Krebs, TomKrishna, PravinMaloney, William F.2013-01-042013-01-042012-10https://hdl.handle.net/10986/12108This paper develops a framework for the quantitative analysis of individual income dynamics, mobility and welfare. Individual income is assumed to follow a stochastic process with two (unobserved) components, component representing measurement error or transitory income shocks and an Autoregressive (AR(1)) component representing persistent changes in income. The analysis uses a tractable consumption-saving model with labor income risk and incomplete markets to relate income dynamics to consumption and welfare, and derive analytical expressions for income mobility and welfare as a function of the various parameters of the underlying income process. The empirical application of the framework using data on individual incomes from Mexico provides striking results. Much of measured income mobility is driven by measurement error or transitory income shocks and therefore (almost) welfare-neutral. A smaller part of measured income mobility is due to either welfare-reducing income risk or welfare-enhancing catching-up of low-income individuals with high-income individuals, both of which have economically significant effects on social welfare. Decomposing mobility into its fundamental components is thus seen to be crucial from the standpoint of welfare evaluation.en-USCC BY 3.0 IGOAGGREGATE GROWTHASSET PRICINGATTRITIONBORROWINGBRIDGEBUSINESS CYCLESCOMPONENT PARTSCONSUMERSCONSUMPTION LEVELSCONSUMPTION PLANSCONVERGENCE PARAMETERDATA SETDECREASING RATEDEVELOPING COUNTRIESDEVELOPING WORLDDEVELOPMENT POLICYDISPLACEMENTDISTRIBUTION OF INCOMEDRIVERSEARNINGS INSTABILITYECONOMETRICSECONOMIC ACTIVITYECONOMIC DEVELOPMENTECONOMIC FLUCTUATIONSECONOMIC GROWTHECONOMIC INEQUALITYECONOMIC REVIEWECONOMIC STUDIESECONOMIC THEORYEMPIRICAL APPLICATIONEMPIRICAL STUDIESEQUAL WEIGHTEQUATIONSEQUILIBRIUMEQUILIBRIUM PRICESEXPECTED UTILITYFAMILY INCOMEFRAMEWORKFUNCTIONAL FORMFUTURE LABORGENERAL EQUILIBRIUMGROWTH LITERATUREHIGH INCOMEHIGH INCOMESHOUSEHOLD MEMBERSINCOMEINCOME DATAINCOME DIFFERENCESINCOME DISTRIBUTIONINCOME DISTRIBUTIONSINCOME DYNAMICSINCOME INEQUALITYINCOME RISKINCOME SHOCKSINCOME TAXINCOME VARIABILITYINCOMPLETE MARKETSINCREASING INEQUALITYINDIVIDUAL INCOMESINEQUALITY MEASUREMENTINNOVATIONINSURANCEINTEREST RATELABOR ECONOMICSLABOR INCOMELABOR MARKETLOG INCOMELONGITUDINAL DATALOW INCOMELOW INCOMESMACROECONOMIC FACTORSMACROECONOMICSMEAN INCOMEMEASUREMENT ERRORMIDDLE CLASSMONETARY ECONOMICSNORMAL DISTRIBUTIONPERMANENT INCOMEPOLICY DISCUSSIONSPOLICY RESEARCHPOLITICAL ECONOMYPRODUCTIVITYPRODUCTIVITY GROWTHPUBLIC POLICYRANDOM WALKRELATIVE IMPACTRESIDUAL INCOMERISK AVERSIONRISK SHARINGSALARYSIGNIFICANT NEGATIVESOCIAL MOBILITYSPANSPEEDSTATICSURBAN EMPLOYMENTUTILITY FUNCTIONVALUATIONWAGESWEALTHWORK FORCEYOUNGER WORKERSWorld Bankhttps://doi.org/10.1596/1813-9450-6254