On the Measurement of Long-Term Income Inequality and Income Mobility

38 Pages Posted: 1 Feb 2010

See all articles by Rolf Aaberge

Rolf Aaberge

Statistics Norway; Institute for the Study of Labor (IZA); Deaprtment of Economics

Magne Mogstad

Statistics Norway; IZA Institute of Labor Economics

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Abstract

This paper proposes a two-step aggregation method for measuring long-term income inequality and income mobility, where mobility is defined as an equalizer of long-term income. The first step consists of aggregating the income stream of each individual into a measure of permanent income, which accounts for the costs associated with income fluctuations and allows for credit market imperfections. The second step aggregates permanent incomes across individuals into measures of social welfare, inequality and mobility. To this end, we employ an axiomatic approach to justify the introduction of a generalized family of rank-dependent measures of inequality, where the distributional weights, as opposed to the Mehran-Yaari family, depend on income shares as well as on population shares. Moreover, a subfamily is shown to be associated with social welfare functions that have intuitively appealing interpretations. Further, the generalized family of inequality measures provides new interpretations of the Gini-coefficient.

Keywords: income inequality, income mobility, social welfare, Gini coefficient, permanent income, credit market, annuity

JEL Classification: D71, D91, I32

Suggested Citation

Aaberge, Rolf and Mogstad, Magne, On the Measurement of Long-Term Income Inequality and Income Mobility. IZA Discussion Paper No. 4699, Available at SSRN: https://ssrn.com/abstract=1545126

Rolf Aaberge (Contact Author)

Statistics Norway ( email )

N-0033 Oslo
Norway

Institute for the Study of Labor (IZA) ( email )

P.O. Box 7240
Bonn, D-53072
Germany

Deaprtment of Economics ( email )

Norway

Magne Mogstad

Statistics Norway ( email )

N-0033 Oslo
Norway

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

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