changes in the French labor market and educational system, in particular an important compression of earnings differentials as well as a large expansion in access to secondary and higher education. Using a two-sample instrumental variables approach, I estimate two measures of intergenerational economic persistence: the intergenerational earnings elasticity (IGE) and the intergenerational correlation (IGC). Over the period, the IGE exhibits a V-shaped pattern. It falls from a high of value of .6 for cohorts born in the 1930s to around .4 for those born in the 1950s, but subsequently rises to a level close to the beginning of the period. In contrast, the IGC remains relatively stable over the period. This suggests that changes in the IGE are partly driven by transitory responses to changes in cross-sectional inequality rather than long-term changes in the degree of intergenerational persistence.

Educational Assortative Mating and Household Income Inequality

We investigate the pattern of educational assortative mating, its evolution over time, and its impact on household income inequality. To these ends, we use rich data from the United States and Norway over the period 1980-2007. We find evidence of positive assortative mating at all levels of education in both countries. However, the time trends vary by the level of education: Among college graduates, assortative mating has been declining over time, whereas individuals with a low level of education are increasingly sorting into internally homogenous marriages. When looking within the group of college educated, we find strong but declining assortative mating by academic major. These findings motivate and guide a decomposition analysis, where we quantify the contribution of various factors to the distribution of household income. We find that educational assortative mating accounts for a non-negligible part of the cross-sectional inequality in household income. However, changes in assortative mating over time barely move the time trends in household income inequality. The reason is that the decline in assortative mating among the highly educated is offset by an increase in assortative mating among the less educated. By comparison, increases in the returns to education over time generate a considerable rise in household income inequality, but these price effects are partly mitigated by increases in college attendance and completion rates among women.

Trade liberalization and intergenerational occupational mobility in urban India

We exploit highly disaggregated occupation data to examine the impact of trade liberalization on intergenerational occupational mobility in urban India. We find that sons that live in urban Indian districts with a greater exposure to trade liberalization have a higher probability of being in a better occupation than their father. Taken together, our results allow us to make two new contributions to the literature on trade and inequality. First, we show that the same mechanism that causes greater cross-sectional inequality, higher relative demand for skill, also facilitates intergenerational occupational mobility. Second, we show that increased investment in education alone need not facilitate intergenerational occupational mobility. Instead, it only does so in urban districts where there has been a sufficient increase in the employment share of high-skill occupations.

Trade Liberalization and Intergenerational Occupational Mobility in Urban India

In this paper, we make two novel contributions to the literature on trade and inequality. First, we show that the same mechanism that causes greater cross-sectional inequality, higher relative demand for skill, also facilitates intergenerational occupational mobility. In particular, we develop a stylized model that shows that the innovation induced by international trade causes an increase in the employment share of high-skill occupations. In turn, this allows an increasing number of sons to enter better occupations than their father. We then exploit spatial variation in exposure to trade liberalization in urban India to test our model’s prediction. Our empirical results confirm that sons that live in urban districts with a greater exposure to trade liberalization have a higher probability of being in a better occupation than their father. Further, as predicted by our model, we find that this positive impact of trade liberalization on intergenerational mobility is stronger in relatively technologically advanced districts. In a second contribution, we show that increased investment in education alone need not facilitate intergenerational occupational mobility. Instead, it only does so in urban districts where there has been a sufficient increase in the employment share of high-skill occupations.

A Theory of Intergenerational Mobility

We develop a model of intergenerational resource transmission that emphasizes the link between cross-sectional inequality and intergenerational mobility. By drawing on first principles of human capital theory, we derive several novel results. In particular, we show that, even in a world with perfect capital markets and without differences in innate ability, wealthy parents invest, on average, more in their offspring than poorer ones. As a result, persistence of economic status is higher at the top of the income distribution than in the middle. Successive generations of the same family may even cease to regress towards the mean. Moreover, we demonstrate that government interventions intended to ameliorate inequality may in fact lower intergenerational mobility — even when they do not directly favor the rich. Lastly, we consider how mobility is affected by changes in the marketplace.

New Estimates of Intergenerational Mobility in Australia

We present new estimates of intergenerational earnings elasticity for Australia. We closely follow the methodology used by Leigh (2007), but use considerably more data (twelve waves of HILDA and four waves of PSID). Our adjusted estimates are intended to be comparable to those for other countries in Corak (2013). Our preferred estimate (0.35) is considerably higher than implied by Leigh’s study, and is less subject to sampling variation. In an international context, intergenerational mobility in Australia is not particularly high, and is consistent with its relatively high level of cross-sectional inequality.

Income and Consumption Risk: Evidence from France

In this paper, we draw life cycle inequality profiles for cohorts born between 1921 and 1975 and observed from 1974 to 2005 from a pseudo-panel of French households. While cross-sectional inequality has not changed much over the period, the within cohort inequality has increased substantially with age. Using the interplay between income and consumption, we decompose the change in inequality into a permanent and a transitory component. The former, called income risk, measures shocks affecting income which are transmitted to consumption levels, while the latter affects income but can be smoothed and thus does not have an impact on the consumption distribution. We find that income risk increases with age, while transitory shocks remain broadly constant over a lifetime. The decomposition sheds light on the diverging trends over time between income and consumption inequality. Consumption inequality has increased since the middle of the nineties because the population has aged, and permanent shocks increase with age, while income inequality has not changed much because of negative transitory shocks that have compensated the permanents shocks. JEL: D31, D12. / KEY WORDS: Inequality, Consumption Distribution, Income Risk.

Educational Assortative Mating and Household Income Inequality

We document the degree of educational assortative mating, how it evolves over time, and the extent to which it differs between countries. Our analysis focuses on the United States but also uses data from Denmark, Germany, the United Kingdom, and Norway. We find evidence of positive assortative mating at all levels of education in each country. However, the time trends vary by the level of education: Among college graduates, assortative mating has been declining over time, whereas individuals with a low level of education are increasingly sorting into internally homogeneous marriages. These findings motivate and guide a decomposition analysis, where we quantify the contribution of various factors to the distribution of household income. We find that educational assortative mating accounts for a non-negligible part of the cross-sectional inequality in household income in each country. However, changes in assortative mating over time barely move the time trends in household income inequality. This is because the inequality contribution from the increase in assortative mating among those with lower levels of education is offset by the equalizing effect from the decline in assortative mating among the highly educated. By comparison, increases over time in the returns to education generate a considerable rise in household income inequality, but these price effects are partly mitigated by increases in college attendance and completion rates among women.

Rising Inequality: Transitory or Persistent? New Evidence from a Panel of U.S. Tax Returns

We use a new, large, and confidential panel of tax returns to study the persistent-versus-transitory nature of rising inequality in male labor earnings and in total household income, both before and after taxes, in the United States over the period 1987-2009. We apply various statistical decomposition methods that allow for different ways of characterizing persistent and transitory income components. For male labor earnings, we find that the entire increase in cross-sectional inequality over our sample period was driven by an increase in the dispersion of the persistent component of earnings. For total household income, we find that most of the increase in inequality reflects an increase in the dispersion of the persistent income component, but the transitory component also appears to have played some role. We also show that the tax system partly mitigated the increase in income inequality, but not sufficiently to alter its broadly increasing trend over the period.

On the Aggregate and Distributional Implications of Productivity Differences Across Countries

We develop a quantitative theory of human capital with heterogeneous agents in order to assess the sources of cross-country income difierences. The cross-sectional implications of the theory and U.S. data are used to restrict the parameters of human capital technology. We then assess the model’s ability to explain the cross-country data. Our quantitative model generates a total-factor-productivity (TFP) elasticity of output per worker of 2.8. This implies that a factor of 3 difierence in TFP is amplifled through physical and human capital accumulation to generate a factor of 20 difierence in output per worker i as observed in the data between rich and poor countries. The implied difierence in TFP is in the range of estimates from micro studies. The theory suggests that using Mincer returns to measure human capital understates human capital difierences across countries by a factor of 2. The cross-country difierences in human capital implied by the theory are consistent with evidence from earnings of immigrants in the United States. We also flnd that TFP has substantial efiects on cross-sectional inequality and intergenerational mobility and that public education policies can have important aggregate and distributional implications.

Inequality and the life cycle

I structurally estimate an incomplete markets life-cycle model with endogenous labor supply using data on the joint distribution of wages, hours, and consump- tion. The model is successful at matching the evolution of both the first and sec- ond moments of the data over the life cycle. The key challenge for the model is to generate declining inequality in annual hours worked over the first half of the working life, while respecting the constraints imposed by the data on consump- tion and wages. I argue that this is a robust feature of the data on life-cycle labor supply that is strongly at odds with the intratemporal first-order condition for la- bor. Allowing for a realistic degree of involuntary unemployment, coupled with preferences that feature nonseparability in the disutility of the extensive and in- tensive margins of hours worked, allows the model to overcome this challenge. The results imply that labor market frictions are important in jointly account- ing for observed cross-sectional inequality in labor supply and consumption, and may have quantitative relevance for analyses that exploit the intratemporal first- order condition for labor. Keywords. Inequality, life cycle, hours worked, intensive and extensive labor sup- ply, structural estimation, precautionary savings. JEL classification. C13, D21, E21, E24, J22.

Widening inequalities in the risk factors for cardiovascular disease amongst men in England between 1998 and 2006

Cardiovascular disease is a major cause of morbidity and mortality for which there are many modifiable risk factors. This study investigated changes in social inequalities of cardiovascular disease risk factors amongst men aged 20-64 years in England between 1998 and 2006. Repeated cross-sectional study. Health Survey for England data from 1998, 2003 and 2006 were used. The following physiological risk factors were considered: body mass index, waist-to-hip ratio, blood pressure and total serum cholesterol level. The behavioural risk factors considered were limited physical exercise, smoking status and level of social support. The National Statistics Socio-economic Classification was used to measure socio-economic position. An index of inequality for each risk factor was calculated, and change in inequality over time was assessed by t-tests. Significant cross-sectional inequality was found for waist-to-hip ratio, systolic blood pressure, smoking, limited physical exercise and social support at one or more time points. Between 1998 and 2006, there was a significant increase in inequality for smoking status [relative index of inequality (RII) 4.06-6.65 (t-test: 2.88, P=0.003)] and limited physical exercise [RII 1.06-1.74 (t-test: 2.92, P=0.003)]; these increases in inequality over time were due to improvements for those in higher socio-economic classes. Policies have not had the desired impact of reducing inequalities. Although the long-term effects of these policies might not yet be apparent, available evidence needs to be used to monitor impact and direct policy change to address the possibility of widening inequalities.