This paper combines cross-sectional and longitudinal income data to present the evolution of absolute intergenerational income mobility in ten developed economies in the 20th century. Absolute mobility decreased during the second half of the 20th century in all these countries. Increasing income inequality and decreasing growth rates have contributed to the decrease. Yet, growth is the dominant contributor in most countries. We show that detailed panel data are unnecessary for estimating absolute mobility over the long run.
This paper uses Bureau of Labor Statistics employment and wage data to study the distributional impact of the COVID-19 crisis on wages in the United States by mid-April. It answers whether wages of lower-wage workers decreased more than others', and to what extent. We find that the COVID-19 outbreak exacerbates existing inequalities. Workers at the bottom quintile in mid-March were three times more likely to be laid off by mid-April compared to higher-wage workers. Weekly wages of workers at the bottom quintile decreased by 6% on average between mid-February and mid-March and by 26% between mid-March and mid-April. The average decrease for higher quintiles was less than 1% between mid-February and mid-March and about 10% between mid-March and mid-April. We also find that workers aged 16-24 were hit much harder than older workers. Hispanic workers were also hurt more than other racial groups. Their wages decreased by 2-3 percentage points more than other workers' between mid-March and mid-April.
This paper combines historical cross-sectional and longitudinal data in the US to study patterns of economic growth within the income distribution. We quantify absolute mobility as the fraction of families with higher income over a period of several years. The rates of absolute mobility over periods of two to four years are procyclical and are largely confined within 45%–55%. We also find that absolute mobility decreases with income. Individuals and families occupying the lower ranks of the income distribution have a higher probability of increasing their income over short time periods than those occupying higher ranks. This also occurs during periods of increasing inequality. Our findings stem from the importance of the changes in the composition of income percentiles. These changes are over and above mechanical labor market dynamics and life cycle effects. We offer a simplified model to mathematically describe these findings.
Income inequality and income intergenerational mobility are negatively associated empirically across countries and across time. There is also a known mechanical relationship between measures of income inequality and intergenerational mobility. This paper tests whether the mechanical relationship explains the empirical association. We find that this relationship alone explains at least 64% of the variance in mobility across 36 countries. We also show that the mechanical relationship accords well with income inequality data across time for the United States. This suggests that policy aiming to achieve more equal outcomes will likely lead to more equal opportunities and vice versa. Yet, these findings also imply that validating empirically causal mechanisms for links between mobility and inequality require being over and above the mechanical relationship.
Wealth Inequality and the Ergodic Hypothesis: Evidence from the United States (with Ole Peters and Alex Adamou)
Studies of wealth inequality often make the ergodic hypothesis that rescaled wealth converges rapidly to a stationary distribution. Changes in distribution are expressed as changes in model parameters, corresponding to shocks in economic conditions. Here we test the validity of the ergodic hypothesis in an established model of wealth in a growing economy with reallocation. We fit model parameters to historical data from the United States. In recent decades, we find negative reallocation rates, i.e. from poorer to richer, for which no stationary distribution exists. When we find positive reallocation, convergence to the stationary distribution is too slow for the distribution to be practically relevant. Inequality evolves because the distribution is inherently unstable on human timescales, irrespective of shocks. Our analysis is informative of net reallocation in the United States economy. It does not support use of the ergodic hypothesis in this model for these data. Studies of other models and data, in which the hypothesis is made, would benefit from similar tests.
Microfoundations of Discounting (with Alex Adamou, Dio Mavroyiannis and Ole Peters)
An important question in economics is how people choose between different payments in the future. The classical normative model predicts that a decision maker discounts a later payment relative to an earlier one by an exponential function of the time between them. Descriptive models use non-exponential functions to fit observed behavioral phenomena, such as preference reversal. Here we propose a model of discounting, consistent with standard axioms of choice, in which decision makers maximize the growth rate of their wealth. Four specifications of the model produce four forms of discounting – no discounting, exponential, hyperbolic, and a hybrid of exponential and hyperbolic – two of which predict preference reversal. Our model requires no assumption of behavioral bias or payment risk.
The Long Run Evolution of Political Cleavages in Israel (to be published as a chapter in Political Cleavages, Party Systems and Social Inequalities, eds. Amory Gethin, Clara Martínez-Toledano and Thomas Piketty)
This paper uses pre-electoral surveys conducted in Israel between 1969 and 2015 to describe the long run evolution of political cleavages in the country. Despite Israel’s exceptional characteristics, we find similar patterns to those found for France, the UK and the US. Notably, we find that in the 1960s–1970s, the vote for left-wing parties was associated with lower education and lower social class voters. It has gradually become associated with high social class voters during the late 1970s and 1980s. Since, the social class cleavage remained largely stable. We also find a weak inter-relationship between inequality and political outcomes, suggesting that despite the social class cleavage, identity-based voting and security issues are more dominant in Israeli politics.
Risk Preferences in Time Lotteries (with Mark Kirstein)
An important question in economics is how people choose when facing uncertainty in the timing of rewards. In this paper we study preferences over time lotteries, in which the payment amount is certain but the payment time is uncertain. In expected discounted utility (EDU) theory decision makers must be risk-seeking over time lotteries. Here we explore growth-optimality, a normative model consistent with standard axioms of choice, in which decision makers maximise the growth rate of their wealth. Growth-optimality is consistent with both risk-seeking and risk-neutral behaviour in time lotteries, depending on how growth rates are computed. We discuss two approaches to compute a growth rate: the ensemble approach and the time approach. Revisiting existing experimental evidence on risk preferences in time lotteries, we find that the time approach accords better with the evidence than the ensemble approach. Surprisingly, in contrast to the EDU prediction, the higher the ensemble-average growth rate of a time lottery is, the less attractive it becomes compared to a sure alternative. Decision makers thus may not consider the ensemble-average growth rate as a relevant criterion for their choices. Instead, the time-average growth rate may be a better criterion for decision-making.
WORK IN PROGRESS
On the Distribution of Estates and the Distribution of Wealth: Evidence from the Dead (with Facundo Alvaredo and Salvatore Morelli, draft coming soon)
Evaluating Growth Spells: Theory and Practice (with François Bourguignon, draft coming soon)
Movies and Snapshots: on the Relationship Between Intergenerational Mobility and Inequality (with Ravi Kanbur)