Do Short-Term Observed Income Changes Overstate Structural Economic Mobility?

Abstract:     
The recent empirical literature on household income dynamics in developing countries has tended to conclude that a large proportion of poverty is transitory. This paper proposes a test to determine whether these findings are partially driven by stochastic changes in transitory income. Using household panel data and Monte Carlo simulations we demonstrate that this is indeed the case. Estimates of total economic mobility and transitory poverty are inversely correlated with the panel spell length. For short spells, total economic mobility is significantly greater than underlying structural economic mobility that is the target of poverty reduction policies.

Keywords: Economic Mobility, Panel Data, Simulation, Transitory Poverty

JEL Classifications: I32, C15

Working Paper Series