The distributional implications of asymmetric income dynamics

Angelopoulos, Konstantinos and Lazarakis, Spyridon and Malley, James (2020) The distributional implications of asymmetric income dynamics. European Economic Review, 128. ISSN 0014-2921

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Abstract

Income dynamics differ between groups of households defined by whether the head has university education or not and have changed asymmetrically in Great Britain since 2008. Using a heterogenous agent incomplete markets model, we examine the quantitative implications of these differences for wealth inequality and for the distribution of conditional welfare losses. Within-group wealth inequality is higher for the non-university group and has increased since 2008 for both groups, while between-group inequality has also increased. Welfare losses are significantly higher for the non-university educated since 2008, and are driven by both a greater fall in mean income and a larger rise in income risk. Non-university educated households, which had initial wealth below the median and net labour income in the lower quintiles, suffered bigger losses. Social insurance policies beyond those currently in place can mitigate such welfare losses via tax and benefit redistributive mechanisms. For the broad majority of households, social insurance is valued more when it insures against the big adverse income shocks.