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Income Inequality, Mobility, and the Accumulation of Capital. The role of Heterogeneous Labor Productivity

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Abstract

We examine the determinants of income inequality and mobility in a Ramsey model with elastic labor supply. Individuals differ both in their initial capital endowment and productive ability (labor endowment). With two sources of heterogeneity, initially poorer agents may catch up with the income and wealth of initial richer ones, implying that the Ramsey model is compatible with rich distributional dynamics. We show that the elasticity of the labor supply plays a key role in the extent of mobility in the economy. Capital-rich individuals supply less labor while ability-rich agents tend to work more. The more elastic the labor supply is, the stronger these effects tend to be and hence the greater the degree of income mobility is.

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  • Cecilia García-Peñalosa & Stephen J. Turnovsky, 2012. "Income Inequality, Mobility, and the Accumulation of Capital. The role of Heterogeneous Labor Productivity," AMSE Working Papers 1216, Aix-Marseille School of Economics, Marseille, France.
  • Handle: RePEc:aim:wpaimx:1216
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    Keywords

    Inequality; Income mobility; Endogenous labour supply; Transitional dynamics.;

    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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