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Income Mobility and Welfare

Author

Listed:
  • Mr. Tom Krebs
  • Mr. Pravin Krishna
  • Mr. William Maloney

Abstract

This paper develops a framework for the quantitative analysis of individual income dynamics, mobility and welfare. Individual income is assumed to follow a stochastic process with two (unobserved) components, an i.i.d. component representing measurement error or transitory income shocks and an AR(1) component representing persistent changes in income. We use a tractable consumption-saving model with labor income risk and incomplete markets to relate income dynamics to consumption and welfare, and derive analytical expressions for income mobility and welfare as a function of the various parameters of the underlying income process. The empirical application of our framework using data on individual incomes from Mexico provides striking results. Much of measured income mobility is driven by measurement error or transitory income shocks and therefore (almost) welfare-neutral. A smaller 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 have economically significant effects on social welfare. Decomposing mobility into its fundamental components is thus seen to be crucial from the standpoint of welfare evaluation.

Suggested Citation

  • Mr. Tom Krebs & Mr. Pravin Krishna & Mr. William Maloney, 2013. "Income Mobility and Welfare," IMF Working Papers 2013/024, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:2013/024
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    References listed on IDEAS

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    Cited by:

    1. Thiagu Ranganathan & Amarnath Tripathi & Ghanshyam Pandey, 2016. "Income Mobility among Social Groups in Indian Rural Households: Findings from the Indian Human Development Survey," Working Papers id:10933, eSocialSciences.
    2. Richard M. Bird & Eric M. Zolt, 2014. "Taxation and inequality in the Americas: Changing the fiscal contract?," Chapters, in: Richard M. Bird & Jorge Martinez-Vazquez (ed.), Taxation and Development: The Weakest Link?, chapter 7, pages 193-237, Edward Elgar Publishing.
    3. Thiagu Ranganathan & Amarnath Tripathi & Ghanshyam Pandey, 2016. "Income Mobility among Social Groups in Indian Rural Households Findings from the Indian Human Development Survey," IEG Working Papers 368, Institute of Economic Growth.
    4. Bird, Richard M. & Zolt, Eric M., 2015. "Fiscal Contracting in Latin America," World Development, Elsevier, vol. 67(C), pages 323-335.
    5. Perez, Victor, 2015. "Moving in and out of poverty in Mexico: What can we learn from pseudo-panel methods?," ISER Working Paper Series 2015-16, Institute for Social and Economic Research.

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