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Income Inequality, Mobility, And The Accumulation Of Capital

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  • García-Peñalosa, Cecilia
  • Turnovsky, Stephen J.

Abstract

We examine the determinants of income mobility and inequality in a Ramsey model with elastic labor supply and heterogeneous wealth and ability. Both agents with lower wealth and those with greater ability tend to supply more labor, implying that labor supply decisions may have an equalizing or unequalizing effect depending on the relative importance of the two sources of heterogeneity. Moreover, these decisions are central to the extent of mobility observed in an economy. The relationship between mobility and inequality is complex. For example, a reduction in the interest rate and an increase in the wage rate reduce capital income inequality and allow upward mobility of the ability-rich. However, the increase in the labor supply of high-ability agents in response to higher wages raises earnings dispersion and thus has an offsetting effect. As a result, high mobility can be associated with an increase or a decrease in overall income inequality.

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  • García-Peñalosa, Cecilia & Turnovsky, Stephen J., 2015. "Income Inequality, Mobility, And The Accumulation Of Capital," Macroeconomic Dynamics, Cambridge University Press, vol. 19(6), pages 1332-1357, September.
    • Handle: RePEc:cup:macdyn:v:19:y:2015:i:06:p:1332-1357_00
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    3. Toda, Alexis Akira, 2017. "A Note On The Size Distribution Of Consumption: More Double Pareto Than Lognormal," Macroeconomic Dynamics, Cambridge University Press, vol. 21(6), pages 1508-1518, September.
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    5. Zheng, Zhijie & Huang, Chien-Yu & Wan, Xi, 2020. "Human Capital and Income Inequality in a Monetary Schumpeterian Growth Model," MPRA Paper 101912, University Library of Munich, Germany.
    6. Zheng, Zhijie & Wan, Xi & Huang, Chien-Yu, 2023. "Inflation and income inequality in a Schumpeterian economy with heterogeneous wealth and skills," Economic Modelling, Elsevier, vol. 121(C).

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    More about this item

    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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