Inequality and Uncertainty

Info: 

Procesy dochodowe są najeżone niepewnością. Wystarczająco trudno jest przewidzieć, co wydarzy się w ciągu najbliższych lat, nie mówiąc już o tym, jak prawdopodobieństwo tych możliwych wydarzeń będzie falować w czasie. Nasze badania skupią się właśnie na charakterystyce procesów dochodowych w Polsce i na Litwie. Zbadamy, w jakim stopniu procesy te są związane z indywidualnymi cechami poszczególnych osób, a na ile są wynikiem serii losowych (nieprzewidywalnych) wydarzeń. Ponadto planujemy zbadać właściwości tych procesów losowych: na ile są trwałe, jak bardzo zmieniają się w czasie. Wreszcie, idąc krok dalej, zbadamy jakie są konsekwencje tych procesów dla nierówności dochodowych oraz poparcia społecznego dla redystrybucji.


Income processes are riddled with uncertainty. It is difficult enough to predict what will happen over the next years, let alone how these possible events will ripple over time. Our research will precisely focus on characterizing income processes in Poland and Lithuania using high-quality data. We will study to what extent these processes are driven by personal characteristics and to what extent they are the results of a series of random shocks. Moreover, we plan to study the properties of those random shocks. Do these shocks endure or are there one-time events from which one can return easily to the prevailing levels? Taking these questions one step further, what are the implications for insurance and redistributive policies?

Budget: 

Źródło finansowania | Financing: Narodowe Centrum Nauki, OPUS

Projekt realizowany | Timeline: 10/2020 -- 02/2023

Kierownik | Principal Investigator: Lucas van der Velde

Budżet łączny | Total budget: 899 510 zł

  • wynagrodzenia dla podstawowych wykonawców | compensation to researchers: 198 000 zł
  • stypendia dla młodych badaczy | scholarships for young scholars: 408 000 zł
  • komputery i oprogramowanie | hardware and software: 39 700 zł
  • konferencje i inne wyjazdy | conference travels: 50 160 zł
  • materiały, dane i usługi obce | data, usables and outsourced services: 20 463 zł
  • eksperyment | experiment: 21 000 zł
  • koszty pośrednie dla FAME | overheads for FAME: 147 465 zł
Purpose: 

The goal of the project is to contribute to the understanding of income inequality. The phenomenon of income dispersion is an outcome of several interdependent processes. Our specific contribution lies in deepening the understanding of the role income uncertainty plays in total dispersion of incomes. Basing on the existing literature, we intend to tackle several dimensions of inequality in incomes:

  • the nature of idiosyncratic component of wages (separating transitory and permanent shocks);
  • the nature and variation in exogenous drivers of productivity (such as firm, sector and business cycle)

The project proposes 5 different working packages to deal with different dimensions of income uncertainty.

WP 1: Characterization of income dynamics. The first package focuses on the evolution of income processes in Lithuania and Poland over time. The methodology of the analysis will follow the guidelines set forth by the Global Income Dynamics project. This project that sets to harmonize evidence on income dynamics at the international level using high-quality data and novel estimation procedures.

WP 2: Sensitivity to shocks: This second package focuses on how income processes are affected by shocks to the economy, and explore whether monetary and real shocks have different implications. We hypothesize that  real and monetary shocks affected different elements of the wage process. Real shocks act through the permanent component, whereas monetary shocks affected the idiosyncratic component.

WP 3: Foreign-owned firms and state-owned enterprises. We propose to analyze how wage dynamics varied by ownership type. The role of management practices in wage uncertainty is not well-established. One could imagine that workers in firms where performance pay is more common would be more exposed to random shocks, when compared to firms not using these instruments. Given that management practices are difficult to observe, we will proxy this element with firm ownership. We hypothesize that workers in state-owned enterprises, where performance pay is less salient, will be less exposed to random shocks.

WP 4: Income processes within households. While changes at the individual level provide a useful benchmark, they offer an incomplete picture of the levels of uncertainty to which individuals are exposed. People living in couples could be exposed to different levels of uncertainty, as the income of each member can act as an insurance for the second. Whether this mechanism holds in practice depends on the correlation of shocks within couples. We will study how the correlation of shocks within the household influences the retirement decisions. 

WP 5: Public perception of inequality and support for redistribution. The previous packages strive to understand income dynamics. These processes results in income inequality, whose legitimacy (and the need for policy intervention) might be related to the source. In this WP we propose to run a vignette experiment on inequality aversion testing three hypothesis: (1) inequality aversion is greater when differences are driven by shocks (and its persistence); (2) inequality aversion is lower when income differences are a function of individual choices; and, (3) individuals, who are themselves more exposed to idiosyncratic shocks show greater inequality aversion.