Income Mobility, Income Risk and Welfare

36 Pages Posted: 17 Jul 2017

See all articles by Tom Krebs

Tom Krebs

University of Mannheim

Pravin Krishna

Johns Hopkins University - Paul H. Nitze School of Advanced International Studies (SAIS); Brown University - Department of Economics; National Bureau of Economic Research (NBER)

William F. Maloney

World Bank - Poverty and Economic Management Unit; IZA Institute of Labor Economics; World Bank - Development Research Group (DECRG)

Date Written: July 2017

Abstract

This paper presents a framework for the quantitative analysis of individual income dynamics, mobility and welfare, with ex-ante identical individuals facing a stochastic income process and market incompleteness implying that they are unable to insure against persistent shocks to income. We show how the parameters of the income process can be estimated using repeated cross-sectional data with a short panel dimension, and use a simple consumption-saving model for quantitative analysis of mobility and welfare. Our empirical application, using data on individual incomes from Mexico, provides striking results. Most of measured income mobility is driven by measurement error or transitory income shocks and therefore (almost) welfare-neutral. Only a small part of measured income mobility is due to either welfare-reducing income risk or welfare-enhancing catching-up of low-income individuals with high-income individuals, both of which, nevertheless, have economically significant effects on social welfare. Strikingly, roughly half of the mobility that cannot be attributed to measurement error or transitory income shocks is driven by welfare-reducing persistent income shocks. Decomposing mobility into its fundamental components is thus crucial from the standpoint of welfare evaluation.

Suggested Citation

Krebs, Tom and Krishna, Pravin and Maloney, William F., Income Mobility, Income Risk and Welfare (July 2017). NBER Working Paper No. w23578. Available at SSRN: https://ssrn.com/abstract=3003716

Tom Krebs (Contact Author)

University of Mannheim ( email )

Universitaetsbibliothek Mannheim
Zeitschriftenabteilung
Mannheim, 68131
Germany

Pravin Krishna

Johns Hopkins University - Paul H. Nitze School of Advanced International Studies (SAIS) ( email )

1740 Massachusetts Avenue, NW
Washington, DC 20036-1984
United States

Brown University - Department of Economics ( email )

64 Waterman Street
Providence, RI 02912
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

William F. Maloney

World Bank - Poverty and Economic Management Unit ( email )

1818 H Street NW
Washington, DC 20433
United States
202-473-6340 (Phone)
202-522-0054 (Fax)

IZA Institute of Labor Economics

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

World Bank - Development Research Group (DECRG)

1818 H. Street, N.W.
MSN3-311
Washington, DC 20433
United States

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