Showing papers in "Review of Income and Wealth in 2012"

Liquidity constraints, household wealth, and entrepreneurship revisited

Abstract: A large body research shows a positive relationship between wealth andentrepreneurship and interprets the relationship as providing evidence of liquidity constraints.Recently, however, the liquidity constraint interpretation has been challenged because of thefinding that the relationship between business entry rates and assets is flat throughout most of theasset distribution and only rises dramatically after this point (Hurst and Lusardi 2004). Wereexamine the liquidity constraint hypothesis in three ways. First, we demonstrate that examiningthe relationship separately for those who experience a job loss and those who do notreveals generally increasing entry rates through the wealth distribution for both groups. Basedon the entrepreneurial choice model of Evans and Jovanovic (1989), these two groups facedifferent incentives, and thus have different solutions to the entrepreneurial decision. We alsofind evidence of a stronger relationship between entrepreneurship and a different measure ofwealth – net housing equity – for the two groups. Second, we examine the liquidity constrainthypothesis using a two-period simulation model that extends the Evans and Jovanovic (1989)model. The model shows how exogenous wealth shocks can be used to accurately identify thepresence of liquidity constraints even allowing for endogenous saving and correlated abilities.Third, we provide new evidence from matched Current Population Survey (1993-2004) data tostudy whether changes in housing prices affect self-employment entry. We find thathousing appreciation measured at the MSA-level is a significantly positive determinant of entryinto self-employment after controlling for changes in local economic conditions and otherfactors. Our estimates indicate that a 10 percent annual increase in housing equity increases themean probability of entrepreneurship by 17 percent and that the effect is not concentrated at theupper tail of the distribution. These estimates are not sensitive to controlling for pre-existingtrends in housing prices suggesting that the results are not being driven by expected localeconomic growth.

Credit, housing collateral, and consumption: evidence from japan, the u.k., and the u.s.

Abstract: The consumption behavior of U.K., U.S., and Japanese households is examined and compared using a modern Ando-Modigliani style consumption function. The models incorporate income growth expectations, income uncertainty, housing collateral, and other credit effects. These models therefore capture important parts of the financial accelerator. The evidence is that credit availability for U.K. and U.S., but not Japanese, households has undergone large shifts since 1980. The average consumption-to-income ratio rose in the U.K. and U.S. as mortgage down-payment constraints eased and as the collateral role of housing wealth was enhanced by financial innovations, such as home equity loans. The estimated housing collateral effect is similar in the U.S. and U.K. In Japan, land prices (which proxy house prices) continue to negatively impact consumer spending. There are negative real interest rate effects on consumption in the U.K. and U.S. and positive effects in Japan. Overall, this implies important differences in the transmission of monetary and credit shocks in Japan versus the U.S., U.K., and other credit-liberalized economies.

More Relatively-Poor People in a Less Absolutely-Poor World

Abstract: Relative deprivation, shame and social exclusion can matter to the welfare of people everywhere. The authors argue that such social effects on welfare call for a reconsideration of how we assess global poverty, but they do not support standard measures of relative poverty. The paper argues instead for using a weakly-relative measure as the upper-bound complement to the lower-bound provided by a standard absolute measure. New estimates of global poverty are presented, drawing on 850 household surveys spanning 125 countries over 1981-2008. The absolute line is $1.25 a day at 2005 prices, while the relative line rises with the mean, at a gradient of 1:2 above $1.25 a day. The authors show that these parameter choices are consistent with cross-country data on national poverty lines. The results indicate that the incidence of both absolute and weakly-relative poverty in the developing world has been falling since the 1990s, but more slowly for the relative measure. While the number of absolutely poor has fallen, the number of relatively poor has changed little since the 1990s, and is higher in 2008 than 1981.

Intergenerational income mobility in urban china

Abstract: This paper estimates the intergenerational income elasticity for urban China, paying careful attention to the potential biases induced by income fluctuations and life cycle effects. Our preferred estimate indicates that the intergenerational income elasticity for father–son is 0.63. This suggests that while China has experienced rapid growth of absolute incomes, the relative position of children in the distribution is largely related to their parents' incomes. By investigating possible causal channels, we find that parental education plays one of the most important roles in transmitting economic status from parents to children.

The Economic Security Index: A New Measure for Research and Policy Analysis

Abstract: This article presents the Economic Security Index (ESI), a new measure of economic insecurity. The ESI assesses the individual-level occurrence of substantial year-to-year declines in available household resources, accounting for fluctuations not only in income but also in out-of-pocket medical expenses. It also assesses whether those experiencing such declines have sufficient liquid financial wealth to buffer against these shocks. We find that insecurity—the share of individuals experiencing substantial resource declines without adequate financial buffers—has risen steadily since the mid-1980s for virtually all subgroups of Americans, albeit with cyclical fluctuation. At the same time, we find that there is substantial disparity in the degree to which different subgroups are exposed to economic risk. As the ESI derives from a data-independent conceptual foundation, it can be measured using different panel datasets. We find that the degree and disparity by which insecurity has risen is robust across the best available sources.

Does size matter? The impact of changes in household structure on income distribution in Germany

Abstract: Income inequality in Germany has been continually increasing during the past 20 years. One cause of this development, among others, could be structural shifts in household formation due to long-term societal trends. These affect per capita incomes, which has repercussions for the income distribution even if wages remain constant. The aim of this paper is to quantify the proportion of changing household structures in the increase in inequality. We find that the growth of the income gap in Germany (for both East and West from 1991 to 2007) is indeed strongly related to changes in household structure and employment behavior, and a large part of this increase is compensated by the welfare state.

Inequality of Opportunity in Europe

Abstract: Using the EU-SILC database, we estimate and compare the Inequality of Opportunity (IO) of 23 European countries in 2005. IO is estimated as the between-type (ex-ante) inequality component following the parametric procedure of Ferreira and Gignoux (2011), which allows for the inclusion of the large set of circumstances in the database. We also measure the degree of correlation between IO estimates and a set of past and contemporaneous economic factors related to the degree of development, labor market performance, investment in human capital, and social protection spending.

Understanding Rising Income Inequality in Germany, 1999/2000–2005/2006

Abstract: We examine the factors behind rising income inequality in Europe's most populous economy. From 1999/2000 to 2005/2006, Germany experienced an unprecedented rise in net equivalized income inequality and poverty. At the same time, unemployment rose to record levels, part-time and marginal part-time work grew, and there was evidence for a widening distribution of labor incomes. Other factors that possibly contributed to the rise in income inequality were changes in the tax and transfer system, changes in the household structure (in particular the rising share of single parent households), and changes in other socio-economic characteristics (e.g., age or education). We address the question of which factors were the main drivers of the observed inequality increase. Our results suggest that the largest part of the increase was due to increasing inequality in labor incomes, but that changes in employment outcomes and changes in the tax system also contributed considerable shares. By contrast, changes in household structures and household characteristics, as well as changes in the transfer system only seem to have played a minor role.

Inequality of opportunity in earnings and consumption expenditure: the case of indian men

Abstract: The paper associates inequality of opportunities with outcome differences that can be accounted by predetermined circumstances which lie beyond the control of an individual, such as parental education, parental occupation, caste, religion, and place of birth. The non-parametric estimates using parental education as a measure of circumstances reveal that the opportunity share of earnings inequality in 2004–05 was 11–19 percent for urban India and 5–8 percent for rural India. The same figures for consumption expenditure inequality are 10–19 percent for urban India and 5–9 percent for rural India. The overall opportunity share estimates (parametric) of earnings inequality due to circumstances, including caste, religion, region, parental education, and parental occupation, vary from 18 to 26 percent for urban India, and from 16 to 21 percent for rural India. The overall opportunity share estimates for consumption expenditure inequality are close to the earnings inequality figures for both urban and rural areas. The analysis further finds evidence that the parental education specific opportunity share of overall earnings (and consumption expenditure) inequality is largest in urban India, but caste and geographical region also play an equally important role when rural India is considered.

Measuring poverty accounting for time

Abstract: In this paper we make a methodological proposal to measure poverty accounting for time by proposing a new index that aims at reconciling the way poverty is measured in a static and a dynamic framework. Our index is able to consider the duration of the poverty spell and the social preference for equality in well-being given that, in contrast with others that have been previously proposed, it is sensitive to the level of inequality between individual complete poverty experiences over time. Moreover, other indices in the literature can be interpreted as special cases of our more general measure. An empirical illustration shows the relevance of considering the distribution of poverty experiences among the population in an international analysis.

On the Role of Capital Gains in Swedish Income Inequality

Abstract: Realized capital gains are typically disregarded in the study of income inequality. We show that in the case of Sweden this severely underestimates the actual increase in inequality and, in particu ...

Globalization, gender, and growth

Abstract: We consider the eect of globalisation on fertility, human capital and growth. We view globalisation as creating market opportunities for employment in less developed countries. We construct a speci…c model of household decision mak- ing, drawing on empirical observations in the development economics literature, and show that if the market opportunities produced by globalisation are for women then globalisation reduces fertility and increases human capital forma- tion. If the opportunities are for men then fertility increases and human capital formation falls. We then show that globalisation that produces job opportu- nities for women increases growth and produces a long run steady state with higher per capita consumption than would prevail either without globalisation, or with globalisation that creates jobs only for men.

Measuring poverty using both income and wealth: a cross‐country comparison between the u.s. and spain

Abstract: We study the correspondence between a householdis income and its vulnerability to income shocks in two developed countries: the U.S. and Spain. Vulnerability is measured by the availability of wealth to smooth consumption in a multidimensional approach to poverty, which allows us to identify three groups of households: the twice-poor group which includes income-poor households who lack of an adequate stock of wealth; the group of protected-poor households, which are all those incomepoor families with a bu§er stock of wealth they can rely on; lastly, the vulnerablenon-poor group, including households above the income-poverty line that do not hold any stock of wealth. Interestingly, the risk of belonging to these groups changes over the life-cycle in both countries while the size of the groups di§ers signiOcantly between Spain and the U.S., although this result is quite sensitive to whether the housing wealth component is included in the wealth measure or not.

Poverty Reduction and Economic Structure: Comparative Path Analysis for Mozambique and Vietnam

Abstract: While economic growth generally reduces income poverty, there are pronounced differences in the strength of this relationship across countries. Typical explanations for this variation include measurement errors in growth–poverty accounting and different compositions of economic growth. We explore the additional influence of economic structure in determining a country's growth–poverty relationship and performance. Using structural path analysis, we compare the experiences of Mozambique and Vietnam—two countries with similar levels and compositions of economic growth but divergent poverty outcomes. We find that the structure of the Vietnamese economy more naturally lends itself to generating broad-based growth. A given agricultural demand expansion in Mozambique will, ceteris paribus, achieve much less rural income growth than in Vietnam. Inadequate education, trade and transport systems are found to be more severe structural constraints to poverty reduction in Mozambique than in Vietnam. Investing in these areas can significantly enhance the effectiveness of Mozambican growth to reduce poverty.

Human capital formation and continuous training: evidence for eu countries

Abstract: This paper links data on continuous training from the EU Labour Force Survey (LFS) to information on skill levels and earnings from the EU KLEMS growth and productivity accounts, to examine the relative magnitudes of continuous workforce training versus human capital formation through the general education system in the European Union. The measurement methodology draws from the literature on measuring intangible investments by firms and sources of growth in an accounting framework. The results suggest that in the EU15 group of countries, intangible investments in continuous training represent just under 2 percent of GDP or about 35 percent of expenditure on general education. The share of GDP accounted for by training is less than a third as large in the new member states. A growth accounting method is employed to show that failure to account for continuous training leads to an underestimate of the impact of human capital on output growth in the EU.

The importance of consecutive spells of poverty: a path-dependent index of longitudinal poverty

Abstract: In this paper we propose a new index of individual poverty in the longitudinal perspective, taking into account the way poverty and non-poverty spells follow one another along individual life courses. The Poverty Persistence Index (PPI) is based on all the pairwise distances between the waves of poverty. The PPI is normalized and it assigns a higher degree of (longitudinal) poverty to people who experience poverty in consecutive, rather than separated, periods, for whom the distances from the poverty line are larger along time and moreover, when the worst years are consecutive and/or recent. We also propose an aggregate index of persistence in poverty (APPI) in order to measure the distribution of the persistence of poverty in a society, and evaluate at once the diffusion of poverty, its depth, duration, and recentness. The indices are tested in comparison with other measures from the literature both at the individual as well as at the societal level.

Bank output measurement in the euro area: a modified approach

Abstract: Banks do not charge explicit fees for many of the services they provide, bundling the service payment with the offered interest rates. This output therefore has to be imputed using estimates of the opportunity cost of funds. We argue that rather than using the single short-term, low-risk interest rate as in current official statistics, reference rates should match the risk characteristics of loans and deposits. This would lower euro area imputed bank output by, on average, 2854 percent compared with the current methodology, implying that euro area GDP (at current prices) is overstated by 0.110.18 percent. This adjustment also leads to more plausible shares in value added of income from fixed capital in the banking industry.

Output, outcome, and quality adjustment in measuring health and education services

Abstract: This paper provides an overview of measuring price and volume changes of the output of health and education providers. In the national accounts, outputs should reflect the results of production and these cannot normally be captured by outcome, the state of health or education of the population. However, we show that outcome information is required when it comes to quality adjustment of output measures. The paper clarifies terminology, and discusses output measurement and quality adjustment methods with a focus on health and education services.

How to measure living standards and productivity

Abstract: I set out a general algorithm for calculating true cost-of-living indices when demand is not homothetic and when the number of products may be large. The non-homothetic case is the important one empirically (Engel's Law). The algorithm can be applied in both time series and cross section. It can also be used to estimate true producer price indices and Total Factor Productivity in the presence of input-biased economies of scale and technical change. The basic idea is to calculate a chain index of prices but with actual budget (cost) shares replaced by compensated shares, i.e. what the shares would have been if consumers (firms) faced actual prices but their utility (output) were held constant at some reference level. The compensated shares can be derived econometrically from the same data as are required for the construction of conventional index numbers. The algorithm is illustrated by applying it to estimating true PPPs for 141 countries and 100 products within household consumption, using data from the World Bank's latest International Comparison Program.

Deprivation and Subjective Well‐Being: Evidence from Panel Data

Abstract: This paper uses data from the 2000–08 waves of the German Socio-Economic Panel dataset (SOEP) to assess the impact of deprivation in various life domains upon individual well-being. Unobserved heterogeneity is controlled for by means of a random effects model extended to include a Mundlak term and explicit controls for the respondents' personality traits. The paper shows that people care about social comparison information in a number of domains, not just income. Using an equivalent income approach, the estimates suggest that a one standard deviation deterioration of the individual position in the income distribution is as important as a 33.5 percent decrease in own income. This monetary equivalent amounts to an income variation of between 25 and 43 percent when it comes to other deprivation domains, including durables, accommodation, health, and social relations. These results recommend that in the fight against deprivation more emphasis should be directed to these non-monetary relevant dimensions.

Assessing the Possible Antipoverty Effects of Recent Rises in Age‐Specific Minimum Wages in New Zealand

Abstract: Real minimum wages increased by nearly 33 percent for adults and 123 percent for teenagers in New Zealand between 1999 and 2008. Where fewer than 2 percent of workers were being paid a minimum wage at the outset of this sample period, more than 8 percent of adult workers and 60 percent of teenage workers were receiving hourly earnings close to the minimum wage by the end of this period. These policy changes provide a unique opportunity to estimate the effects of the minimum wage on poverty. Although minimum wage workers are more likely to live in the poorest households, they are relatively widely dispersed throughout the income distribution. This is particularly true of teenage minimum wage workers. Furthermore, low-income households often do not contain any working members. We estimate that a 10 percent increase in minimum wages, even without a loss in employment or hours of work, would lower the relative poverty rate by less than one-tenth of a percentage point.

Who is deprived ? who feels deprived ? labor deprivation, youth and gender in Morocco

Abstract: One of the recurrent explanations of the Arab spring is that governments were disconnected from their populations and that public policies were simply not in line with people's sentiments and expectations. This paper provides a methodology to better understand how objective conditions of deprivation are translated into subjective feelings of deprivation using a strand of the recent literature on relative deprivation. The authors apply this methodology to better understand the question of gender and youth deprivation in the context of the Moroccan labor market. They find that the reference group (the people with whom people compare themselves) plays a pivotal role in understanding how feelings of labor deprivation are generated. This can explain the apparent mismatch between objective conditions and subjective feelings of deprivation related to joblessness among young men and women. The methodology can help us understand why greater discontent may be exhibited by a group of individuals who are in fact less deprived in a material sense. It can also potentially help governments design public policies that address objective conditions of deprivation, such as unemployment, with a better understanding of subjective implications.

Is the age gradient in self-reported material hardship explained by resources, needs, behaviors, or reporting bias?

Abstract: Older people report much less hardship than younger people in a range of contexts, despite lower incomes. Hardship indicators are increasingly influential, so the source of this age gradient has considerable policy implications. We propose a theoretical and empirical strategy to decompose the sources of this relationship. We exploit a unique feature of the Household, Income and Labour Dynamics Australia (HILDA) survey, which collects reports of hardship from all adult household members. This facilitates within-couple estimates, allowing us to identify age-related reporting bias. The majority of the raw age–hardship gradient is explained by observed resources, particularly wealth and home ownership. One third of the relationship is explained by unobserved differences between households, which we interpret as age-related behavioral choices. Reporting error does not appear to contribute to the age gradient.

Assessing the welfare impact of tax reform: a case study of the 2001 u.s. tax cut

Abstract: This note acknowledges a programming error in our paper, “Assessing the Welfare Impact of Tax Reform: A Case Study of the 2001 U.S. Tax Cut” (Review of Income and Wealth, 58(2), 233–56, 2012). Correcting the error primarily has the effect of scaling the calculated family welfare impact of 2001 U.S. Tax Cut. The primary conclusions from the analysis, however, are unaffected.

Trends in american living standards and inequality, 1959–2007

Abstract: We analyze the trends from 1959 to 2007 using an expanded measure of income called the Levy Institute Measure of Economic Well-Being (LIMEW). LIMEW is different in scope from the official U.S. Census Bureau measure of gross money income (MI) in that our measure includes non-cash transfers, public consumption, imputed income from wealth, and household production and nets out personal taxes. While the annual growth rates of median LIMEW and MI are very close over the whole period (0.67 and 0.63 percent), median LIMEW grew much faster than median MI after 1982 and much slower before. The Gini coefficient of MI is uniformly higher than that of LIMEW but both show about the same change from 1959 to 2007. Decomposition analysis shows that changes in inequality are driven to a large extent by non-home wealth in LIMEW and earnings in MI. While the racial gap in MI declined somewhat over the 1990s and 2000s, the racial gap in LIMEW actually widened a bit. Over the same years, while there was little change in the gap in MI between the elderly and non-elderly, the LIMEW of the elderly actually overtook that of the non-elderly.

Gender and work compensation in china's industrial sector

Abstract: The gender gap in earnings is analyzed using data for 250,000 Chinese industrial firms in 2004. The skill-weighted gender wage is estimated to be 12 percent and stems entirely from the female wage disadvantage among employees with below college education. Firms' payments to social insurance programs do not give further polarization of earnings, and descriptive statistics contradict the notion that women are segregated into sectors with low program participation rates. Narrower gender wage gaps are found in more labor intensive industries and in private domestic firms, suggesting that the market transition has not hurt the relative wages of female industrial workers. Finally, women's earnings disadvantage is fully accounted for by smaller contributions to value added, suggesting that firms do not wage-discriminate against female employees.

Explaining the saving puzzles in urban china

Abstract: This paper identifies two saving puzzles obtained from the Chinese Urban Household Survey data from 1990 to 2006. The first saving puzzle is identified by the time trend of household saving rates, which were stable before 1998, but surged subsequently. The second saving puzzle is associated with the various age profiles of household saving rates, which are not only inconsistent with the prediction of the Life Cycle Hypothesis, but also different from the patterns observed in other economies. This paper constructs pseudo-panel data and empirically examines the applicability of the habit-formation model in solving the second saving puzzle through the existence of saving rates and the effects of income-related variables. On the other hand, the parametric changes of such variables help explain the first saving puzzle. The parametric changes possibly stem from the adjustment of habit stock, the rising transitory shocks of income, and the higher expenditure needs for housing.

Comparing per capita income in the Hellenistic world: the case of Mesopotamia

Abstract: Until quite recently, GDP growth between ca. 1 ce and the late Middle Ages was considered non-existent or even negative. Recently, largely on account of increasing interest in historical national accounting, the late-medieval figures have been revised upward, in line with an upward adjustment in the estimated shares of manufacturing and pasture. Leaving GDPs dating from the ancient world unaltered would consequently generate figures indicating increased economic growth during the first millennium ce. A considerable number of studies of the late-medieval period (the object of increasing attention on the part of specialists in early economic history) have caused estimates for the ancient one to be revised upwards, essentially leaving estimates of the changes in economic development over time unaltered. These studies, however, have focused on the Roman Empire and Italia while there is a consensus in the literature that it was quite unrepresentative of all ancient societies with its relatively high share of GDP from the manufacturing sector of the economy. We therefore estimate a new per capita income for another contemporary agrarian society: ancient Mesopotamia. In addition, by examining manufacturing and pasture—the two main reasons for higher income which have been identified in the literature—we have found a tentative explanation for the fact that ancient Mesopotamia's per capita income deviated from that of Rome.

On the “pro-poorness” of growth in a multidimensional context

Abstract: This paper represents a first attempt to bring together the issues of multidimensional poverty and growth “pro-poorness” assessments. More specifically, we suggest the use of sequential dominance procedures to test the “pro-poorness” of observed growth spells when poverty is measured on the basis of income and another discrete well-being attribute. Sequential procedures are also used to obtain graphical tools that are consistent with the spirit of Ravallion and Chen's growth incidence curve and Son's poverty growth curve. Contrary to traditional unidimensional tests, our method makes it possible to take into account the importance of deprivation correlations at the individual level and thus may reverse results observed with the traditional tools used to check the “pro-poorness” of growth. An illustration of our approach is given using Turkish data for the period 2003–05.

Heterogeneity or true state dependence in poverty: the tale told by twins

Abstract: This study focuses on the persistence of poverty in Sweden. The purpose is to distinguish between two different reasons why poverty could persist on an individual level. By using a sample of identi ...