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Detailed knowledge of individual income dynamics is crucial for investigatingthe existence of the American dream: Are we able to improve our income statusduring our working life? This key question simply boils down to observingindividual status and how it moves between two thresholds: the current incomeand the desired income. Yet, our knowledge of these temporal properties ofincome remains limited since we rely on estimates coming from transitionmatrices which simplify income dynamics by aggregating the individual changesinto quantiles and thus overlooking significant microscopic variations. Here,we bridge this gap by employing First Passage Time concepts in a baselinestochastic process with resetting used for modeling income dynamics anddeveloping a framework that is able to crucially disaggregate the temporalproperties of income to the level of an individual worker. We find analyticallyand illustrate numerically that our framework is orthogonal to the transitionmatrix approach and leads to improved and more granular estimates. Moreover, tofacilitate empirical applications of the framework, we introduce a publiclyavailable statistical methodology, and showcase the application using the USAincome dynamics data. These results help to improve our understanding on thetemporal properties of income in real economies and provide a set of tools fordesigning policy interventions.

The fate of the American dream: A first passage under resetting approach to income dynamics