Heterogeneous Factor Return, Stochastic Shock and Residual Income Inequality
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| Title | Heterogeneous Factor Return, Stochastic Shock and Residual Income Inequality
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| Author | Xu Shu and Zhu Nanmiao |
| Organization | School of Economics, Research Institute of Economics and Management, SWUFE |
| Email | stan.sugar.xu@gmail.com; zhulanmiao@163.com |
| Key Words | Latent Heterogeneity; Stochastic Shock; Residual Income Inequality |
| Abstract | Residual income is the residual in a Mincer wage equation. It is a measure of within group inequality among workers with the same characteristics, which account for more than 60% real income inequality. This study separates the impact of unobserved heterogeneity, stochastic income shock and their corresponding price effects on worker’s residual income inequality in a unified framework. Through which a persuasive explanation of the rising residual income inequality is offered. The results suggest that transitory income shock is the main source of residual income inequality, which accounts for more than 60% of its variance. However, the price effect related to worker’s unobserved heterogeneity is responsible for the successive rising of residual income inequality in recent years. Moreover, estimation results across different education groups indicate that more rapid growth of the price of latent heterogeneity for higher educated workers is of great importance in explaining the widening income gap between education groups. |
| Serial Number | WP72 |
| Time | 2011-04-26 |
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