Non-labor Income Research Articles

How Do Inheritances Shape Wealth Inequality? Theory and Evidence from Sweden

A recent literature has found that inheritances reduce relative measures of wealth inequality. Theoretically, we show that this surprising finding stems from high intergenerational wealth mobility or low inheritance inequality. Empirically, we show that this finding is only true in the short run using Swedish administrative data and exploiting randomness in the timing of death. The inheritance effect on wealth inequality is reversed within a decade due to less wealthy heirs depleting their inherited wealth in contrast to more affluent heirs. Investigating mechanisms behind this depletion, we find that inheritances generate a roughly constant increase in annual non-labor income. 60% of this increase is allocated to consumption of goods (half of which consists of car consumption) in the first years, compared to 80% in later years. The remaining labor supply responses reflect a considerable albeit declining inheritance labor-supply elasticity. In a second quasi-experimental design, we demonstrate that large windfall inheritances due to a inheritance tax repeal were sustained over time. Our findings suggest that inheritance taxation increases short-run wealth inequality but reduces it in the long run solely through taxation of very large inheritances.

Innovation and Health Disparities During an Epidemic: The Case of HIV

We examine whether medical innovation can reinforce existing health disparities by disproportionately benefiting socioeconomically advantaged patients. The reason is that less advantaged patients often do not use new medications. This may be due to high costs of new drugs, but could also reflect differences in how side effects of new treatments interact with labor supply. To investigate, we develop a dynamic lifecycle model in which the effect of medical treatment on labor supply varies across sociodemographic groups. We estimate the model using rich data on treatment choices and employment decisions of men infected with HIV. In the model, treatments can improve long-run health, but can also cause immediate side effects that interact with the utility cost of work. Estimates indicate that HIV-infected men often forego medication to avoid side effects, in part to remain employed. This effect is stronger for people with fewer years of education, leading to lower use of treatment and worse health outcomes. As a result, while a breakthrough HIV treatment - known as HAART - improved lifetime utility for all patients, it disproportionately benefitted those with higher levels of completed education, thereby reinforcing existing inequality. A counterfactual subsidy that increases non-labor income reduces employment for all education groups, but only increases adoption of HAART and improves health among lower-education individuals, who face a starker health-work tradeoff.

Growing Income Inequality in the United States and Other Advanced Economies

This paper studies the contribution of both labor and non-labor income in the growth in income inequality in the United States and large European economies. The paper first shows that the capital to labor income ratio disproportionately increased among high-earnings individuals, further contributing to the growth in overall income inequality. That said, the magnitude of this effect is modest, and the predominant driver of the growth in income inequality in recent decades is the growth in labor earnings inequality. Far more important than the distinction between total income and labor income, is the way in which educational factors account for the growth in US labor and capital income inequality. Growing income gaps among different education groups as well as composition effects linked to a growing fraction of highly educated workers have been driving these effects, with a noticeable role of occupational and locational factors for women. Findings for large European economies indicate that inequality has been growing fast in Germany, Italy, and the United Kingdom, though not in France. Capital income and education don’t play as much as a role in these countries as in the United States.

Decentralized markets and the emergence of housing wealth inequality

Recent studies suggest that the traditional determinants of housing wealth are insufficient to explain its current inequality levels. Thus, they argue that efforts should focus on understanding institutional factors. From the perspective of complex adaptive systems, institutions are more than the ‘the rules of the game’, they also consider the interaction protocols or the ‘algorithm’ through which agents engage in socioeconomic activities. By viewing markets as complex adaptive systems, I develop a model that allows estimating how much housing wealth inequality is attributable to the market institution. It combines virtues from two different modeling traditions: (1) the microeconomic foundations from overlapping-generation models and (2) the explicit interaction protocols of agent-based models. Overall, the model generates prices and housing inequality endogenously and from bottom-up; without needing to impose assumptions about the aggregate behavior of the market (such as market equilibrium). It accounts for economic and institutional factors that are important to housing consumption decisions (e.g., wages, consumption of goods, non-labor income, government transfers, taxes, etc.). I calibrate the model with the British Wealth and Assets Survey at the level of each individual household (i.e., ~25 million agents). By performing counter-factual simulations that control for data heterogeneity, I estimate that, in the United Kingdom, the decentralized protocol interaction of the housing market contributes with one to two thirds of the Gini coefficient. I perform policy experiments and compare the outcomes between an expansion in the housing stock, a sales tax, and an inheritance tax. The results raise concerns about the limitations of traditional policies and call for a careful re-examination of housing wealth inequality.

Property tax limits and female labor supply: Evidence from the housing boom and bust

This paper investigates whether and how property tax limits impact female labor supply during the housing boom and bust. Theory predicts that property tax limits increase non-labor income during the housing boom and decrease non-labor income during the bust periods, leading to opposite effects on labor supply during the boom and bust periods. Exploiting exogenous variation of housing market conditions in the housing boom and bust and geographic changes of property tax limits in the cross-state Combined Statistical Areas, we test the theory and find that property tax limits reduced female labor force participation by 0.7 to 1.4 percentage points during the housing boom (2005–2006) as predicted. In contrast, the impact of property tax limits on female labor force participation during the housing bust (2008–2009) is always positive but not statistically significant in most specifications. These results are consistent with our model and provide new evidence of housing wealth effects in the labor market.

A practical generalized propensity-score estimator for quantile continuous treatment effects

In this article, we present a new command, qcte, that implements several methods for estimation and inference for quantile treatment-effects models with a continuous treatment. We propose a semiparametric two-step estimator, where the first step is based on a flexible Box–Cox model, as the default model of the command. We develop practical statistical inference procedures using bootstrap. We implement some simulations to show that the proposed methods perform well. Finally, we apply qcte to a survey of Massachusetts lottery winners to estimate the unconditional quantile effects of the prize amount, as a proxy of nonlabor income changes, on subsequent labor earnings from U.S. Social Security records. The empirical results reveal strong heterogeneity across unconditional quantiles.

Family Welfare and the Great Recession

The analysis in this paper provides estimates of family welfare losses generated by wage and nonlabor income declines experienced across the Great Recession and by labor market constraints existing postrecession. Welfare losses are greater as families (both married and single) move up the income distribution. Total static welfare losses are estimated to amount to roughly $190 billion, comparing family welfare between 2007 and 2011.

Is Land Ownership a Key Factor in the Choice of Livelihood in the Mekong Delta, Vietnam?

Our main objective in this research was to examine the role of land ownership in the choice of household livelihood in the rural Mekong Delta region, Vietnam. Using secondary data on rural households in the Mekong Delta region, we use cluster analysis techniques to classify livelihoods currently adopted by rural households. Using Bonferroni pairwise tests and quantile functions (Pen’s parades), we then compare the income levels of identified livelihoods. Finally, we employ a multinomial logit model to examine different factors affecting the choice of livelihoods. We identify five livelihoods pursued by local households, and found that households engaged in farm work, formal wage-earning work and non-wage work livelihoods obtain higher levels of income than did those whose livelihoods depend on informal wage-earning work or non-labor income sources. We also found that several types of land are positively associated with the choice of high-return livelihoods, implying that lack of access to land is a potential obstacle to adopting a profitable livelihood. Also, we found education plays a major role in the pursuit of remunerative livelihoods, which suggests that better education would allow households to move from low- to high-return livelihoods.

Cash Transfers and Gender Differentials in Child Schooling and Labor: Evidence from the Lesotho Child Grants Programme

Cash Transfers and Gender Differentials in Child Schooling and Labor: Evidence from the Lesotho Child Grants Programme

Pensions for the Poor: the Effects of Non-contributory Pensions in El Salvador

Most Salvadorans reach retirement age without a formal pension, resulting in increased financial vulnerability and poverty in old age. Moreover, fewer women qualify for a formal pension and the average amounts for women are smaller. In this paper, we study gender-disaggregated effects of the Universal Basic Pension (UBP), a non-contributory pension of $50 per month for individuals aged 70 years and over in extreme poverty. We analyze a purpose-specific sample of 2256 households with adults between 66 and 74 years of age in the 32 poorest municipalities in the country using an instrumental variables approach. We contribute to the literature on non-contributory pensions by exploring new outcomes and analyzing gender differentiated effects. Independent of the recipient’s gender, we find that the pension increases non-labor income by 53% on average, lowering the probability that a beneficiary household lives below the extreme poverty line by 17 percentage points for males and 8.1 percentage points for females. Increases in food consumption and medical attention, and reductions in remittances are qualitatively larger for male pensioners. Pensioners appear to have gender-specific preferences with regard to investments in children, with increases in school enrollment and attendance for boys aged 11 to 18 years in households with a male pensioner and of girls of the same age in households with a female pensioner.

Actors in the Child Development Process

We construct and estimate a model of child development in which both the parents and children make investments in the child's skill development. In each period of the development process, partially altruistic parents act as the Stack- elberg leader and the child the follower when setting her own study time. We then extend this non-cooperative form of interaction by allowing parents to of- fer incentives to the child to increase her study time, at some monitoring cost. We show that this incentive scheme, a kind of internal conditional cash transfer, produces efficient outcomes and, in general, increases the child's cognitive abil- ity. In addition to heterogeneity in resources (wage offers and non-labor income), the model allows for heterogeneity in preferences both for parents and children, and in monitoring costs. Like their parents, children are forward looking, but we allow children and parents to have different preferences and for children to have age-varying discount rates, becoming more patient as they age. Using detailed time diary information on the allocation of parent and child time linked to mea- sures of child cognitive ability, we estimate several versions of the model. Using model estimates, we explore the impact of various government income transfer policies on child development. As in Del Boca et al. (2016), we find that the most effective set of policies are (external) conditional cash transfers, in which the household receives an income transfer given that the child's cognitive ability exceeds a prespecified threshold. We find that the possibility of households using internal cash transfers greatly increases the cost effectiveness of external cash transfer policies.

Nonlabor Income and Age at Marriage: Evidence From China\u2019s Heating Policy

We exploit China’s heating policy to investigate how nonlabor income affects marriage. From the mid-1950s, the policy gave substantial subsidies to urban residents north of the Huai River. Applying geographic regression discontinuity, we find that with the policy, urban men in the north married 15 months earlier than men in the south. The difference is substantial given that the average age at first marriage is 24.9 years for urban men in the south. The effect is larger for later birth cohorts, which is consistent with the progressive implementation of the policy. The effect is smaller among women, consistent with women having less power in the household than men. There is no effect among rural residents, who did not benefit from the heating policy.

Poverty changes in Manaus: Legacy of a Brazilian free trade zone?

AbstractThis study contributes to the literature on the social impacts of Special Economic Zones by analyzing poverty changes in the Brazilian state of Amazonas, where the Free Trade Zone of Manaus (FTZM) is located. Using census data, statistical micro‐decompositions and counterfactual simulations, we show that labor income was the major driver of poverty declines during the 2000 to 2010 decade in the municipality of Manaus (and all the more so for households with members working in the FTZM, who were less poor to start with). Comparison with ex‐ante “similar” municipalities, in regard to socioeconomic and demographic criteria, corroborates the relative success of Manaus in terms of poverty reduction as well as the essential role played by labor income. Wage regressions also show a significant FTZM premium effect for workers, though diminishing over time. In the rest of the state of Amazonas, nonlabor income remains the main factor for poverty reduction and the FTZM appears to have limited spillover effects, even at short distances. Our contrasting results illustrate both the benefits and limitations that trade and industrial policies face in underprivileged areas and suggest that a better targeting of social policies is needed to improve distributional outcomes and spillovers for the whole state.

Guaranteed Nonlabor Income and Labor Supply: The Effect of the Alaska Permanent Fund Dividend

Abstract One peculiar source of nonlabor income that has not been extensively studied for its effect on labor supply is the Alaska Permanent Fund (APF) dividend. This is somewhat surprising given the recent policy focus on Guaranteed Basic Income programs. An annual lump-sum payment, the Permanent Fund Dividend (PFD) is available to almost all Alaska residents, is clearly exogenous with respect to work effort, and – while relatively predictable – varies over time and across households (since it increases linearly with family size). This paper estimates the nonlabor income elasticity of labor supply using exogenous variation from the Alaskan PFD and data from the American Community Survey (ACS). The analysis finds that men have elasticities between −0.15 and −0.10, depending on the specification. Single women have elasticities between −0.14 and −0.09, while married women have somewhat larger elasticities between −0.18 and −0.11.

On the Accumulation of Wealth: The Role of Inheritances

Inheritances reduce relative measures of wealth inequality according to recent evidence from several countries. Using a theoretical model and Swedish administrative data, we first show that this counter-intuitive finding can be explained by high intergenerational wealth mobility and low inheritance inequality relative to wealth inequality. We then exploit two quasi-experiments: randomness in the timing of death and an inheritance tax repeal. We find that the equalizing effect of inheritances is short-lasting and reverted within a decade since less wealthy heirs deplete their inherited wealth rapidly in contrast to more affluent heirs. This depletion represents a constant reduction in annual savings equivalent in size to 10% of the average inheritances amount. 70% of this additional annual non-labor income are allocated to consumption (half of it is car purchases) in the first years, compared to 90% in later years. The remaining 30% (or 10%) reflect a considerable albeit declining labor supply elasticity with respect to inheritances. Taken together, our findings suggest that inheritance taxation can reduce long-run wealth inequality solely through the taxation of very large inheritances.

Quantile continuous treatment effects

Continuous treatments (e.g., doses) arise often in practice. Methods for estimation and inference for quantile treatment effects models with a continuous treatment are proposed. Identification of the parameters of interest, the dose-response functions and the quantile treatment effects, is achieved under the assumption that selection to treatment is based on observable characteristics. An easy to implement semiparametric two-step estimator, where the first step is based on a flexible Box–Cox model is proposed. Uniform consistency and weak convergence of this estimator are established. Practical statistical inference procedures are developed using bootstrap. Monte Carlo simulations show that the proposed methods have good finite sample properties. Finally, the proposed methods are applied to a survey of Massachusetts lottery winners to estimate the unconditional quantile effects of the prize amount, as a proxy of non-labor income changes, on subsequent labor earnings from U.S. Social Security records. The empirical results reveal strong heterogeneity across unconditional quantiles. The study suggests that there is a threshold value in non-labor income that is high enough to make all individuals stop working, and that this applies uniformly for all quantiles. It also shows that the threshold value is monotonic in the quantiles.

Non-Labor Income and the Age of Marriage: Evidence from China's Heating Policy

We exploit China's heating policy to investigate how non-labor income affects marriage. From the mid-1950s, the policy gave substantial subsidies to urban residents north of the Huai River. Applying geographic regression discontinuity, we find that, with the policy, urban men in the north married 15 months earlier than southerners. The difference is substantial compared with the average age of first marriage of 24.9 years for urban men in the south. The effect is larger for later birth cohorts, which is consistent with the progressive implementation of the policy. The effect is smaller among women, consistent with women having less power in the household than men. There is no effect among rural people, who did not benefit from the heating policy.

A Note on Time Discretion and the Welfare Cost of Lump-Sum Taxation

The lump-sum tax is broadly regarded by standard optimal tax theory as the only non-distortionary tax instrument; any other tax instrument distorts relative prices and thus creates a deadweight loss. This paper discusses an unintended effect of lump-sum taxation that can be considered a distortion of the time endowment. Whenever this tax exceeds the amount of non-labor income, it reduces the taxpayer’s ability to freely allocate her time endowment. As long as the taxpayer assigns a positive value to time discretion, the lump-sum tax creates a welfare cost that has not been identified in the relevant literature. The welfare cost of the lump-sum tax could plausibly be greater than the traditional measure of deadweight loss of an equal yield labor income tax, which does not affect time discretion. Since the lump-sum tax does not unambiguously lead to a greater welfare level, we can conclude that it is not a proper efficiency standard at low levels of non-labor income. The same argument can be used to call for caution in the use of taxes based on the value of assets that are not the source of income flows, like owner-occupied property taxes and some types of wealth taxes. At low levels of non-labor income, these tax instruments will also have a negative effect on time discretion.

Intra-Household Wealth and Welfare Inequality in the US: Estimations from a Collective Model of Labor Supply

This paper analyzes the intra-household distribution of wealth and welfare in the United States, within a theoretical framework based on a collective model of labor supply, where household decisions are Pareto efficient, and spouses negotiate a sharing rule for non-labor income. Using the American Time Use Survey for the years 2003 to 2015, estimates show a positive correlation between individual wages and labor supply, while cross-wages go in the opposite direction. Additionally, we find that wives tend to be more altruistic in comparison to their husbands regarding the intra-household allocation of income, which leads to wealth inequalities. However, the intra-household processes appear to be efficient in terms of welfare, as increases in any source of household income are associated with decreases in intra-household inequality, as measured by the spouses' estimated indirect utility. Our results shed light on the spouses' wealth shares and the sharing rule guiding the individual allocations, which may be important in the design of policies aimed at alleviating poverty.

The Analysis of the Effect of Non-labor Income on Labor Supply: Focusing on the Policy Implications to Introduce the Basic Income in Korea

The Analysis of the Effect of Non-labor Income on Labor Supply: Focusing on the Policy Implications to Introduce the Basic Income in Korea