Lecture 3 - January 20th

What are some limitations to consumption smoothing?
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What are some limitations to consumption smoothing?
Borrowing constraints, imperfect markets
How is earnings computed in the DGR paper?
Earnings = (wages and salaries + [[(wages and salaries)/(market income-self-employment income-wages and salaries)+(wages and salaries)]*Self-employment income]
What causes much of the inequality at the bottom end of the distribution in the DGR paper?
Zero earnings/income individuals
What is the most unequal out of earnings, income, and wealth?
Wealth
What is one reason why the DGR paper might have so many zero values at the bottom of the earnings distribution? How does this differ from HPV?
Because they include everyone, including students and retirees. They only include working class people
What is different today about wealth and income than in the 1960s? 1920s?
The wealth concentration is very high relative to where it was in the 60s but low compared to where it was in the 20s. The number for capital would have been much higher (successful investors in the stock exchange and real estate)
What characterized the 1920s economy?
The rentier economy where people would be living off of their investment income
What type of economy characterizes nowadays for the top end of the wealth distribution?
It is a managerial economy. While wealthy people have some capital income, they are actually working
In Scandinavian countries, how is wealth inequality so much lower?
CEOs are not as highly paid while the role of people who inherited family fortunes (endowments) (estates) plays a much larger role
Would the % share of the wealth of total holdings be higher in the partition by wealth or income?
By income because the highest earnings people have the highest share of wealth
What is the equation for lifetime utility?Vi = E(T,t=0) B(t)u(Cit). Where u(Cit) is the utility function of a profit maximizer at a point in time and B is a discount factor (often this is 1/1+r, and Vi is lifetime utility.What is the household budget constraint?c = Yd + net assets - savingWhy is consumption inequality less than income inequality?Because of consumption smoothing via saving/borrowingIn practice, on what do we have the best data? What type of data would be ideal to have?Y. Longitudinal/panel data on c.What is the main asset with the SCF data compared to other datasets?Particular focus on the upper tail of the distribution by oversampling the rich.What does the SCF measure?Earnings, income, wealth, demographicsWhat is the one shortcoming of the SCF data?Repeated cross-sections (non-longitudinal)What is Atkinson's checklist and what is it applied to DGR?Reference unit: household. Equivalence scale: none. Weighting of observations: household Concept of resources: various Time period: annual Inequality measure: variousWhat are the sources of household income? What is the main component for most households?Yd = wN + rA + pi - tau + T. Tau are taxes and T are transfers. Labour income/earningsY = Y1 + Y2, what is the variance of Y?var(Y) = var(Y1) + var(Y2) + 2*cov(Y1, Y2).The earnings poor are quite weathly. Why is this?Because most of them are retired. On average they have negative earnings.The income poor are either ultra ____________________ or ultra _________________________.young; old.The wealth-poor have substantial ___________________ income. What does this imply?Labour. They are young and educatedThe earnings-rich receive a lot of business income and almost no __________________________.transfersHigh earners have mostly ___________________ income. Very high earners also have a lot of _____________________ income. How did this used to be different?Labour; business. High earners used to make high amounts of capital income.What type of income do low earners have? What about zero earners?Transfer. capital.The wealth poor have almost exclusively _____________________ and ____________________ income.labour; transfer.