Income Inequality Matters, but Mobility Is Just as Important
Concerns about rising income inequality are based on comparing income distributions over time. It is important to remember that such distributions are snapshots of a single year, and that the same households do not necessarily appear year after year in the same quintile of the distribution. Paying attention to mobility, as well as inequality, gives us a richer picture of the income possibilities for households over time. We document changes in a measure of income mobility over the past 40 years, a period in which income inequality has increased. We find a modest level of movement through the ...
Can Wealth Explain Neighborhood Sorting by Race and Income?
Why do high-income blacks live in neighborhoods with characteristics similar to those of low-income whites? One plausible explanation is wealth, since homeownership requires some wealth, and black households hold less wealth than white households at all levels of income. We present evidence against this hypothesis by showing that wealth does not predict sorting into neighborhood quality once race and income are taken into account. An alternative explanation is that the scarcity of high-quality black neighborhoods increases the cost of living in a high-quality neighborhood for black households ...
The Piketty Transition
We study the effects on inequality of a "Piketty transition" to zero growth. In a model with a worker-capitalist dichotomy, we show first that the relationship between inequality (measured as a ratio of incomes for the two types) and growth is complicated; zero growth can raise or lower inequality, depending on parameters. Extending our model to include idiosyncratic wage risk we show that growth has quantitatively negligible effects on inequality, and the effect is negative. Finally, following Piketty?s thought experiment, we study how the transition might occur without declining returns; ...
On the Heterogeneous Welfare Gains and Losses from Trade
How are the gains and losses from trade distributed across individuals within a country? First, we document that tradable goods constitute a larger fraction of expenditures for poor households. Second, we build a trade model with nonhomothetic preferences?to generate the documented relationship between tradable expenditure shares, income, and wealth?and uninsurable earnings risk?to generate heterogeneity in income and wealth. Third, we use the calibrated model to quantify the differential welfare gains and losses from trade along the income and wealth distribution. In a numerical exercise, we ...
The Politics of Flat Taxes
We study the political determination of flat tax systems using a workhorse macroeconomic model of inequality. There is significant variation in preferred tax policy across the wealth and income distribution. The majority voting outcome features (i) zero labor income taxation, (ii) simultaneous use of capital income and consumption taxation, and (iii) essentially zero transfers. This policy is supported by a coalition of low- and middle-wealth households. Zero labor income taxation is supported by households with below average wealth, while the middle-wealth households prefer to keep the ...
The Winners and Losers from Trade
Although increased international trade is widely viewed as beneficial to the economies of the participating countries, the benefits are not distributed evenly across individuals within those countries, and indeed some individuals may bear a cost. We discuss two channels through which trade can affect individuals differently depending on their skill and income levels and assess the combined impact of those channels. We find that the effects of trade on the labor market and the effects of trade on prices go in opposite directions and are of similar magnitude.
Neighborhood dynamics and the distribution of opportunity
This paper uses an overlapping-generations dynamic general equilibrium model of residential sorting and intergenerational human capital accumulation to investigate effects of neighborhood externalities. In the model, households choose where to live and how much to invest toward the production of their child?s human capital. The return on the parent?s investment is determined in part by the child?s ability and in part by an externality from the average human capital in their neighborhood. We use the model to test a prominent hypothesis about the concentration of poverty within ...
The demand for income tax progressivity in the growth model
This paper examines the degree of income tax progressivity chosen through a simple majority vote in a model with savings. Households have permanent differences with respect to their labor productivity and their discount factors. The government has limited commitment to future policy, so voting is repeated every period. Because the model features mobility within the wealth distribution, the median voter is determined endogenously. In a numerical experiment, the model is initialized to the 1992 U.S. joint distribution of income and wealth as well as several statistics of the federal income tax ...
Zero Growth and Long-Run Inequality
Using a basic model to study both wealth and income inequality and their relations to long-run economic growth may lead to questionable conclusions. We consider a more complex model that includes realistic variation in the levels of income and wealth across households in addition to a new ingredient, luck in each household?s labor productivity. Using this model,we determine that existing estimates of the elasticity of substitution between capital and labor are generally far away from the region where inequality would explode if long-run growth were zero.
The Racial Wealth Gap and Access to Opportunity Neighborhoods
Some Black households live in neighborhoods with lower incomes, as well as higher unemployment rates and lower educational attainment, than their own incomes might suggest, and this may impede their economic mobility. We investigate reasons for the neighborhood sorting patterns we observe and find that differences in financial factors such as income, wealth, or housing costs between Black and white households do not explain racial distributions across neighborhoods. Our findings suggest other factors are at work, including discrimination in the housing market, ongoing racial hostility, or ...