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

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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Paper provided by Aix-Marseille School of Economics, Marseille, France in its series AMSE Working Papers with number 1216.

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Length: 53 pages
Date of creation: Apr 2012
Date of revision:
Handle: RePEc:aim:wpaimx:1216
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