Income Inequality, Mobility and the Accumulation of Capital

33 Pages Posted: 22 Jan 2014

See all articles by Cecilia Garcia-Peñalosa

Cecilia Garcia-Peñalosa

Aix-Marseille University

Stephen J. Turnovsky

University of Washington - Institute for Economic Research; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: December 31, 2013

Abstract

We examine the determinants of income mobility and inequality in a Ramsey model with elastic labor supply and heterogeneous wealth and ability (labor endowment). Both agents with lower wealth and with greater ability tend to supply more labor, implying that labor supply decisions may have an equalizing or unequalizing effect depending on the relative importance of the two sources of heterogeneity. Moreover, these decisions are central to the extent of mobility observed in an economy. The relationship between mobility and inequality is complex. For example, a reduction in the interest rate and an increase in the wage rate reduce capital income inequality and allow upward mobility of the ability-rich. However, the increase in the labor supply of high ability agents in response to higher wages raises earnings dispersion and thus has an offsetting effect. As a result, high mobility can be associated with an increase or a decrease in overall income inequality.

Keywords: inequality, income mobility, endogenous labor supply, transitional dynamics

JEL Classification: D310, O410

Suggested Citation

Garcia-Peñalosa, Cecilia and Turnovsky, Stephen J., Income Inequality, Mobility and the Accumulation of Capital (December 31, 2013). CESifo Working Paper Series No. 4559, Available at SSRN: https://ssrn.com/abstract=2382504 or http://dx.doi.org/10.2139/ssrn.2382504

Cecilia Garcia-Peñalosa

Aix-Marseille University ( email )

3 Avenue Robert Schuman
3 Avenue Robert Schuman,
Aix-en-Provence, 13628
France

Stephen J. Turnovsky (Contact Author)

University of Washington - Institute for Economic Research ( email )

Seattle, WA 98195
United States
206-685-8028 (Phone)
206-543-5955 (Fax)

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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