Background
Transitory income is a term in economics referring to fluctuations in an individual’s income that are temporary and not representative of their long-term financial situation. It differentiates between actual, often fluctuating, income and more stable, permanent income.
Historical Context
Transitory income is a part of the broader “Permanent Income Hypothesis” (PIH) formulated by economist Milton Friedman in the 1950s. Friedman’s work aimed to understand consumer behavior and savings using the distinction between permanent and transitory income.
Definitions and Concepts
Transitory income is defined as the difference between an individual’s actual (current) income and their permanent income.
- Actual Income: The income received by an individual or household within a specific period.
- Permanent Income: The average income an individual expects to earn over a longer period, considering normal levels of fluctuations.
Major Analytical Frameworks
Classical Economics
Classical economics does not focus distinctly on the concept of transitory income, as it largely revolves around long-term factors like full employment and natural output levels rather than short-term income fluctuations.
Neoclassical Economics
Neoclassical economics extends the classical view to include expectations and utility maximization over an individual’s lifetime, which touches upon distinctions between short-term income fluctuations and expected long-term earnings.
Keynesian Economics
Keynesian economics primarily addresses aggregate demand and income at a macro level, focusing less explicitly on personal distinctions between transitory and permanent income.
Marxian Economics
Marxian economics views income through the lens of class struggle and surplus value distribution, generally not disaggregating the individual income categories used in neoclassical analysis.
Institutional Economics
Institutional economics might consider transitory income when looking at social and economic structures’ impacts on income stability and distribution.
Behavioral Economics
Behavioral economics examines how the concept of transitory income might affect consumer spending behaviors. Temporary boosts in income may lead to different spending decisions compared to steady, permanent income.
Post-Keynesian Economics
Post-Keynesians, focusing on issues like income distribution and effective demand, might incorporate the idea but generally prioritize understanding macroeconomic aggregates.
Austrian Economics
Austrian economics might address transitory income within the context of subjective value theory and time preference, emphasizing individual perceptions of income changes over long-term value.
Development Economics
In development economics, transitory income could be important in understanding the fluctuation impacts on poverty and economic behavior in developing regions.
Monetarism
Monetarism, pioneered by Milton Friedman, directly uses the concept of transitory income to underpin the Permanent Income Hypothesis. It examines the implications of income variations on consumer spending and savings behavior over time.
Comparative Analysis
Different economic schools interpret the role and impact of transitory income differently, often influencing policy suggestions around taxation, welfare, and economic stimulus measures.
Case Studies
Stimulus vs. Long-Term Investments
Analysis may compare the short-term boost provided by stimulus checks (transitory income) versus sustained increases from job creation programs (potential rise in permanent income).
Seasonal Employment
Example studies could include individuals in seasonal industries such as agriculture or retail, highlighting the gap between transitory income received during peak seasons vs. the more stable off-peak permanent income.
Suggested Books for Further Studies
- “A Theory of the Consumption Function” by Milton Friedman
- “Macroeconomics” by N. Gregory Mankiw
- “Behavioral Economics and Economic Policy” edited by Shinsuke Ikeda
Related Terms with Definitions
- Permanent Income: The average level of income an individual expects to maintain over the long term.
- Income Smoothing: Techniques used by individuals or households to maintain stable consumption despite income fluctuations.
- Consumption Function: An economic formula representing the relationship between total consumption and gross national income.
