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How to measure and proxy permanent income
- 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 alsoPermanent 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.…
Author details: | David BradyORCiD, Marco GiesselmannORCiD, Ulrich KohlerORCiDGND, Anke Radenacker |
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DOI: | https://doi.org/10.1007/s10888-017-9363-9 |
ISSN: | 1569-1721 |
ISSN: | 1573-8701 |
Title of parent work (English): | The Journal of Economic Inequality |
Subtitle (English): | evidence from Germany and the US |
Publisher: | Springer |
Place of publishing: | Dordrecht |
Publication type: | Article |
Language: | English |
Date of first publication: | 2018/12/16 |
Publication year: | 2018 |
Release date: | 2021/10/11 |
Tag: | Income; Lifetime income; Longitudinal and panel data; Measurement; Permanent income; Social class |
Volume: | 16 |
Issue: | 3 |
Number of pages: | 25 |
First page: | 321 |
Last Page: | 345 |
Funding institution: | National Institutes of HealthUnited States Department of Health & Human ServicesNational Institutes of Health (NIH) - USA [R01 HD069609]; National Science FoundationNational Science Foundation (NSF) [1157698] |
Organizational units: | Wirtschafts- und Sozialwissenschaftliche Fakultät / Sozialwissenschaften |
DDC classification: | 3 Sozialwissenschaften / 32 Politikwissenschaft / 320 Politikwissenschaft |
Peer review: | Referiert |