IDEAS home Printed from https://ideas.repec.org/p/fip/fedgfe/2011-60.html
   My bibliography  Save this paper

Rising inequality: transitory or permanent? New evidence from a U.S. panel of household income 1987-2006

Author

Listed:

Abstract

We use a new and large panel dataset of household income to shed light on the permanent versus transitory nature of rising inequality in individual male labor earnings and in total household income, both before and after taxes, in the United States over the period 1987-2006. Due to the quality and the significant size of our dataset, we are able to conduct our analysis using rich and precisely estimated error-components models of income dynamics. Our main specification finds evidence for a quadratic heterogeneous income profiles component and a random walk component in permanent earnings, and for a moving-average component in autoregressive transitory earnings. We find that the increase in inequality over our sample period was entirely permanent for male earnings, and predominantly permanent for household income. We also show that the tax system, though reducing inequality, nonetheless did not materially affect its increasing trend. Furthermore, we compare our model-based findings against those of simpler, non-model based inequality decomposition methods. We show that the results for the trends in the evolution of the permanent and transitory variances are remarkably similar across methods, whereas the results for the shares of those variances in cross-sectional inequality differ widely. Further investigation into the sources of these differences suggests that simpler methods produce erroneous decompositions because they cannot flexibly capture the relative degree of persistence of the transitory component of income.

Suggested Citation

  • Jason M. DeBacker & Bradley T. Heim & Vasia Panousi & Ivan Vidangos, 2011. "Rising inequality: transitory or permanent? New evidence from a U.S. panel of household income 1987-2006," Finance and Economics Discussion Series 2011-60, Board of Governors of the Federal Reserve System (U.S.).
  • Handle: RePEc:fip:fedgfe:2011-60
    as

    Download full text from publisher

    File URL: http://www.federalreserve.gov/pubs/feds/2011/201160/201160abs.html
    Download Restriction: no

    File URL: http://www.federalreserve.gov/pubs/feds/2011/201160/201160pap.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Costas Meghir & Luigi Pistaferri, 2004. "Income Variance Dynamics and Heterogeneity," Econometrica, Econometric Society, vol. 72(1), pages 1-32, January.
    2. Altonji, Joseph G & Segal, Lewis M, 1996. "Small-Sample Bias in GMM Estimation of Covariance Structures," Journal of Business & Economic Statistics, American Statistical Association, vol. 14(3), pages 353-366, July.
    3. Shin, Donggyun & Solon, Gary, 2011. "Trends in men's earnings volatility: What does the Panel Study of Income Dynamics show?," Journal of Public Economics, Elsevier, vol. 95(7-8), pages 973-982, August.
    4. MaCurdy, Thomas E., 1982. "The use of time series processes to model the error structure of earnings in a longitudinal data analysis," Journal of Econometrics, Elsevier, vol. 18(1), pages 83-114, January.
    5. Abowd, John M & Card, David, 1989. "On the Covariance Structure of Earnings and Hours Changes," Econometrica, Econometric Society, vol. 57(2), pages 411-445, March.
    6. Sabelhaus, John & Song, Jae, 2009. "Earnings Volatility Across Groups and Time," National Tax Journal, National Tax Association;National Tax Journal, vol. 62(2), pages 347-364, June.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Michael Kumhof & Romain Rancière & Pablo Winant, 2015. "Inequality, Leverage, and Crises," American Economic Review, American Economic Association, vol. 105(3), pages 1217-1245, March.
    2. Robert Moffitt & Sisi Zhang, 2018. "Income Volatility and the PSID: Past Research and New Results," AEA Papers and Proceedings, American Economic Association, vol. 108, pages 277-280, May.
    3. Yi Wen, 2011. "Making sense of China’s astronomical foreign reserves," Working Papers 2011-018, Federal Reserve Bank of St. Louis.
    4. Samuel Ackerman & John Edward Sabelhaus, 2012. "The effect of self-reported transitory income shocks on household spending," Finance and Economics Discussion Series 2012-64, Board of Governors of the Federal Reserve System (U.S.).
    5. Bargain, Olivier & Dolls, Mathias & Immervoll, Herwig & Neumann, Dirk & Peichl, Andreas & Pestel, Nico & Siegloch, Sebastian, 2011. "Tax Policy and Income Inequality in the U.S., 1978-2009: A Decomposition Approach," IZA Discussion Papers 5910, Institute of Labor Economics (IZA).
    6. Barry Z. Cynamon & Steven M. Fazzari, 2013. "Inequality and Household Finance during the Consumer Age," Economics Working Paper Archive wp_752, Levy Economics Institute.
    7. Bargain, Olivier & Dolls, Mathias & Immervoll, Herwig & Neumann, Dirk & Peichl, Andreas & Pestel, Nico & Siegloch, Sebastian, 2013. "Partisan Tax Policy and Income Inequality in the U.S., 1979-2007," IZA Discussion Papers 7190, Institute of Labor Economics (IZA).
    8. Christopher D. Carroll, 2014. "Representing Consumption and Saving without a Representative Consumer," NBER Chapters, in: Measuring Economic Sustainability and Progress, pages 115-134, National Bureau of Economic Research, Inc.
    9. Bargain, Olivier & Dolls, Mathias & Immervoll, Herwig & Neumann, Dirk & Peichl, Andreas & Pestel, Nico & Siegloch, Sebastian, 2014. "Tax policy and income inequality in the US, 1979-2007," ZEW Discussion Papers 14-001, ZEW - Leibniz Centre for European Economic Research.
    10. Jonathan A. Schwabish & Julie H. Topoleski, 2013. "Modeling Individual Earnings in CBO’s Long-Term Microsimulation Model: Working Paper 2013-04," Working Papers 44306, Congressional Budget Office.
    11. Dynan Karen & Elmendorf Douglas & Sichel Daniel, 2012. "The Evolution of Household Income Volatility," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 12(2), pages 1-42, December.
    12. Giorgia Menta & Edward N. Wolff & Conchita D’ Ambrosio, 2021. "Income and wealth volatility: evidence from Italy and the U.S. in the past two decades," The Journal of Economic Inequality, Springer;Society for the Study of Economic Inequality, vol. 19(2), pages 293-313, June.
    13. Jacob Krimmel & Kevin B. Moore & John Sabelhaus & Paul A. Smith, 2013. "The current state of U.S. household balance sheets," Review, Federal Reserve Bank of St. Louis, issue Sep, pages 337-359.
    14. Robert A. Moffitt, 2020. "Reconciling Trends in U.S. Male Earnings Volatility: Results from a Four Data Set Project," NBER Working Papers 27664, National Bureau of Economic Research, Inc.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Otto Kässi, 2014. "Earnings dynamics of men and women in Finland: permanent inequality versus earnings instability," Empirical Economics, Springer, vol. 46(2), pages 451-477, March.
    2. Masakatsu Okubo, 2015. "Earnings Dynamics and Profile Heterogeneity: Estimates from Japanese Panel Data," The Japanese Economic Review, Japanese Economic Association, vol. 66(1), pages 112-146, March.
    3. Dmytro Hryshko, 2012. "Labor income profiles are not heterogeneous: Evidence from income growth rates," Quantitative Economics, Econometric Society, vol. 3(2), pages 177-209, July.
    4. Jeremy Lise & Costas Meghir & Jean-Marc Robin, 2016. "Matching, Sorting and Wages," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 19, pages 63-87, January.
    5. Jenkins, Stephen P., 2011. "Has the Instability of Personal Incomes been Increasing?," National Institute Economic Review, Cambridge University Press, vol. 218, pages 33-43, October.
    6. Fatih Guvenen, 2009. "An Empirical Investigation of Labor Income Processes," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 12(1), pages 58-79, January.
    7. Joseph G. Altonji & Anthony A. Smith Jr. & Ivan Vidangos, 2013. "Modeling Earnings Dynamics," Econometrica, Econometric Society, vol. 81(4), pages 1395-1454, July.
    8. Blundell, Richard William & Pistaferri, Luigi & Preston, Ian, 2002. "Partial Insurance, Information, and Consumption Dynamics," CEPR Discussion Papers 3666, C.E.P.R. Discussion Papers.
    9. Koray Aktas, 2021. "Characterizing Life-Cycle Dynamics of Annual Days of Work, Wages, and Cross-Covariances," Working Papers 465, University of Milano-Bicocca, Department of Economics.
    10. Jonathan Heathcote & Kjetil Storesletten & Giovanni L. Violante, 2014. "Consumption and Labor Supply with Partial Insurance: An Analytical Framework," American Economic Review, American Economic Association, vol. 104(7), pages 2075-2126, July.
    11. Thierry Magnac & Sébastien Roux, 2009. "Dynamique des salaires dans une cohorte," Économie et Prévision, Programme National Persée, vol. 187(1), pages 1-24.
    12. Benjamin Friedrich & Costas Meghir & Lisa Laun & Luigi Pistaferri, 2018. "Earnings Dynamics and Firm-Level Shocks," 2018 Meeting Papers 536, Society for Economic Dynamics.
    13. Cappellari, Lorenzo & Jenkins, Stephen P., 2013. "Earnings and Labour Market Volatility in Britain," IZA Discussion Papers 7491, Institute of Labor Economics (IZA).
    14. Robert Moffitt & Sisi Zhang, 2018. "Income Volatility and the PSID: Past Research and New Results," AEA Papers and Proceedings, American Economic Association, vol. 108, pages 277-280, May.
    15. Jeremy Lise & Costas Meghir & Jean-Marc Robin, 2016. "Matching, Sorting, and Wages," SciencePo Working papers hal-03392023, HAL.
    16. Dean R. Hyslop & Wilbur Townsend, 2020. "Earnings Dynamics and Measurement Error in Matched Survey and Administrative Data," Journal of Business & Economic Statistics, Taylor & Francis Journals, vol. 38(2), pages 457-469, April.
    17. Taisuke Nakata & Christopher Tonetti, 2015. "Small sample properties of Bayesian estimators of labor income processes," Journal of Applied Economics, Universidad del CEMA, vol. 18, pages 121-148, May.
    18. Ivan Vidangos, 2009. "Household welfare, precautionary saving, and social insurance under multiple sources of risk," Finance and Economics Discussion Series 2009-14, Board of Governors of the Federal Reserve System (U.S.).
    19. Robert Moffitt & Peter Gottschalk, 2008. "Trends in the Transitory Variance of Male Earnings in the U.S., 1970-2004," Boston College Working Papers in Economics 697, Boston College Department of Economics.
    20. Paul Bingley & Lorenzo Cappellari & Niels Westergård‐Nielsen, 2013. "Unemployment Insurance, Wage Dynamics and Inequality Over the Life Cycle," Economic Journal, Royal Economic Society, vol. 0, pages 341-372, May.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:fip:fedgfe:2011-60. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: . General contact details of provider: https://edirc.repec.org/data/frbgvus.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Ryan Wolfslayer ; Keisha Fournillier (email available below). General contact details of provider: https://edirc.repec.org/data/frbgvus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.