Accounting for Imputed and Capital Income Flows in Income Inequality Analyses

Joachim Frick and Markus Grabka

No 4634, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: Using representative and consistent microdata from the German Socio-Economic Panel Study (SOEP) from 1985-2007, we illustrate that capital income (CI = return on financial investments) and imputed rent (IR = return on investments in owner-occupied housing) have become increasingly important sources of economic inequality in Germany over the last two decades. Whereas the operationalization of CI in this paper is based on monetary returns on financial investments only, our definition of IR follows a regulation by the European Commission, (EC) which is currently being used to harmonize income measurement for the European Statistics on Income and Living Conditions (EU-SILC) in Europe. While both of these components represent some kind of return on alternative private investments, our results indicate that they do not coincide in their impacts on income inequality and poverty. In line with the literature, net IR as defined according to the EC regulation tends to exert a dampening effect on inequality and relative poverty, very much driven by the increasing share of outright ownership among the elderly. On the other hand, inequality is boosted by CI especially when looking at the upper tail of the income distribution. As the German public pension scheme gradually loses its ability to maintain people's living standards into retirement, we find these effects to increase over time. The analyses presented here, exemplified for Germany, make a clear case for the joint consideration of all components of private investment income for the purpose of welfare analysis, be they of a monetary or non-monetary nature. This appears to be relevant in at least three dimensions of comparative research: (1) across time; (2) across space, regions, welfare regimes; (3) across the individual life course, thus analyzing the impact of investment income on intrapersonal mobility patterns.

Keywords: capital income; decomposition; imputed rent; income inequality; SOEP (search for similar items in EconPapers)
JEL-codes: D31 D33 I31 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2009-12
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

Published - published in: Douglas J. Besharov and Kenneth Couch (eds.), Counting the Poor: New Thinking About European Poverty Measures and Lessons for the United States, Oxford 2012, 117-142

Downloads: (external link)
https://docs.iza.org/dp4634.pdf (application/pdf)

Related works:
Working Paper: Accounting for Imputed and Capital Income Flows in Income Inequality Analyses (2009)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:iza:izadps:dp4634

Ordering information: This working paper can be ordered from
IZA, Margard Ody, P.O. Box 7240, D-53072 Bonn, Germany
library@iza.org

Access Statistics for this paper

More papers in IZA Discussion Papers from Institute of Labor Economics (IZA) IZA, P.O. Box 7240, D-53072 Bonn, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Holger Hinte (hinte@iza.org).