This talk is run by The Institute for New Economic Thinking at the Oxford Martin School

Speaker: Oleg Kitov

We study the dynamics of age-dependent income distribution and inequality using a new agent-based model for the evolution of personal incomes. At the fundamental level, incomes of individuals are driven by micro processes that change in time as each person ages, by personal characteristics and by the economic environment. In this framework, distribution and inequality are macro characteristics that result from the aggregation of the dynamically changing microstructure of personal incomes. Unlike the age-aggregated methods, we model the evolution of age-dependent personal incomes in time and explain its micro and macro properties.

Our approach provides a quantitative framework for thinking about income distribution and inequality as emergent properties of a dynamically developing non-linear and inhomogeneous microstructure of individual earnings/incomes. To account for the observed age-dependent effects we formulate an agent-based model for the evolution of individual earnings with time/age, produce quantitative predictions and assess the model fit using empirical data. The time-history of each person’s income is modeled directly to explain changes along individual trajectories and differences between persons within and between jobs. In our framework, the personal income growth process is driven by a non-linear differential equation with several endogenous parameters including the person’s work experience, job type (instrument to earn money) and human capital (ability to earn money), as well as exogenous economic shocks. Endogenous variables vary among individuals and change in time, which allows constructing a multitude of income growth trajectories mirroring the observed variations in income paths. Finally, we aggregate the micro model and predict income distributions and inequality time-series, while accounting for the dynamic and age-dependent features not previously covered in the literature.