Essays on income inequality, poverty and mobility [Elektronische Ressource] / vorgelegt von Timm Bönke
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Essays on income inequality, poverty and mobility [Elektronische Ressource] / vorgelegt von Timm Bönke

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Essays on Income Inequality, Poverty and Mobility Inaugural-Dissertation zur Erlangung des akademischen Grades eines Doktors der Wirtschaftswissenschaft des Fachbereichs Wirtschaftswissenschaft der Freien Universität Berlin vorgelegt von Diplom-Volkswirt Timm Bönke aus Oldenburg Berlin, 2010 „Gedruckt mit Genehmigung des Fachbereichs Wirtschaftswissenschaft der Freien Universität Berlin“ Dekan: Univ.-Professor Dr. Ronnie Schöb Erstgutachter: Univ.-Professor Dr. Dr. Giacomo Corneo Zweitgutachter: Univ.-Professor Dr. Viktor Steiner Tag der Disputation: 26.11.2010 2Acknowledgements I express my sincere gratitude to Giacomo Corneo for supervising my thesis, for providing numerous inspiring insights as well as for enabling my research by providing an excellent “laissez faire” environment at his chair. Furthermore, I am thankful to Viktor Steiner for agreeing to evaluate once more a thesis of mine. Of course, I would like to thank my dear colleague and co-author Carsten Schröder for our fruitful and excellent team work and countless discussions on and off the topic. Not to forget, I am obliged to Sebastian Eichfelder for his valuable suggestions and knowledge regarding any topic of German law and to all my current and past colleagues for their support.

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Published 01 January 2010
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Essays on Income Inequality, Poverty and Mobility


Inaugural-Dissertation zur Erlangung des akademischen Grades eines Doktors der
Wirtschaftswissenschaft des Fachbereichs Wirtschaftswissenschaft der Freien Universität
Berlin



vorgelegt von Diplom-Volkswirt Timm Bönke

aus

Oldenburg



Berlin, 2010

„Gedruckt mit Genehmigung des Fachbereichs Wirtschaftswissenschaft der Freien Universität
Berlin“

Dekan: Univ.-Professor Dr. Ronnie Schöb
Erstgutachter: Univ.-Professor Dr. Dr. Giacomo Corneo
Zweitgutachter: Univ.-Professor Dr. Viktor Steiner
Tag der Disputation: 26.11.2010 
2Acknowledgements
I express my sincere gratitude to Giacomo Corneo for supervising my thesis, for providing
numerous inspiring insights as well as for enabling my research by providing an excellent
“laissez faire” environment at his chair. Furthermore, I am thankful to Viktor Steiner for
agreeing to evaluate once more a thesis of mine. Of course, I would like to thank my dear
colleague and co-author Carsten Schröder for our fruitful and excellent team work and
countless discussions on and off the topic. Not to forget, I am obliged to Sebastian Eichfelder
for his valuable suggestions and knowledge regarding any topic of German law and to all my
current and past colleagues for their support. Also I am indebted to Ralf Himmelreicher and
the team at the Forschungsdatenzentrum at the Deutsche Rentenversicherung Bund for their
support and joint effort to help a layman making sense of German social security regulations.
Last but not least, I am indebted to my family and friends for the all-round support during the
time of the preparation of this thesis.
34Table of Contents
General Introduction ................................................................................................................... 7

Incomes and Inequality in the Long Run: The Case of German Elderly ................................. 11

Poverty in Germany – Statistical Inference and Decomposition .............................................. 41

Cohort Earnings Inequality and Mobility: Evidence from German Social Security Records .. 87

Country Inequality Rankings and Conversion Schemes ........................................................ 119

Zusammenfassung (German) .................................................................................................. 147

Curriculum Vitae .................................................................................................................... 149
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6General Introduction
The current cumulative doctoral dissertation consists of four essays. Common aim of all
essays is to provide empirically backed insights on different aspects of the distribution of
income. The two initial essays address key social problems of the German welfare state. The
first essay examines the economic situation of the elderly with a particular focus on
pensioners, the second essay investigates poverty. While these two contributions take a cross
sectional perspective using cross sectional data, the third essay complements their findings by
adding the longitudinal dimension of earnings dynamics in terms of mobility and volatility. In
sum, these three essays provide a comprehensive picture on the long run trends of the German
income distribution. The fourth essay investigates the conceptual understanding of income
distributions, scrutinizing the methodology usually applied when equivalent incomes are
investigated as in the first two essays of this thesis.
The first essay entitled Incomes and Inequality in the Long Run: The Case of German
Elderly is a joined work with Carsten Schröder and Katharina Schulte who each contributed
one third to the overall project. Furthermore, it is accepted for publication in the German
Economic Review. In this essay German Sample Survey income data is used to examine the
income distribution for elderly individuals during the period from 1978 to 2003, an era
particularly interesting for the development of the statutory German pay-as-you-go (PAYG)
pension system as it was subject to several fundamental reforms. Indeed, in the late 1970s, the
German PAYG system was expanded to one of the world’s most generous ones, in terms of
both replacement rates and early retirement provisions. Population aging, German
reunification and high unemployment rates, however, caused a raising fiscal imbalance and, in
consequence, the eligibility age has been raised, replacement rates have been lowered and
subsidies have been introduced to stimulate private old-age provisions. The reforms
undertaken and in preparation have direct implications for the financial situation of
Germany’s actual and future elderly. In order to investigate the implications of these
institutional changes, the elderly population, defined as people of age 55 and older, is
decomposed by people resident in the Old and New Federal States. Further, we distinguish
between persons receiving old-age pensions and persons who do not. Inequality estimates are
decomposed by income components, and the bootstrap method is used to test for statistical
significance of results. In sum, taking stock of the changes in the income distribution of the
elderly in the last decades provides a useful yardstick for taxing the costs and benefits of the
ongoing reform process.
7 In common with the first essay’s period under investigation and data source, the
second contribution entitled Poverty in Germany – Statistical Inference and Decomposition is
aimed at completing the overall picture on long-term trends by looking at the bottom of the
German income distribution. The essay is a joined work co-authored by Carsten Schroeder
(his contribution is fifty percent) and is accepted for publication in the Journal of Economics
and Statistics (Jahrbücher für Nationalökonomie und Statistik). Poverty poses a key social
problem, both on the individual level as well as for the society as a whole. Therefore, its
measurement, explaining its causes and its consequences is on top of the research agenda of
scholars from various disciplines. On the individual level, a slim budget not only restrains the
actual possibility to consume. Growing up poor is likely to have negative effects on children’s
learning and social capabilities, and on their future life chances. Medical studies indicate that
poverty during infancy and childhood is an important predictor of mortality risk. In addition,
the loss of autonomy and social participation can work as a psychological stress for
deteriorating health, the so-called status syndrome. As mentioned above, poverty is not only
an individual dilemma. High poverty rates are likely to create social costs and lower income
growth. Credit constraints may prevent people with low income from undertaking efficient
human capital investments. Substantial income and wealth disparities may discourage and
frustrate people. In turn, deprived people might withdraw from social life, stop looking for
work, or turn their backs on the democratic system. Individuals who feel powerless in view of
large economic disparities may see no other chance to improve their economic situation but to
infringe social and ethical rules and norms. To investigate poverty in Germany, the second
essay provides insights of inter-temporal changes in poverty for Germany from year 1978 to
2003. Again, we employ the bootstrap method to test for the statistical significance of results.
All estimates are decomposed by household type and region. Across household types, we find
poverty estimates are particularly high for single parents. The regional decomposition reveals
that poverty is particularly high in the New states. In addition, a nonlinear Oaxaca-Blinder
decomposition is conducted to quantify the separate contribution of regional differences in
households’ characteristics to the probability of being poor.
Whereas the first and second essays investigate poverty and inequality in (repeated)
cross sections, the single-authored third essay entitled Cohort Earnings Inequality and
Mobility: Evidence from German Social Security Records focuses on the dynamics of
earnings. Thus, the findings of the first to essays are complemented by adding the dimension
of income mobility and volatility. Again, long run trends in Germany are investigated but
different data is deployed. Here, rich longitudinal data on individual earnings biographies
obtained from social security administration records is analyzed to research the long-term
8evolution of earnings inequality and mobility in Germany for the period 1967 to 2007.
Categorized into four age cohorts, West German males’ annual earnings are investigated.
Each age cohort encompasses ten years. Annual earnings inequality is U-shaped in age and
increases steadily for all age cohorts over the period under investigation. Short as well as
long-term earnings mobility, in the opposite, has remained stable. The variance in annual log
earnings is increasing over the full period. This trend can almost exclusively be explained by
an increase in the permanent variance of earnings. In sum, essays one, two and three provide a
comprehensive picture on the long term evolution of inequality, poverty and mobility in
Germany.
The last essay contributes to the conceptual understanding of income distributions and
their implications for the distribution of living standards. The paper is co-authored by Carsten
Schröder (his contribution is fifty percent) and is entitled Country Inequality Rankings and
Conversion Schemes. The essay aims at deepening the insights on the distribution of living
standards in a society comprised of heterogeneous households, a topic of interest not only to
researchers but to the general public. Thereby, living standard of a household’s members is
determined by the material comfort derived from available goods and services. Economists
consider the income distribution as a close proxy for the distribution of living standard. When
heterogeneous household types are involved two complications emerge. First, different
household types have different needs. Members of differently sized/structured households
with the same household income may attain different living standards. To obtain a measure
that reflects differences in living standards across household types, household incomes must
be adjusted for differences in needs. Second, household size heterogeneity also raises the
issue of an adequate household weighting when the distribution of living standards is derived.
Two conversion schemes are usually employed for assessing personal-income inequality from
household equivalent incomes: to weight household units by size or by needs. Using data
from the Luxembourg Income Study, we show the sensitivity of country inequality rankings
to conversion schemes and explain the finding by means of inequality decomposition. A
bootstrap approach is implemented to test for statistical significance of our results.

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