Do Short‐Term Observed Income Changes Overstate Structural Economic Mobility?*
| Author | Felix Naschold,Christopher B. Barrett |
| Date | 01 October 2011 |
| Published date | 01 October 2011 |
| DOI | http://doi.org/10.1111/j.1468-0084.2011.00640.x |
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©Blackwell Publishing Ltd and the Department of Economics, University of Oxford, 2011. Published by Blackwell Publishing Ltd,
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OXFORD BULLETIN OF ECONOMICS AND STATISTICS, 73, 5 (2011) 0305-9049
doi: 10.1111/j.1468-0084.2011.00640.x
Do Short-Term Observed Income Changes Overstate
Structural Economic Mobility?*
Felix Naschold† and Christopher B. Barrett‡
†Department of Economics and Finance, University of Wyoming, 1000 E. University Avenue,
Laramie, WY 82071, USA (e-mail: fnaschol@uwyo.edu)
‡Charles H. Dyson School of Applied Economics and Management, Cornell University, 315
Warren Hall, Ithaca, NY 14853, USA (e-mail: cbb2@cornell.edu)
Abstract
The recent empirical literature on household income dynamics in developing countries has
tended to find considerable intertemporal economic mobility and thus inferred that a large
proportion of poverty is transitory.This article introduces a statistical test which shows that
these findings are partially driven by stochastic changes in transitory income. Estimates
of total economic mobility are inversely correlated with the panel spell length. For short
data spells, estimated total economic mobility is significantly greater than the underlying
structural economic mobility because of short-lived movements across the poverty line
that cancel out over periods of multiple years.
I. Introduction
A solid empirical understanding of patterns of change in household welfare, that is, of
economic mobility, is essential to the design of poverty reduction policies. It is especially
important to understand to what extent observed changes in household welfare over time
are stochastic, resulting from random gains and losses that are not expected to persist into
the future by the time they have been identified in data, rather than structural, reflect-
ing permanent welfare adjustments because of changes in household asset holdings or
in the expected returns to those assets. Short-term stochastic welfare fluctuations may
be best addressed by stabilizing household incomes and/or by improving households’
access to financial products that can effectively smooth consumption. In contrast, structural
welfare transitions more commonly inform forward-looking, longer term poverty reduction
policies based on stimulating asset accumulation and productivity growth. Precious few
studies make any effort to distinguish between these components of economic mobility.
ÅThe authors thank Gary Fields, David Newhouse, Steve Younger, Paul Cichello and seminar participants at
Cornell University for valuable comments on earlier drafts, the International Food Policy Research Institute for
granting access to the Pakistan data and United States Agency for International Development (USAID) for financial
support through grant LAG-A-00-96-90016-00 to the BASIS CRSP.Views expressed and any remaining errors are
the authors’ alone.
JEL Classification numbers: I32, C15.
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