Income and Wealth Inequality

  • Nicholas Bloom
  • Raj Chetty
  • Emmanuel Saez

Leaders: Nicholas Bloom, Raj Chetty, Emmanuel Saez

The CPI is home to some of the country’s most influential analyses of the income and wealth distribution. The purpose of the Income and Wealth RG is to monitor the ongoing takeoff in income inequality, to better understand its sources, and to analyze its implications for labor market performance, educational attainment, mobility, and more. The following is a sampling of the CPI’s research projects within this area.

Trends in income and wealth inequality: What are the key trends in U.S. income and wealth inequality? The U.S. increasingly looks to Emmanuel Saez and his research team for the latest data on U.S. economic inequality.

Distributional National Accounts: In an ambitious infrastructural project, Emmanuel Saez and his team are building a “Distributional National Accounts” based on tax returns, a data set that will eliminate the current gap between (a) national accounts data based on economic aggregates and (b) inequality analysis that uses micro-level tax data to examine the distribution of income but is not consistent with national aggregates. This new data set will in turn make it possible to evaluate the extent to which economic growth, which has long been represented as a preferred poverty-reduction approach, is indeed delivering on that objective.

The rise of between-firm inequality: How much of the rise in earnings inequality can be attributed to increasing between-firm dispersion in the average wages they pay? This question can be addressed by constructing a matched employer-employee data set for the United States using administrative records.

Rent and inequality: It is increasingly fashionable to argue that “rent” accounts for much of the takeoff in income inequality. The Current Population Survey can be used to assess whether this claim is on the mark. 

Income And Wealth - CPI Research

Title Author Media
Heterogeneity in Returns to Wealth and the Measurement of Wealth Inequality Andreas Fagereng , Luigi Guiso , Davide Malacrino , Luigi Pistaferri

Heterogeneity in Returns to Wealth and the Measurement of Wealth Inequality

Author: Andreas Fagereng , Luigi Guiso , Davide Malacrino , Luigi Pistaferri
Publisher: American Economic Review
Date: 05/2016

Lacking a long time series on the assets of the very wealthy, Saez and Zucman (2015) use US tax records to obtain estimates of wealth holdings by capitalizing asset income from tax returns. They document marked upward trends in wealth concentration. We use data on tax returns and actual wealth holdings from tax records for the whole Norwegian population to test the robustness of the methodology. We document that measures of wealth based on the capitalization approach can lead to misleading conclusions about the level and the dynamics of wealth inequality if returns are heterogeneous and even moderately correlated with wealth.

A Vicious Cycle: A Social–Psychological Account of Extreme Racial Disparities in School Discipline Jason A. Okonofua, Greg Walton, Jennifer L. Eberhardt

A Vicious Cycle: A Social–Psychological Account of Extreme Racial Disparities in School Discipline

Author: Jason A. Okonofua, Greg Walton, Jennifer L. Eberhardt
Publisher: Perspectives on Psychological Science
Date: 05/2016

Can social–psychological theory provide insight into the extreme racial disparities in school disciplinary action in the United States? Disciplinary problems carry enormous consequences for the quality of students’ experience in school, opportunities to learn, and ultimate life outcomes. This burden falls disproportionately on students of color. Integrating research on stereotyping and on stigma, we theorized that bias and apprehension about bias can build on one another in school settings in a vicious cycle that undermines teacher–student relationships over time and exacerbates inequality. This approach is more comprehensive than accounts in which the predicaments of either teachers or students are considered alone rather than in tandem, it complements nonpsychological approaches, and it gives rise to novel implications for policy and intervention. It also extends prior research on bias and stigmatization to provide a model for understanding the social–psychological bases of inequality more generally.

Wealth Inequality in the United States since 1913: Evidence from Capitalized Income Tax Data Emmanuel Saez, Gabriel Zucman

Wealth Inequality in the United States since 1913: Evidence from Capitalized Income Tax Data

Author: Emmanuel Saez, Gabriel Zucman
Publisher: Quarterly Journal of Economics
Date: 05/2016

This paper combines income tax returns with macroeconomic household balance sheets to estimate the distribution of wealth in the United States since 1913. We estimate wealth by capitalizing the incomes reported by individual taxpayers, accounting for assets that do not generate taxable income. We successfully test our capitalization method in three micro datasets where we can observe both income and wealth: the Survey of Consumer Finance, linked estate and income tax returns, and foundations’ tax records. We find that wealth concentration was high in the beginning of the twentieth century, fell from 1929 to 1978, and has continuously increased since then. The top 0.1% wealth share has risen from 7% in 1978 to 22% in 2012, a level almost as high as in 1929. Top wealth-holders are younger today than in the 1960s and earn a higher fraction of the economy’s labor income. The bottom 90% wealth share first increased up to the mid-1980s and then steadily declined. The increase in wealth inequality in recent decades is due to the upsurge of top incomes combined with an increase in saving rate inequality. We explain how our findings can be reconciled with Survey of Consumer Finances and estate tax data.

Consumption Inequality Orazio P. Attanasio, Luigi Pistaferri

Consumption Inequality

Author: Orazio P. Attanasio, Luigi Pistaferri
Publisher: Journal of Economic Perspectives
Date: 04/2016

In this essay, we discuss the importance of consumption inequality in the debate concerning the measurement of disparities in economic well-being. We summarize the advantages and disadvantages of using consumption as opposed to income for measuring trends in economic well-being. We critically evaluate the available evidence on these trends, and in particular discuss how the literature has evolved in its assessment of whether consumption inequality has grown as much as or less than income inequality. We provide some novel evidence on three relatively unexplored themes: inequality in different spending components, inequality in leisure time, and intergenerational consumption mobility.

Why Can Modern Governments Tax So Much? An Agency Model of Firms as Fiscal Intermediaries Henrik Jacobsen Kleven, Claus Thustrup Kreiner, Emmanuel Saez

Why Can Modern Governments Tax So Much? An Agency Model of Firms as Fiscal Intermediaries

Author: Henrik Jacobsen Kleven, Claus Thustrup Kreiner, Emmanuel Saez
Publisher: Economica
Date: 04/2016

We develop an agency model explaining why third-party information reporting by firms makes tax enforcement successful. While third-party reporting would be ineffective with frictionless collusion between firms and employees, collusive evasion is impossible to sustain in firms with many employees and accurate business records as any single employee may reveal evasion. We embed our agency model into a macro model where the number of employees grows with development, showing that the tax take evolves as an S-shape driven by changes in third-party information. We show that our model is consistent with a set of stylized facts on taxation and development.

Income And Wealth - CPI Affiliates

Erik Olin Wright Professor of Sociology University of Wisconsin-Madison
G. William Domhoff Research Professor University of California at Santa Cruz
Jeffrey P. Thompson Principal Economist Board of Governors of the Federal Reserve System
Jonathan Fisher Research Scholar, Center on Poverty and Inequality Stanford University
Robert M. Hauser Vilas Research Professor of Sociology; Director, Center for Demography of Health and Aging University of Wisconsin-Madison

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Income And Wealth - Other Research

Title Author Media
Reducing Income Inequality in Educational Attainment: Experimental Evidence on the Impact of Financial Aid on College Completion Sara Goldrick-Rab, Robert Kelchen, Douglas N. Harris, James Benson

Reducing Income Inequality in Educational Attainment: Experimental Evidence on the Impact of Financial Aid on College Completion

Author: Sara Goldrick-Rab, Robert Kelchen, Douglas N. Harris, James Benson
Publisher: American Journal of Sociology
Date: 05/2016

Income inequality in educational attainment is a long-standing concern, and disparities in college completion have grown over time. Need-based financial aid is commonly used to promote equality in college outcomes, but its effectiveness has not been established, and some are calling it into question. A randomized experiment is used to estimate the impact of a private need-based grant program on college persistence and degree completion among students from low-income families attending 13 public universities across Wisconsin. Results indicate that offering students additional grant aid increases the odds of bachelor’s degree attainment over four years, helping to diminish income inequality in higher education.

‘Membership Has Its Privileges’: Status Incentives and Categorical Inequality in Education Thurston Domina, Andrew M. Penner, Emily K. Penner

‘Membership Has Its Privileges’: Status Incentives and Categorical Inequality in Education

Author: Thurston Domina, Andrew M. Penner, Emily K. Penner
Publisher: Sociological Science
Date: 05/2016

Prizes – formal systems that publicly allocate rewards for exemplary behavior – play an increasingly important role in a wide array of social settings, including education. In this paper, we evaluate a prize system designed to boost achievement at two high schools by assigning students color-coded ID cards based on a previously low stakes test. Average student achievement on this test increased in the ID card schools beyond what one would expect from contemporaneous changes in neighboring schools. However, regression discontinuity analyses indicate that the program created new inequalities between students who received low-status and high-status ID cards. These findings indicate that status-based incentives create categorical inequalities between prize winners and others even as they reorient behavior toward the goals they reward.

American Amnesia: How the War on Government Led Us to Forget What Made America Prosper Jacob S. Hacker, Paul Pierson

American Amnesia: How the War on Government Led Us to Forget What Made America Prosper

Author: Jacob S. Hacker, Paul Pierson
Publisher: Simon & Schuster
Date: 03/2016

From the groundbreaking author team behind the bestselling Winner-Take-All Politics, a timely and topical work that examines what’s good for American business and what’s good for Americans—and why those interests are misaligned.

In Winner-Take-All Politics, Jacob S. Hacker and Paul Pierson explained how political elites have enabled and propelled plutocracy. Now in American Amnesia, they trace the economic and political history of the United States over the last century and show how a viable mixed economy has long been the dominant engine of America’s prosperity.

Structural versus Ethnic Dimensions of Housing Segregation Richard H. Sander , Yana Kucheva

Structural versus Ethnic Dimensions of Housing Segregation

Author: Richard H. Sander , Yana Kucheva
Publisher: US Census Bureau Center for Economic Studies (Working Paper No. CES-WP-16-22)
Date: 03/2016

Racial residential segregation is still very high in many American cities. Some portion of segregation is attributable to socioeconomic differences across racial lines; some portion is caused by purely racial factors, such as preferences about the racial composition of one’s neighborhood or discrimination in the housing market. Social scientists have had great difficulty disaggregating segregation into a portion that can be explained by interracial differences in socioeconomic characteristics (what we call structural factors) versus a portion attributable to racial and ethnic factors. What would such a measure look like? In this paper, we draw on a new source of data to develop an innovative structural segregation measure that shows the amount of segregation that would remain if we could assign households to housing units based only on non-racial socioeconomic characteristics. This inquiry provides vital building blocks for the broader enterprise of understanding and remedying housing segregation.

The Health Effects of Income Inequality: Averages and Disparities Beth C. Truesdale, Christopher Jencks

The Health Effects of Income Inequality: Averages and Disparities

Author: Beth C. Truesdale, Christopher Jencks
Publisher: Annual Review of Public Health
Date: 03/2016

Much research has investigated the association of income inequality with average life expectancy, usually finding negative correlations that are not very robust. A smaller body of work has investigated socioeconomic disparities in life expectancy, which have widened in many countries since 1980. These two lines of work should be seen as complementary because changes in average life expectancy are unlikely to affect all socioeconomic groups equally. Although most theories imply long and variable lags between changes in income inequality and changes in health, empirical evidence is confined largely to short-term effects. Rising income inequality can affect individuals in two ways. Direct effects change individuals' own income. Indirect effects change other people's income, which can then change a society's politics, customs, and ideals, altering the behavior even of those whose own income remains unchanged. Indirect effects can thus change both average health and the slope of the relationship between individual income and health.