Essays on inequality and mobility of Korean households' income and consumption

Abstract

This dissertation analyzes income and consumption inequality empirically and theoretically using Korean Labor and Income Panel Study (KLIPS). This dissertation consists of three chapters. First two chapters are about detrended income and consumption excluding the effects of household's characteristics. Third chapter is about observed income and consumption. In the chapters 1 and 2, we track income and consumption of same cohort of Korean households over the lifecycle and find empirical evidences are not explained by existing income and consumption models with iid assumption of income shocks. For example, future cumulative gains in consumption (income) are negatively correlated with initial consumption (income). Second, consumption inequality does not grow over the lifecycle. At the chapter 1, we develop new income process model. Our suggesting generalized restricted income profiles (G-RIP) and stochastic heterogeneous income profile (SHIP) consider iid income shocks as well as household-specific factors of macroeconomy. We find that the estimated model fits the dynamics of inequalities and mobility of income better than the conventional RIP or HIP models. At the chapter 2, we develop new consumption process model. New consumption model has consumption shocks as well as household-specific uncertainty. Therefore, consumption risk is correlated with past consumption, which can explain the observed consumption moments. Our suggesting heterogeneous conditional mean (HCM) model fits the dynamics of inequalities and mobility of income and consumption better than the conventional model that assume iid income shocks. At the chapter 3, we deal with non-classical measurement errors in consumption using a double-differencing correction method. Aguiar and Bils (2015) develop a double differencing correction method to estimate the relative consumption inequality adjusted for measurement errors. In the first step they estimate Engel curve which measurement errors are correlated with error terms of and use current income as an instrument for total expenditure. This chapter provides an alternative instrument based on the permanent income hypothesis (PIH) for total expenditure. A long panel data is required to capture a household's permanent income and using a Korean household panel allows to test a hypothesis that permanent income could be more appropriate instrument than current income. We find the expected lifecycle income is better instrument than current income for current consumption.