Income Risk, Income Mobility and Welfare

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, component representing measurement erro...

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Bibliographic Details
Main Authors:	Krebs, Tom, Krishna, Pravin, Maloney, William F.
Format:	Policy Research Working Paper
Language:	English en_US
Published:	World Bank, Washington, DC 2013
Subjects:	AGGREGATE GROWTH ASSET PRICING ATTRITION BORROWING BRIDGE BUSINESS CYCLES COMPONENT PARTS CONSUMERS CONSUMPTION LEVELS CONSUMPTION PLANS CONVERGENCE PARAMETER DATA SET DECREASING RATE DEVELOPING COUNTRIES DEVELOPING WORLD DEVELOPMENT POLICY DISPLACEMENT DISTRIBUTION OF INCOME DRIVERS EARNINGS INSTABILITY ECONOMETRICS ECONOMIC ACTIVITY ECONOMIC DEVELOPMENT ECONOMIC FLUCTUATIONS ECONOMIC GROWTH ECONOMIC INEQUALITY ECONOMIC REVIEW ECONOMIC STUDIES ECONOMIC THEORY EMPIRICAL APPLICATION EMPIRICAL STUDIES EQUAL WEIGHT EQUATIONS EQUILIBRIUM EQUILIBRIUM PRICES EXPECTED UTILITY FAMILY INCOME FRAMEWORK FUNCTIONAL FORM FUTURE LABOR GENERAL EQUILIBRIUM GROWTH LITERATURE HIGH INCOME HIGH INCOMES HOUSEHOLD MEMBERS INCOME INCOME DATA INCOME DIFFERENCES INCOME DISTRIBUTION INCOME DISTRIBUTIONS INCOME DYNAMICS INCOME INEQUALITY INCOME RISK INCOME SHOCKS INCOME TAX INCOME VARIABILITY INCOMPLETE MARKETS INCREASING INEQUALITY INDIVIDUAL INCOMES INEQUALITY MEASUREMENT INNOVATION INSURANCE INTEREST RATE LABOR ECONOMICS LABOR INCOME LABOR MARKET LOG INCOME LONGITUDINAL DATA LOW INCOME LOW INCOMES MACROECONOMIC FACTORS MACROECONOMICS MEAN INCOME MEASUREMENT ERROR MIDDLE CLASS MONETARY ECONOMICS NORMAL DISTRIBUTION PERMANENT INCOME POLICY DISCUSSIONS POLICY RESEARCH POLITICAL ECONOMY PRODUCTIVITY PRODUCTIVITY GROWTH PUBLIC POLICY RANDOM WALK RELATIVE IMPACT RESIDUAL INCOME RISK AVERSION RISK SHARING SALARY SIGNIFICANT NEGATIVE SOCIAL MOBILITY SPAN SPEED STATICS URBAN EMPLOYMENT UTILITY FUNCTION VALUATION WAGES WEALTH WORK FORCE YOUNGER WORKERS
Online Access:	http://documents.worldbank.org/curated/en/2012/10/16900833/income-risk-income-mobility-welfare http://hdl.handle.net/10986/12108

Description
Summary:	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, component representing measurement error or transitory income shocks and an Autoregressive (AR(1)) component representing persistent changes in income. The analysis uses 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 the 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.

Income Risk, Income Mobility and Welfare

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