Income Dynamics and Politics in North America and Europe

by

Austin Nichols

• LAST REVIEWED: 26 October 2020
• LAST MODIFIED: 28 May 2013
• DOI: 10.1093/obo/9780199756223-0073

Introduction

Income dynamics and politics encompasses several disparate fields of theoretical and empirical work in the social sciences, e.g., the effect of changes in macroeconomic conditions or income distributions on political outcomes and the effect of individual income dynamics on activity in the political sphere. The topic also includes an enormous literature on the welfare state, including its origins, function, and changes due to external influence. The works cited in this article are organized into four very broad categories, focused on types of income dynamics, macro effects of income dynamics, effects of income dynamics on levels of government, and effects on, and of, the welfare state. Many works appear in economics journals, even if they pertain directly to politics, though some appear in journals of political science and sociology. Recent works in political science focus on the deleterious effect of increasing income risk (including income inequality) on political stability or polarization of opinions, though obviously political strife can, in turn, increase various kinds of income risk, and the direction of the causal chain is not clearly established in much of the work that examines associations.

Income Dynamics

Inequality is increasing both in the United States, as most famously described in Piketty and Saez 2003, and in other countries, as shown in Organisation for Economic Co-operation and Development 2008, Organisation for Economic Co-operation and Development 2011, and Smeeding 2005, though changes in income dynamics may or may not offset the increase, and the changes are both within and between cohorts and partly due to population and technology changes. Jäntti 2009 characterizes how changes in income dynamics offset the increase in inequality. There are many other aspects of income dynamics as well, including heterogeneous variation in income growth rates (mobility), volatility of income (measured often with observed year-to-year variation around a long-run trend), and intergenerational links in lifetime incomes. Not all authors find mobility or income volatility increasing, including Kopczuk, et al. 2010, though this may often be due to income definitions and sample selection rules, as shown in Nichols and Zimmerman 2008. Nichols 2008 decomposes income risks into long-run inequality, volatility, and mobility risk and finds all three increasing in the United States. Findings on mobility, in particular, depend crucially on definitions and assumptions.

• Jäntti, Markus. “Mobility in the United States in Comparative Perspective.” Focus 26.2 (Fall 2009): 38–42.

  Summarizes much of the literature on income mobility in comparing developed countries.

• Kopczuk, Wojciech, Emmanuel Saez, and Jae Song. “Earnings Inequality and Mobility in the United States: Evidence from Social Security Data since 1937.” Quarterly Journal of Economics 125.1 (2010): 91–128.

  DOI: 10.1162/qjec.2010.125.1.91

  Finds virtually all of the increase in earnings variance due to “permanent” (as opposed to “transitory”) earnings variation. Mobility at the top of the earnings distribution is said to be stable; short-term earnings mobility stable but long-term mobility increased since the 1950s in the United States. Supplementary online appendix.

• Nichols, Austin. Trends in Income Inequality, Volatility, and Mobility Risk. IRISS Working Paper 2008-10. Differdange, Luxembourg: Institute for Research and Innovation in Social Services, 2008.

  Uses a novel generalized entropy measure defined on panel data from the United States to decompose income risk into long-run inequality, volatility, and mobility risk, and finds all three increasing over time. Tax regime changes appear to have changed the progressivity of income growth.

• Nichols, Austin, and Seth Zimmerman. Measuring Trends in Income Variability. Washington, DC: Urban Institute, 2008.

  Finds a more robust upward trend in US intertemporal income variability for family incomes than for own earnings and an increased covariance over time in earnings of family members due to changing employment patterns of women, which explains why those using their own earnings find little change in risk over the last few decades but those using family income find large increases.

• Organisation for Economic Co-operation and Development (OECD). Growing Unequal? Income Distribution and Poverty in OECD Countries. Paris: Organisation for Economic Co-operation and Development, 2008.

  Emphasizes that the gap between rich and poor grew modestly in most OECD countries over three decades, using a measure (Gini) that gives greater weight to variation around the median than to extremes. The same information is cast in a different light in the 2011 report, which converts growth in Gini into percentage terms to make it seem larger and more comparable to other findings on the growth in inequality.

• Organisation for Economic Co-operation and Development (OECD). Divided We Stand: Why Inequality Keeps Rising. Paris: Organisation for Economic Co-operation and Development, December 2011.

  Focuses instead on the 10th and 90th percentiles and attributes large increases in inequality to eight factors, including tax and benefit systems becoming less redistributive since the mid-1990s due mainly to cuts to benefit levels, tightening of eligibility rules to contain expenditures for social protection, and the failure of transfers to the lowest income groups to keep pace with earnings growth all contributed.

• Piketty, Thomas, and Emmanuel Saez. “Income Inequality in the United States, 1913–1998.” Quarterly Journal of Economics 118 (February 2003): 1–39.

  DOI: 10.1162/00335530360535135

  Shows increasing inequality in incomes in America driven by increases in incomes among the superrich, fractions of the top percentile. Appendixes updated several times since 2003 are available online (see “Income and Wealth Inequality”), and subsequent work by Piketty and Saez explores related themes and theoretical results.

• Smeeding, Timothy M. “Public Policy, Economic Inequality, and Poverty: The United States in Comparative Perspective.” Social Science Quarterly 86 (2005): 955–998.

  DOI: 10.1111/j.0038-4941.2005.00331.x

  Compares levels and trends in inequality across OECD nations and the effects of government policies and social spending on inequality.