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Accounting for Imputed and Capital Income Flows in Income Inequality Analyses

  • Frick, Joachim R.

    (DIW Berlin)

  • Grabka, Markus M.

    ()

    (DIW Berlin)

Using representative and consistent microdata from the German Socio-Economic Panel Study (SOEP) from 1985-2007, we illustrate that capital income (CI = return on financial investments) and imputed rent (IR = return on investments in owner-occupied housing) have become increasingly important sources of economic inequality in Germany over the last two decades. Whereas the operationalization of CI in this paper is based on monetary returns on financial investments only, our definition of IR follows a regulation by the European Commission, (EC) which is currently being used to harmonize income measurement for the European Statistics on Income and Living Conditions (EU-SILC) in Europe. While both of these components represent some kind of return on alternative private investments, our results indicate that they do not coincide in their impacts on income inequality and poverty. In line with the literature, net IR as defined according to the EC regulation tends to exert a dampening effect on inequality and relative poverty, very much driven by the increasing share of outright ownership among the elderly. On the other hand, inequality is boosted by CI especially when looking at the upper tail of the income distribution. As the German public pension scheme gradually loses its ability to maintain people's living standards into retirement, we find these effects to increase over time. The analyses presented here, exemplified for Germany, make a clear case for the joint consideration of all components of private investment income for the purpose of welfare analysis, be they of a monetary or non-monetary nature. This appears to be relevant in at least three dimensions of comparative research: (1) across time; (2) across space, regions, welfare regimes; (3) across the individual life course, thus analyzing the impact of investment income on intrapersonal mobility patterns.

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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 4634.

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Length: 31 pages
Date of creation: Dec 2009
Date of revision:
Publication status: forthcoming in: David Besharov and Kenneth Couch (eds.): Measuring Poverty, Income Inequality, and Social Exclusion. Lessons from Europe, Oxford: OUP
Handle: RePEc:iza:izadps:dp4634
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  1. Markus M. Grabka & Joachim R. Frick, 2008. "The Shrinking German Middle Class: Signs of Long-Term Polarization in Disposable Income?," Weekly Report, DIW Berlin, German Institute for Economic Research, vol. 4(4), pages 21-27.
  2. Anna Fräßdorf & Markus M. Grabka & Johannes Schwarze, 2008. "The Impact of Household Capital Income on Income Inequality: A Factor Decomposition Analysis for Great Britain, Germany and the USA," SOEPpapers on Multidisciplinary Panel Data Research 104, DIW Berlin, The German Socio-Economic Panel (SOEP).
  3. Yates, Judith, 1994. "Imputed Rent and Income Distribution," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 40(1), pages 43-66, March.
  4. Joachim R. Frick & Markus M. Grabka, 2003. "Imputed Rent and Income Inequality: A Decomposition Analysis for Great Britain, West Germany and the U.S," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 49(4), pages 513-537, December.
  5. Joachim R. Frick & Jan Goebel & Markus M. Grabka, 2007. "Assessing the Distributional Impact of "Imputed Rent" and "Non-cash Employee Income" in Microdata: Case Studies Based on EU-SILC (2004) and SOEP (2002)," SOEPpapers on Multidisciplinary Panel Data Research 2, DIW Berlin, The German Socio-Economic Panel (SOEP).
  6. Shorrocks, Anthony F, 1984. "Inequality Decomposition by Population Subgroups," Econometrica, Econometric Society, vol. 52(6), pages 1369-85, November.
  7. Mariacristina De Nardi & Eric French & John Bailey Jones, 2009. "Life expectancy and old age savings," Working Paper Series WP-08-18, Federal Reserve Bank of Chicago.
  8. David Card & John E. DiNardo, 2002. "Skill Biased Technological Change and Rising Wage Inequality: Some Problems and Puzzles," NBER Working Papers 8769, National Bureau of Economic Research, Inc.
  9. Lucian Bebchuk, 2005. "The Growth of Executive Pay," Oxford Review of Economic Policy, Oxford University Press, vol. 21(2), pages 283-303, Summer.
  10. Jantti, Markus, 1997. "Inequality in Five Countries in the 1980s: The Role of Demographic Shifts, Markets and Government Policies," Economica, London School of Economics and Political Science, vol. 64(255), pages 415-40, August.
  11. Edward N. Wolff & Ajit Zacharias, 2006. "Household Wealth and the Measurement of Economic Well-Being in the United States," Economics Working Paper Archive wp_447, Levy Economics Institute.
  12. Gert G. Wagner & Joachim R. Frick & Jürgen Schupp, 2007. "The German Socio-Economic Panel Study (SOEP): Scope, Evolution and Enhancements," SOEPpapers on Multidisciplinary Panel Data Research 1, DIW Berlin, The German Socio-Economic Panel (SOEP).
  13. Jenkins, Stephen P, 1995. "Accounting for Inequality Trends: Decomposition Analyses for the UK, 1971-86," Economica, London School of Economics and Political Science, vol. 62(245), pages 29-63, February.
  14. Tullio Jappelli & Franco Modigliani, 1998. "The Age-Saving Profile and the Life-Cycle Hypothesis," CSEF Working Papers 09, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
  15. George J. Borjas, 2005. "Native Internal Migration and the Labor Market Impact of Immigration," NBER Working Papers 11610, National Bureau of Economic Research, Inc.
  16. Frick, Joachim R. & Grabka, Markus M. & Smeeding, Timothy M. & Tsakloglou, Panos, 2010. "Distributional effects of imputed rents in five European countries," Journal of Housing Economics, Elsevier, vol. 19(3), pages 167-179, September.
  17. Joachim R. Frick & Markus M. Grabka, 2009. "Wealth Inequality on the Rise in Germany," Weekly Report, DIW Berlin, German Institute for Economic Research, vol. 5(10), pages 62-73.
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