Wealth Inequality, Network Topology and Financial Instability

This paper asks if two, otherwise identical, economies were distinguished only by their distributions of wealth, are they equally stable in response to a random shock? A theoretical financial network model is proposed to understand the relationship between wealth inequality and financial crises. In a financial network, financial assets link individual asset and liability holders to form a web of economic connections. The total connectivity of an individual is described by their degree, and the overall distribution of connections in the network is imposed through a degree distribution--equivalent to the wealth distribution as incoming connections represent assets and outgoing connections liabilities. A network's topology varies with the level of wealth inequality and total wealth and together, simulations show, they determine network contagion in the event of a random negative income shock to some individual. Random network simulations, whereby each financial connection is randomly placed, reveal that increasing wealth inequality makes a wealthy network less stable--as measured by the share of individuals failing financially or the decline in financial asset values. These results suggest a unique architectural role for accumulated assets and their distribution in macro-financial stability.

Sectoral Heterogeneity, Income Inequality and Productivity Dynamics

An intricate dynamic pattern has been commonly observed in many developed countries during the past decades. This pattern contains a simultaneous rise in the following economic variables: (i) total factor productivity, (ii) educated labor supply, (iii) wage-gap between high- and low-skilled workers, and (iv) income inequality. Typical explanations for the different elements of this pattern assume a skill-biased technical change (SBTC) or capital-skill complementarity. In this study we offer a complementing explanation for these phenomena, which is based on sectoral heterogeneity and endogenous factor mobility, rather than on an SBTC. We show that sectoral heterogeneity can amplify the effects of a technical change, whether skill-biased or general, in a manner that generates the four elements of the above described dynamic pattern. Furthermore, inequality can perform also a Kuznets-curve pattern, as was observed in several countries, in contrast to the inequality dynamics in typical SBTC models.

Fitting Pareto Tails to Wealth Survey Data: A Practioners’ Guide

Taking survey data of household wealth as our major example, this short article discusses some of the issues applied researchers are facing when fitting (Type I) Pareto distributions to complex survey data. The contribution of this article is threefold. First, we show how the ordering of the data vector is related to alternative definitions of the empirical CCDF. Second, we provide an intuitive reinterpretation of the bias-corrected estimator developed by Gabaix and Ibragimov (2011), in terms of the alternative definitions of the empirical CCDF, which allows us to generalize their result to the case of complex survey data. Third, we provide computational formulas for standard Kolmogorov-Smirnov (KS) and Cramer-von Mises (CvM) goodness- of-fit tests for complex survey data. Taken together the article provides a concise and hopefully useful presentation of the fundamentals of Pareto tail- fitting with complex survey data.

Does income distribution among immigrants adapt to host country?

We investigate trends in income inequality for five special groups (immigrants from Turkey in Denmark and Germany, natives in the two countries and in Turkey). The migration of people with similar characteristics and motivations to countries with structural differences is similar to a natural experiment. We ask whether immigrant inequality adapts over time to inequality among natives. We find, first, that immigrants are concentrated in the lower deciles of the overall income distribution. Secondly, considering native and immigrant distributions separately, in every decile an average native is significantly richer than an average immigrant. Thirdly, inequality decompositions show that during the great recession, in Denmark inequality grew faster among immigrants than among natives. In Germany, inequality rose somewhat among natives, while it remained the same among immigrants. Therefore, we do not observe a convergence in inequality. In both countries, in 2007-2013, rising inequality among natives is the most important factor behind the rise in overall inequality. For the longer period from the 1980s to 2013 we find no convergence in inequality. Finally, compared to Turks in Turkey, immigrants in both countries have higher incomes, distributed much more equally.

Wealth Inequality and the Ergodic Hypothesis: Evidence from the United States

Many studies of wealth inequality make the ergodic hypothesis that rescaled wealth converges rapidly to a stationary distribution. Under this assumption, changes in distribution are expressed as changes in model parameters, reflecting shocks in economic conditions, with rapid equilibration thereafter. Here we test the ergodic hypothesis in an established model of wealth in a growing and reallocating economy. We fit model parameters to historical data from the United States. In recent decades, we find negative reallocation, from poorer to richer, for which no stationary distribution exists. When we find positive reallocation, convergence to the stationary distribution is slow. Our analysis does not support using the ergodic hypothesis in this model for these data. It suggests that inequality evolves because the distribution is inherently unstable on relevant timescales, regardless of shocks. Studies of other models and data, in which the ergodic hypothesis is made, would benefit from similar tests.

Visualizing the evolution of income inequality

The reporting of only relative inequalities is decreasing and other inequality invariance criteria are often being considered simultaneously. Having multiple measures with potentially different conclusions on whether inequality has increased or decreased complicates communicating what these results imply about the evolution of income inequality. To facilitate understanding this evolution, we highlight the advantage of visualizing in a single graph the relationship between changes in mean income and the development of inequality according to multiple inequality invariance criteria. Not presenting how these entities relate may mislead policy makers about the evolution of income inequality and its potential causes.

Entrepreneurship and Income Inequality: A Spatial Econometric Approach

This paper extends research on the link between entrepreneurship and income inequality by introducing spatial considerations. Following a battery of specification tests, we model the relationship between entrepreneurship and inequality using a dynamic spatial Durbin model. Using data from the 48 continental U.S. states, we obtain strong evidence that entrepreneurship within a state not only affects inequality within that state, but has cross-state effects, as well.

Population, Education and Income Inequality

In non-democracies, a large population size and density lead to more redistributive policies and lower income inequality. This is the result of the interconnection of two intermediate hypotheses. First, in non-democracies a larger population size and density increase the chance of a revolution attempt to overthrow the governing elites. Second, this revolution threat prompts the elites to better re-distribute the country’s income in an attempt to fend off this threat. This paper suggests and empirically tests that wider spread primary and, to a lesser extent, secondary education is one of the channels through which the elites achieve this better distribution.

Distributional Implications of Unemployment-Reducing Policies

We study the distributional implications that follow from the fact that higher-income households tend to consume higher-quality goods. This is done through a two-sector model in which one sector produces vertically differentiated products, whose skill intensity is an increasing function of quality. The skilled-to-unskilled wage ratio is fixed at a level sufficiently low that some unskilled workers remain unemployed. We show that uniform technological progress increases the unemployment rate, and we consider a number of policy responses to alleviate the “plight of the less-skilled”. Political economy consequences are emphasized, as we assess each policy’s chance of receiving political support. We conclude that a budget-neutral subsidy for the employment of unskilled workers is a viable policy option.

Slowdown of monetary inequality reduction in developing countries

This article documents the level and trends of monetary inequality in developing countries based on PovcalNet data, up to the year 2015. On average, during the first half of the 2010s, in inequality declined in developing economies, although it did so at a substantially lower rate as compared to the 2000s. The current average Gini coefficient is higher than that of the early 1980s, a fact illustrative of the complex obstacles societies face in their pursuit of reducing economic inequality.