How Income Mobility and Income Growth Explain Income Inequality Trends

Melbourne Institute Working Paper No. 14/15

Date: 2015

Author(s):

Nicolas Herault

Abstract

Jenkins and Van Kerm (2006) show how income inequality trends can be explained by income mobility and the equalising effect of panel-income changes. This paper extends their framework to show explicitly how the distributional effect of panel-income changes depends on the respective size and distribution of income gains and losses. An application to US data illustrates the contribution of the approach. One of the new insights of the application to US data for the 1970/2009 period is that most of the equalising effect of income growth occurs through income gains rather than income losses even in times of recession. The analysis also reveals some interesting trends regarding income mobility and the business cycle.

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