Inequality and Mobility in a Minimal Model for Evolving Income Distributions

Abstract: In this paper we explore the dynamic relationship between income inequality and economic mobility through a pairing of a population-scale partial differential equation (PDE) model and an associated individual-based stochastic differential equation (SDE) model. We focus on two fundamental mechanisms of income growth: (1) that annual growth is percentile-dependent, and (2) that there is intrinsic variability from one individual to the next. Under these two assumptions, we show that increased economic mobility does not necessarily imply decreased income inequality. In fact, we show that the mechanism that directly enhances mobility, intrinsic variability, simultaneously increases inequality. Using Growth Incidence Curves, and other summary statistics like mean income and the Gini coefficient, we calibrate our model to US Census data (1968-2021) and show that there are multiple parameter settings that produce the same growth in inequality over time. Strikingly, these parameter settings produce dramatically different mobility outcomes. Naturally, the greater disparity there is between annual percentage growth in the upper and lower income levels, the less ability there is for individuals to climb the percentile ranks over a fixed period of time. However, more than this, the model shows that whatever mobility does exist, it decreases substantially over time. In other words, while it may remain true that opportunity to reach the upper ranks mathematically persists in the long run, that long run gets longer and longer every year.