Accounting for imputed and capital income flows in inequality analyses

48
1 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 * [email protected]

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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) - PowerPoint PPT Presentation

Transcript of Accounting for imputed and capital income flows in inequality analyses

Page 1: 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

* [email protected]

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0%

5%

10%

15%

20%

25%

19

13

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23

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28

19

33

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38

19

43

19

48

19

53

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58

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03

Sh

are

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

80

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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Comments welcome

[email protected]

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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