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.
Detalhes
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Autor
Krebs, Tom Krishna, Pravin Maloney, William F.
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Data do documento
2012/10/01
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TIpo de documento
Documento de trabalho sobre pesquisa de políticas
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No. do relatório
WPS6254
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Nº do volume
1
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Total Volume(s)
1
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País
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Região
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Data de divulgação
2012/10/01
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Disclosure Status
Disclosed
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Nome do documento
Income risk, income mobility and welfare
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Palavras-chave
labor income;individual income;measurement error;Social Welfare;transitory income;transitory shock;consumption;residual income;Macroeconomics and Growth;Macroeconomics & Growth;income shock;income parameter;income dynamic;income risk;parameter of interest;income process;welfare analysis;persistent shock;lifetime consumption;development research group;permanent shock;empirical application;income change;equilibrium consumption;high-income individual;incomplete market;
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