Income dynamics in Germany, the USA and the UK: evidence from panel data

This paper is about the distributional dynamics of net household income in Germany, the US and the UK. We reject the common wisdom that Germany is a country in statsis: stable cross-sectional distributions are deceptive, concealing substantial movements beneath the surface. The US and the UK underwent a process of income polarisation. For the study of mobility, stochastic kernels are used, because standard approaches based on mobility indices and transition matrices, which group persons into income classes of arbitrary size, lead to misleading conclusions. The measures attribute greater mobility to Germany than to the US, but this ranking is entirely driven by the substantially greater mobility of the German poor. In order to determine whether incomes changes are transitory or permanent, a law of motion for income is estimated.