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Income Mobility, Inequality and Social Welfare

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  • Creedy, John
  • Wilhelm, Mark

Abstract

It is often argued that an observation of rising annual income inequality need not have negative normative implications. The argument is that if there has been a sufficiently large simultaneous increase in mobility, the inequality of income measured over a longer time period can be lower despite the rise in annual inequality. In this paper, it is shown by example that if normative implications are drawn from a standard social welfare function, the set of circumstances put forward in the above argument are not sufficient to guarantee that social welfare will improve. The reason is that even though rising mobility does reduce longer term inequality, it also increases the variability of income profiles over time and the latter has a detrimental social welfare effect. Hence, there are two types of mobility: one which reduces inequality (regression to the mean), but another that increases inequality (relative movements uncorrelated with incomes). Further, if individuals' aversion to income variability is sufficiently larger than the social welfare judge's aversion to inequality, then an increase in mobility, no matter how large, cannot offset the negative normative effect of rising annual inequality. Copyright 2002 by Blackwell Publishers Ltd/University of Adelaide and Flinders University of South Australia

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Bibliographic Info

Article provided by Wiley Blackwell in its journal Australian Economic Papers.

Volume (Year): 41 (2002)
Issue (Month): 2 (June)
Pages: 140-50

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Handle: RePEc:bla:ausecp:v:41:y:2002:i:2:p:140-50

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Cited by:
  1. Creedy, John & Halvorsen, Elin & Thoresen, Thor, 2012. "Inequality Comparisons in a Multi-Period Framework: The Role of Alternative Welfare Metrics," Working Paper Series 2434, Victoria University of Wellington, Chair in Public Finance.
  2. Denisa Maria Sologon & O'Donoghue, Cathal, 2011. "Shaping earnings instability: labour market policy and institutional factors," MERIT Working Papers 077, United Nations University - Maastricht Economic and Social Research Institute on Innovation and Technology (MERIT).
  3. Sologon, Denisa Maria & O'Donoghue, Cathal, 2009. "Increased Opportunity to Move Up the Economic Ladder? Earnings Mobility in EU: 1994-2001," IZA Discussion Papers 4311, Institute for the Study of Labor (IZA).
  4. Yoram Amiel & Frank A Cowell, 1997. "Inequality, Welfare and Monotonicity," STICERD - Distributional Analysis Research Programme Papers, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE 29, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
  5. Sami Bibi & Jean-Yves Duclos & Abdelkrim Araar, 2014. "Mobility, taxation and welfare," Social Choice and Welfare, Springer, Springer, vol. 42(3), pages 503-527, March.
  6. Seidl, Christian & Camacho Cuena, Eva & Morone, Andrea, 2003. "Income Distributions versus Lotteries Happiness, Response-Mode Effects, and Preference," Economics Working Papers 2003,01, Christian-Albrechts-University of Kiel, Department of Economics.
  7. Fredrik Carlsson & Dinky Daruvala & Olof Johansson-Stenman, 2005. "Are People Inequality-Averse, or Just Risk-Averse?," Economica, London School of Economics and Political Science, London School of Economics and Political Science, vol. 72(3), pages 375-396, 08.

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