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 find considerable intertemporal economic mobility and thus inferred that a large proportion of poverty is transitory. This article introduces a statistical test which shows that these findings are partially driven by stochastic changes in transitory income. Estimates of total economic mobility are inversely correlated with the panel spell length. For short data spells, estimated total economic mobility is significantly greater than the underlying structural economic mobility because of short-lived movements across the poverty line that cancel out over periods of multiple years.

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

JEL Classification: I32, C15