Accounting for imputed and capital income flows in inequality analyses
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Transcript of Accounting for imputed and capital income flows in inequality analyses
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Accounting for imputed and
capital income flows in inequality analyses
Joachim R. Frick* & Markus M. Grabka (DIW Berlin / SOEP, TU Berlin, IZA Bonn)
Pre-APPAM Conference on “European Measures of Income, Poverty, and Social Exclusion: Recent Developments and Lessons for U.S. Poverty Measurement“
Washington / DC, 4 November 2009
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Sh
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of
tota
l in
co
me
ac
cru
ing
to
ea
ch
gro
up
Top 1% (incomes above $398,900 in 2007)
Top 5-1% (incomes between $155,400 and $398,900)
Top 10-5% (incomes between $109,600 and $155,400)
Income Inequality on the rise (1): Top Decile Income Share in the United States, 1913-2007
Source: Piketty & Saez (2003) Saez (2009: series updated to 2007). Income is defined as market income including capital gains.
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Source: OECD 2008: Growing Unequal.
Income Inequality on the rise (2) Point Change in Gini (Mid-1980s to Mid-2000s)
-0,040 -0,020 0,000 0,020 0,040 0,060 0,080
FRA
ESP
IRL
GRC
TUR
GBR
LUX
DNK
NLD
BEL
AUT
JPN
HUN
OECD-24
MEX
CZE
CAN
SWE
ITA
DEU
NOR
USA
PRT
FIN
NZL
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Motivation
Reasons for rising income inequality in OECD countries
Changes in labor income due to … Skill-based technological change, SBTC (e.g. Card & DiNardo 2002) Rising returns to education (e.g. Acemoglu 2002) Superstar-phenomenon, CEOs (Bebchuk & Grinstein 2005) Unemployment Immigration (e.g. Borjas 2006)
Changing demographic structures / population (e.g. Reed 2006) Share of Immigrants ↑, single HH ↑, lone parents ↑, Ageing societies (fertility ↓, life expentancy ↑)
Changes in Income portfolios Research gap: Impact of various income components on inequality
esp. investment income
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Motivation
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100
120
140
160
180
200
220
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Compensation of employees Profits / income from self-employment Net investment income
Development of income aggregates in the SNA in Germany (1991=100)
Source: own calculations based on SVR 2007/08.
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Definition
Investment income = Capital income + Imputed Rent(NB: Capital gains are not considered)
Capital Income (CI) = returns on financial investmentsImputed Rent (IR) = returns on investments in real estate
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Definition
Investment income = Capital income + Imputed Rent(NB: Capital gains are not considered)
Capital income (CI):
SNA: „income derived from a resident entity‘s ownership of domestic and foreign assets“
income on equity (dividends, branch profits, distributed income of corporations, reinvested earnings, etc.)
income on debt (interest)
rent from land (less expenses)
imputed income from net equity in life insurances / pension funds
others (royalties etc.)
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Definition
Investment income = Capital income + Imputed Rent (NB: Capital gains are not considered)
Capital income (CI):
SNA: „income derived from a resident entity‘s ownership of domestic and foreign assets“
income on equity (dividends, branch profits, distributed income of corporations, reinvested earnings, etc.)
income on debt (interest)
rent from land (less expenses) ≠ income from renting & leasing
imputed income from net equity in life insurances / pension funds ≠ not captured in income surveys
others (royalties etc.) ≠ rarely captured in income surveys
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Definition
Imputed Rent (IR):
Fictitious income advantage for owner-occupied housing
Investment in real estate rather in the capital market
IR in SNA = production activity “mixed income”
EU-Regulation (to be applied in EU-SILC)
Beneficiaries: owners, tenants with reduced rent, rent-free
Regression-based opportunity cost approach (including Heckman selection correction)
Deduction of all owner-specific costs (net value of IR)
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Previous Research
Impact of separate components on income inequality:
Capital income: contribution to inequality about 2-3-times higher than its contribution to overall income (e.g. Jäntti 1997 (UK, USA), Becker 2000 (DE), Fräßdorf et al. 2008 (UK, USA, DE))
Imputed rent: in general, inequality and poverty reducing effect (e.g. Yates 1994 (Australia); Frick & Grabka 2003 (USA, UK, DE); Frick et al. 2007 (various EU countries); AIM-AP project 2006-2009)
However, no joint consideration of CI and IR. Different from research on the link between “income and imputed flows from net worth” (e.g. Weisbrod & Hansen 1968; Wolff & Zacharias 2009; Smeeding & Thompson 2007)
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Data & Methods
Aim comprehensive and time-consistent analysis of the impact of CI and IR on economic inequality and mobility
Data German Socio-Economic Panel (SOEP) (longest running European household panel) representative panel study (2007: about 11,000 households) oversampling of high income households survey years 1985-2007 (East Germany 1992-2007)
Empirical approach incidence & relevance of investment income (CI, IR) inequality decomposition by subgroup and by factor income mobility
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Incidence of CI & IR
Source: SOEP 1985-2007
0
10
20
30
40
50
60
70
80
90
100
Imputed Rent (%) Capital Income (%)
Population share holding CI / IR (in %)
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Relevance of CI & IR
Source: SOEP 1985-2007
0,0
1,0
2,0
3,0
4,0
5,0
6,0
Imputed Rent in € Capital Income in €
CI & IR as a share of total disposable income (in %)
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Inequality (Gini)
- Baseline Income = Post-Gov‘t Income excluding CI and IR - OECD Equivalence Scale (1; 0.5; 0.3) - Comparison of inequality in baseline income to augmented measures
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Inequality
Source: SOEP 1985-2007
Gini-coefficient for baseline disposable income
0,220
0,230
0,240
0,250
0,260
0,270
0,280
0,290
0,300
0,310
0,320
Baseline
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Inequality
Source: SOEP 1985-2007
Gini-coefficient for baseline disposable income plus Capital Income (CI)
0,220
0,230
0,240
0,250
0,260
0,270
0,280
0,290
0,300
0,310
0,320
Baseline Baseline plus CI
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Inequality
Source: SOEP 1985-2007
Gini-coefficient for baseline disposable income plus Imputed Rent (IR)
0,220
0,230
0,240
0,250
0,260
0,270
0,280
0,290
0,300
0,310
0,320
Baseline Baseline plus IR
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Inequality
Source: SOEP 1985-2007
Gini-coefficient for baseline disposable income plus CI and IR
0.220
0.230
0.240
0.250
0.260
0.270
0.280
0.290
0.300
0.310
0.320
Baseline Full Income incl. IR and CI
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Relative Poverty Risk Rate (FGT0)
- Poverty line given at 60 % of Median Income - Comparison of poverty in baseline income to augmented measures
(re-calculating poverty threshold when adding CI and IR)
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Relative Poverty Risk Rate
Source: SOEP 1985-2007
FGT0 for baseline disposable income
10.0
11.0
12.0
13.0
14.0
15.0
16.0
17.0
18.0
19.0
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
Ris
k o
f P
ov
ert
y r
ate
in %
Baseline
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Relative Poverty Risk Rate
Source: SOEP 1985-2007
FGT0 for baseline disposable income plus CI
10.0
11.0
12.0
13.0
14.0
15.0
16.0
17.0
18.0
19.0
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
Ris
k o
f P
ove
rty
rate
in %
Baseline Baseline plus CI
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Relative Poverty Risk Rate
Source: SOEP 1985-2007
FGT0 for baseline disposable income plus IR
10.0
11.0
12.0
13.0
14.0
15.0
16.0
17.0
18.0
19.0
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
Ris
k o
f P
ove
rty
rate
in %
Baseline Baseline plus IR
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Relative Poverty Risk Rate
Source: SOEP 1985-2007
FGT0 for baseline disposable income CI and IR
10.0
11.0
12.0
13.0
14.0
15.0
16.0
17.0
18.0
19.0
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
Ris
k o
f P
ove
rty
rate
in %
Baseline Full Income incl. IR and CI
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Who „profits“ most from CI and IR ?
- Inequality decomposition by age groups - Comparison of baseline and „full“ income inequality
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Relevance of CI & IR by age
Source: SOEP
CI & IR as a share of full disposable income by age group
0,0
5,0
10,0
15,0
20,0
25,0
< 25 25-<40
40-<50
50-<65
65 + All
1997 CI
1997 IR
0,0
5,0
10,0
15,0
20,0
25,0
< 25 25-<40
40-<50
50-<65
65 + All
2007 CI
2007 IR
24%
14%
7%
9%9%
12%
17%
13%
6%
9%8%
10%
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Subgroup decomposition
Source: SOEP
MLD by age groups 2007 – baseline income
0,000
0,050
0,100
0,150
0,200
0,250
0,300
0,350
0,400
Below 25 25-<40 40-<50 50-<65 65 andmore
% Withingroups
%Betweengroups
all
Baseline Full inc. Incl. CI & IR
Inequality is lowest among the elderly
Source: SOEP 2007.
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Subgroup decomposition
Source: SOEP
MLD by age groups 2007 – baseline income plus CI and IR
0,000
0,050
0,100
0,150
0,200
0,250
0,300
0,350
0,400
Below 25 25-<40 40-<50 50-<65 65 andmore
% Withingroups
%Betweengroups
all
Baseline Full inc. Incl. CI & IR
Adding CI & IR ... Increase in overall inequality +47% especially within-group inequality is affected Strongest increase among elderly +107%
+ 14% + 74% + 36% + 107%+ 27% + 47%
Source: SOEP 2007.
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What drives the picture: CI or IR ?
- Inequality decomposition by income component (Shorrocks 1982)
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Factor decomposition
Source: SOEP 1985-2007
Relative contribution of CI & IR to full income
0,0
1,0
2,0
3,0
4,0
5,0
6,0
1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
IR income share
CI income share
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Factor decomposition
Source: SOEP 1985-2007
Relative contribution of CI & IR to inequality and to full income
0,0
5,0
10,0
15,0
20,0
25,0
30,0
35,0
40,0
45,0
1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
IR income share
CI income share
IR % inequality
CI % inequality
In recent years (prior to the financial crisis) about 1/3 of inequality is due to CI, less than 5% is due to IR
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Factor decomposition
Source: SOEP 1985-2007 applying a 1% Top Coding for CI
Relative contribution of CI & IR to inequality and to full income
0,0
2,0
4,0
6,0
8,0
10,0
12,0
1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
0,0
2,0
4,0
6,0
8,0
10,0
12,0
IR income share
CI income share
IR % inequality
CI % inequality
When top-coding CI, about 10% of inequality is due to CI
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How do CI and IR impact on income mobility?
- Five year windows (1986-1990, ...., 2003-2007) - Shorrocks (1978) mobility measure, using Gini
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Income Mobility
Source: SOEP 1986-2007
Shorrocks Mobility over 5 years, using Gini-index
-0,120
-0,100-0,080
-0,060-0,040
-0,0200,000
0,0200,040
0,0600,080
0,1000,120
1986-90
1987-91
1988-92
1989-93
1990-94
1991-95
1992-96
1993-97
1994-98
1995-99
1996-2000
1997-2001
1998-2002
1999-2003
2000-2004
2001-2005
2002-2006
2003-2007
Baseline
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Income Mobility
Source: SOEP 1986-2007
Shorrocks Mobility over 5 years, using Gini-index
-0,120
-0,100
-0,080-0,060
-0,040
-0,020
0,0000,020
0,040
0,060
0,0800,100
0,120
1986-90
1987-91
1988-92
1989-93
1990-94
1991-95
1992-96
1993-97
1994-98
1995-99
1996-2000
1997-2001
1998-2002
1999-2003
2000-2004
2001-2005
2002-2006
2003-2007
-12,0
-10,0-8,0
-6,0
-4,0
-2,00,0
2,0
4,0
6,08,0
10,0
12,0
chan
ge in
%
Baseline Baseline plus IR
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Income Mobility
Source: SOEP 1986-2007
Shorrocks Mobility over 5 years, using Gini-index
-0,120
-0,100
-0,080-0,060
-0,040
-0,020
0,0000,020
0,040
0,060
0,0800,100
0,120
1986-90
1987-91
1988-92
1989-93
1990-94
1991-95
1992-96
1993-97
1994-98
1995-99
1996-2000
1997-2001
1998-2002
1999-2003
2000-2004
2001-2005
2002-2006
2003-2007
-12,0
-10,0-8,0
-6,0
-4,0
-2,00,0
2,0
4,0
6,08,0
10,0
12,0
chan
ge in
%
Baseline Baseline plus IR Baseline plus CI
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Income Mobility
Source: SOEP 1986-2007
Shorrocks Mobility over 5 years, using Gini-index
-0,120
-0,100
-0,080-0,060
-0,040
-0,020
0,0000,020
0,040
0,060
0,0800,100
0,120
1986-90
1987-91
1988-92
1989-93
1990-94
1991-95
1992-96
1993-97
1994-98
1995-99
1996-2000
1997-2001
1998-2002
1999-2003
2000-2004
2001-2005
2002-2006
2003-2007
-12,0
-10,0-8,0
-6,0
-4,0
-2,00,0
2,0
4,0
6,08,0
10,0
12,0
chan
ge in
%
Baseline Baseline plus IR Baseline plus CI Full income incl. IR and CI
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Summary
Comprehensive and consistent analysis of CI + IR • Inequality and poverty effects
• Baseline income: secular trend for increasing inequality • IR dampening effect vs. CI increasing effect
• Mobility effects• Baseline income: trend towards decreasing income mobility • IR exerts no relevant effect vs. CI re-inforces overall trend (esp. top incomes)
• Inequality decomposition by age
• by 2007, CI & IR contribute to almost 25% of full income among those >65• inequality among the elderly doubles when considering CI & IR
• Factor decomposition
• in recent years, CI’s inequality share is 7-times higher than its income share• top-coding reveals large measurement issues (volatility)
If at all possible, differentiate CI and IR in empirical analyses
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Conclusion
Relevance for (national) policy recommendations:
• Germany is a rapidly ageing society; PAYG-pension system under pressure
• Strong age dependency of CI and IR will most likely yield a further increase in economic inequality, esp. among elderly
• impact of the financial crisis (yet unclear, need to differentiate short-run financial effects from long-run effects arising from increasing unemployment)
Comparative research needs to consider differences in investment behavior as well as in institutional arrangements (incentive structures) across countries and welfare regimes which impact on the income-wealth nexus:
• income savings wealth portfolio determines level, structure and volatility of returns on investment (CI and IR) income portfolio
• this line of thinking may offer one argument for why private households in different countries appear to have been struck differently by the financial crisis:
• Germany (still strong public pension system) vs. liberal regimes (US, UK, AUS)
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Relevance of CI & IR
Source: SOEP
CI & IR as a share of total disposable income by income quintile
0,0
2,0
4,0
6,0
8,0
10,0
12,0
IR CI IR CI
1997 2007
1 (bottom)
2
3
4
5 (top)
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Relevance of CI & IR
Source: SOEP
CI & IR as a share of total disposable income by income quintile
0,0
2,0
4,0
6,0
8,0
10,0
12,0
IR CI IR CI
1997 2007
1 (bottom)
2
3
4
5 (top)
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Relevance of CI & IR
Source: SOEP
CI & IR as a share of total disposable income by age group
0,0
2,0
4,0
6,0
8,0
10,0
12,0
14,0
IR CI IR CI
1997 2007
less than 25
25-<40
40-<50
50-<65
65 and more
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Relevance of CI & IR
Source: SOEP
CI & IR as a share of total disposable income by age group
0,0
2,0
4,0
6,0
8,0
10,0
12,0
14,0
IR CI IR CI
1997 2007
less than 25
25-<40
40-<50
50-<65
65 and more
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Incidence of CI & IR
Source: SOEP
Population share holding CI & IR by income quintile 1997 / 2007
0
10
20
30
40
50
60
70
80
90
100
IR CI IR CI
1997 2007
1 (bottom)
2
3
4
5 (top)
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Incidence of CI & IR
Source: SOEP
Population share holding CI & IR by income quintile 1997 / 2007
0
10
20
30
40
50
60
70
80
90
100
IR CI IR CI
1997 2007
1 (bottom)
2
3
4
5 (top)
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Incidence of CI & IR
Source: SOEP
Population share holding CI & IR by age groups 1997 / 2007
0
10
20
30
40
50
60
70
80
90
100
IR CI IR CI
1997 2007
less than 25
25-<40
40-<50
50-<65
65 and more
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Incidence of CI & IR
Source: SOEP
Population share holding CI & IR by age groups 1997 / 2007
0
10
20
30
40
50
60
70
80
90
100
IR CI IR CI
1997 2007
less than 25
25-<40
40-<50
50-<65
65 and more
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Inequality
Source: SOEP 1985-2007
Gini-coefficient for baseline disposable income plus …
0,200
0,220
0,240
0,260
0,280
0,300
0,320
0,340
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
Baseline Baseline plus IRBaseline plus CI Full Income incl. IR and CI