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How to measure and proxy permanent income: evidence from Germany and the U.S.


Brady, David; Giesselmann, Marco; Kohler, Ulrich; Radenacker, Anke (2017). How to measure and proxy permanent income: evidence from Germany and the U.S. Journal of Economic Inequality, 16(3):321-345.

Abstract

Permanent income (PI) is an enduring concept in the social sciences and is highly relevant to the study of inequality. Nevertheless, there has been insufficient progress in measuring PI. We calculate a novel measure of PI with the German Socio-Economic Panel (SOEP) and U.S. Panel Study of Income Dynamics (PSID). Advancing beyond prior approaches, we define PI as the logged average of 20+ years of post-tax and post-transfer (“post-fisc”) real equivalized household income. We then assess how well various household- and individual-based measures of economic resources proxy PI. In both datasets, post-fisc household income is the best proxy. One random year of post-fisc household income explains about half of the variation in PI, and 2–5 years explain the vast majority of the variation. One year of post-fisc HH income even predicts PI better than 20+ years of individual labor market earnings or long-term net worth. By contrast, earnings, wealth, occupation, and class are weaker and less cross-nationally reliable proxies for PI. We also present strategies for proxying PI when HH post-fisc income data are unavailable, and show how post-fisc HH income proxies PI over the life cycle. In sum, we develop a novel approach to PI, systematically assess proxies for PI, and inform the measurement of economic resources more generally.

Abstract

Permanent income (PI) is an enduring concept in the social sciences and is highly relevant to the study of inequality. Nevertheless, there has been insufficient progress in measuring PI. We calculate a novel measure of PI with the German Socio-Economic Panel (SOEP) and U.S. Panel Study of Income Dynamics (PSID). Advancing beyond prior approaches, we define PI as the logged average of 20+ years of post-tax and post-transfer (“post-fisc”) real equivalized household income. We then assess how well various household- and individual-based measures of economic resources proxy PI. In both datasets, post-fisc household income is the best proxy. One random year of post-fisc household income explains about half of the variation in PI, and 2–5 years explain the vast majority of the variation. One year of post-fisc HH income even predicts PI better than 20+ years of individual labor market earnings or long-term net worth. By contrast, earnings, wealth, occupation, and class are weaker and less cross-nationally reliable proxies for PI. We also present strategies for proxying PI when HH post-fisc income data are unavailable, and show how post-fisc HH income proxies PI over the life cycle. In sum, we develop a novel approach to PI, systematically assess proxies for PI, and inform the measurement of economic resources more generally.

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Additional indexing

Item Type:Journal Article, refereed, original work
Communities & Collections:06 Faculty of Arts > Institute of Sociology
Dewey Decimal Classification:490 Other languages
410 Linguistics
Scopus Subject Areas:Social Sciences & Humanities > Sociology and Political Science
Social Sciences & Humanities > General Economics, Econometrics and Finance
Social Sciences & Humanities > Organizational Behavior and Human Resource Management
Uncontrolled Keywords:Income, Permanent income, Lifetime income, Measurement, Longitudinal and panel data, Social class
Language:English
Date:16 December 2017
Deposited On:28 May 2020 07:28
Last Modified:23 Jun 2024 01:39
Publisher:Springer
ISSN:1569-1721
OA Status:Closed
Publisher DOI:https://doi.org/10.1007/s10888-017-9363-9