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INCOME INEQUALITY, MOBILITY, AND THE ACCUMULATION OF CAPITAL

Published online by Cambridge University Press:  03 March 2014

Cecilia García-Peñalosa  and
Stephen J. Turnovsky
Cecilia García-Peñalosa
Affiliation:
Aix-Marseille UniversityCNRS and EHESS
Stephen J. Turnovsky*
Affiliation:
University of Washington
*
Address correspondence to: Stephen Turnovsky, Department of Economics, University of Washington, Box 353330, Seattle, WA 98195, USA; e-mail: [email protected].
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Abstract

We examine the determinants of income mobility and inequality in a Ramsey model with elastic labor supply and heterogeneous wealth and ability. Both agents with lower wealth and those with greater ability tend to supply more labor, implying that labor supply decisions may have an equalizing or unequalizing effect depending on the relative importance of the two sources of heterogeneity. Moreover, these decisions are central to the extent of mobility observed in an economy. The relationship between mobility and inequality is complex. For example, a reduction in the interest rate and an increase in the wage rate reduce capital income inequality and allow upward mobility of the ability-rich. However, the increase in the labor supply of high-ability agents in response to higher wages raises earnings dispersion and thus has an offsetting effect. As a result, high mobility can be associated with an increase or a decrease in overall income inequality.

Keywords

InequalityIncome MobilityEndogenous Labor SupplyTransitional Dynamics
Type
Articles
Information
Macroeconomic Dynamics , Volume 19 , Special Issue 6: Growth, Optimal Fiscal and Monetary Policy, and Financial Frictions , September 2015 , pp. 1332 - 1357
Copyright
Copyright © Cambridge University Press 2014 

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