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
State of the Union 2019: Student Debt Susan Dynarski

State of the Union 2019: Student Debt

Author: Susan Dynarski
Publisher: Stanford Center on Poverty and Inequality
Date: 06/2019
  • Relative to Generation X, millennials took out more student loans, took out larger student loans, and defaulted more frequently. 
  • Defaults increased because millennials faced higher tuition payments, took out larger loans to meet those higher costs, turned to for-profit schools that don’t offer any returns, and entered a labor market in the throes of recession.
The Intergenerational Transmission of Family-Income Advantages in the United States Mitnik, Pablo A., Bryant, Victoria, Weber, Michael

The Intergenerational Transmission of Family-Income Advantages in the United States

Author: Mitnik, Pablo A., Bryant, Victoria, Weber, Michael
Publisher: Sociological Science
Date: 05/2019

Estimates of economic persistence and mobility in the United States, as measured by the intergenerational elasticity (IGE), cover a very wide range. Nevertheless, careful analyses of the evidence suggested until recently that as much as half, and possibly more, of economic advantages are passed on from parents to children. This “dominant hypothesis” was seriously challenged by the first-ever study of family-income mobility based on tax data (Chetty et al. 2014), which provided estimates of family-income IGEs indicating that only one-third of economic advantages are transmitted across generations and claimed that previous highly influential IGE estimates were upward biased. Using a different tax-based data set, this article provides estimates of family-income IGEs that strongly support the dominant hypothesis. The article also carries out a one-to-one comparison between IGEs estimated with the two tax-based data sets and shows that Chetty et al.’s estimates were driven downward by a combination of attenuation, life-cycle, selection, and functional-form biases. Lastly, the article determines the exact relationship between parental income inequality, economic persistence, and inequality of opportunity for income. This leads to the conclusion that, in the United States, at least half of income inequality among parents is transformed into inequality of opportunity among their children.

Universal Basic Income in the US and Advanced Countries Hoynes, Hilary W., Rothstein, Jesse

Universal Basic Income in the US and Advanced Countries

Author: Hoynes, Hilary W., Rothstein, Jesse
Publisher: National Bureau of Economic Research
Date: 02/2019

We discuss the potential role of Universal Basic Incomes (UBIs) in advanced countries. A feature of advanced economies that distinguishes them from developing countries is the existence of well developed, if often incomplete, safety nets. We develop a framework for describing transfer programs, flexible enough to encompass most existing programs as well as UBIs, and use this framework to compare various UBIs to the existing constellation of programs in the United States. A UBI would direct much larger shares of transfers to childless, non-elderly, non-disabled households than existing programs, and much more to middle-income rather than poor households. A UBI large enough to increase transfers to low-income families would be enormously expensive. We review the labor supply literature for evidence on the likely impacts of a UBI. We argue that the ongoing UBI pilot studies will do little to resolve the major outstanding questions.

Do Tax Cuts Produce More Einsteins? The Impacts of Financial Incentives vs. Exposure to Innovation on the Supply of Inventors Bell, Alexander M., Chetty, Raj, Jaravel, Xavier, Petkova, Neviana, Van Reenen, John

Do Tax Cuts Produce More Einsteins? The Impacts of Financial Incentives vs. Exposure to Innovation on the Supply of Inventors

Author: Bell, Alexander M., Chetty, Raj, Jaravel, Xavier, Petkova, Neviana, Van Reenen, John
Publisher: National Bureau of Economic Research
Date: 01/2019

Many countries provide financial incentives to spur innovation, ranging from tax incentives to research and development grants. In this paper, we study how such financial incentives affect individuals' decisions to pursue careers in innovation. We first present empirical evidence on inventors' career trajectories and income distributions using de-identified data on 1.2 million inventors from patent records linked to tax records in the U.S. We find that the private returns to innovation are extremely skewed – with the top 1% of inventors collecting more than 22% of total inventors' income – and are highly correlated with their social impact, as measured by citations. Inventors tend to have their most impactful innovations around age 40 and their incomes rise rapidly just before they have high-impact patents. We then build a stylized model of inventor career choice that matches these facts as well as recent evidence that childhood exposure to innovation plays a critical role in determining whether individuals become inventors. The model predicts that financial incentives, such as top income tax reductions, have limited potential to increase aggregate innovation because they only affect individuals who are exposed to innovation and have no impact on the decisions of star inventors, who matter most for aggregate innovation. Importantly, these results hold regardless of whether the private returns to innovation are known at the time of career choice. In contrast, increasing exposure to innovation (e.g., through mentorship programs) could have substantial impacts on innovation by drawing individuals who produce high-impact inventions into the innovation pipeline. Although we do not present direct evidence supporting these model-based predictions, our results call for a more careful assessment of the impacts of financial incentives and a greater focus on alternative policies to increase the supply of inventors.

Millionaire Migration in California: Administrative Data for Three Waves of Tax Reform Charles Varner, Cristobal Young, Allen Prohofsky

Millionaire Migration in California: Administrative Data for Three Waves of Tax Reform

Author: Charles Varner, Cristobal Young, Allen Prohofsky
Publisher: Stanford Center on Poverty and Inequality
Date: 07/2018

Does taxing the rich lead to migration of top income earners? In principle, barriers to migration for the wealthy are low, suggesting that even small changes to top tax rates might set off tax flight. Since top earners are also the largest taxpayers, the potential flight of the rich can set off a race to the bottom, as states compete to attract (or retain) the rich with ever lower tax rates. We draw on big administrative data covering 25 years of all top tax filers in California, showing movement into and out of the state. We examine three waves of tax reform affecting top earners: two “millionaire taxes” passed by voters via the proposition system in 2004 and 2012, and a tax cut passed by legislation in 1996. We emphasize non-parametric, graphical analyses that reveal the evidence with as few assumptions as possible and analogous regression models that confirm the non-parametric results. Both in absolute terms, and compared to sensible control groups, we find little migration response to changes in top tax rates. 

income and wealth - CPI Affiliates

G. William Domhoff's picture G. William Domhoff Distinguished Professor Emeritus and Research Professor (Sociology and Psychology)
University of California at Santa Cruz
Jeffrey P. Thompson's picture Jeffrey P. Thompson Director, Senior Economist and Policy Advisor
Federal Reserve Bank of Boston
Robert M. Hauser Vilas Research Professor of Sociology, Director, Center for Demography of Health and Aging
University of Wisconsin-Madison
Timothy M. Smeeding's picture Timothy M. Smeeding Lee Rainwater Distinguished Professor of Economics and Public Adminstration, Former Director, Institute for Research on Poverty
University of Wisconsin-Madison
Yu Xie's picture Yu Xie Bert G. Kerstetter '66 University Professor of Sociology and the Princeton Institute for International and Regional Studies
Princeton University

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Income And Wealth - Other Research

Title Author Media
Building Emergency Savings Through Employer-Sponsored Rainy-day Savings Accounts John Beshears, James J. Choi, Mark Iwry, David John, David Laibson, Brigitte C. Madrian

Building Emergency Savings Through Employer-Sponsored Rainy-day Savings Accounts

Author: John Beshears, James J. Choi, Mark Iwry, David John, David Laibson, Brigitte C. Madrian
Publisher: National Bureau of Economic Research
Date: 11/2019

Many Americans live paycheck to paycheck, carry revolving credit balances, and have little liquidity to absorb financial shocks. One consequence of this financial vulnerability is that many individuals use a portion of their retirement savings during their working years. For every $1 that flows into 401(k)s and similar accounts, between 30¢ and 40¢ leaks out before retirement (Argento, Bryant, and Sabelhaus 2015). We explore the practical considerations and challenges associated with helping households accumulate liquid savings that can be deployed when urgent pre-retirement needs arise. Automatically enrolling workers into an employer-sponsored “rainy-day” or “emergency” savings account—terms that we use interchangeably in this paper—funded by payroll deduction could be a cost-effective way to achieve this goal. We explore three specific implementation options: (a) after-tax employee 401(k) accounts; (b) deemed Roth IRAs under a 401(k) plan; and (c) depository institution accounts. We evaluate the pros and cons of each approach and conclude that all three approaches merit exploration and field testing.

The Segregation of Opportunity: Social and Financial Resources in the Educational Contexts of Lower- and Higher-Income Children, 1990–2014 Ann Owens, Kendra Bischoff

The Segregation of Opportunity: Social and Financial Resources in the Educational Contexts of Lower- and Higher-Income Children, 1990–2014

Author: Ann Owens, Kendra Bischoff
Publisher: Demography
Date: 09/2019

This article provides a rich longitudinal portrait of the financial and social resources available in the school districts of high- and low-income students in the United States from 1990 to 2014. Combining multiple publicly available data sources for most school districts in the United States, we document levels and gaps in school district financial resources—total per-pupil expenditures—and social resources—local rates of adult educational attainment, family structure, and adult unemployment—available to the average public school student at a variety of income levels over time. In addition to using eligibility for the National School Lunch Program as a blunt measure of student income, we estimate resource inequalities between income deciles to analyze resource gaps between affluent and poor children. We then examine the relationship between income segregation and resource gaps between the school districts of high- and low-income children. In previous work, the social context of schooling has been a theoretical but unmeasured mechanism through which income segregation may operate to create unequal opportunities for children. Our results show large and, in some cases, growing social resource gaps in the districts of high- and low-income students nationally and provide evidence that these gaps are exacerbated by income segregation. Conversely, per-pupil funding became more compensatory between high- and low-income students’ school districts over this period, especially in highly segregated states. However, there are early signs of reversal in this trend. The results provide evidence that school finance reforms have been somewhat effective in reducing the consequences of income segregation on funding inequities, while inequalities in the social context of schooling continue to grow.

Does Condominium Development Lead to Gentrification? Leah Platt Boustan, Robert A. Margo, Matthew M. Miller, James M. Reeves, Justin P. Steil

Does Condominium Development Lead to Gentrification?

Author: Leah Platt Boustan, Robert A. Margo, Matthew M. Miller, James M. Reeves, Justin P. Steil
Publisher: National Bureau of Economic Research
Date: 08/2019

The condominium structure, which facilitates ownership of units in multi-family buildings, was only introduced to the US during the 1960s. We ask whether the subsequent development of condominiums encouraged high-income households to move to central cities. Although we document a strong positive correlation between condominium density and resident income, this association is entirely driven by endogenous development of condos in areas otherwise attractive to high-income households. When we instrument for condo density using the passage of municipal regulations limiting condo conversions, we find little association between condo development and resident income, education or race.

The Uptick in Income Segregation: Real Trend or Random Sampling Variation? John R. Logan, Andrew Foster, Jun Ke, Fan Li

The Uptick in Income Segregation: Real Trend or Random Sampling Variation?

Author: John R. Logan, Andrew Foster, Jun Ke, Fan Li
Publisher: American Journal of Sociology
Date: 07/2018

Recent trends in income segregation in metropolitan regions show that, after a decline in the 1990s, there was an increase in 2000–2010 that reinforced concerns about the overall growth in U.S. income inequality since the 1970s. Yet the evidence may be systematically biased to exacerbate the upward trend because the effective sample for the American Community Survey (ACS) is much smaller than it was for the 2000 census to which it is being compared. Apparent changes in disparities across census tracts may result partly from a higher level of sampling variation and bias due to the smaller sample. This study uses 100% microdata from the 1940 census to simulate the impact of different sampling rates and applies those approaches to publicly available data for 2000 and 2007–11. The reduction in sample sizes associated with the ACS appears to exaggerate the evidence for increasing income segregation for all measures tested here.

Children and the Elderly: Wealth Inequality Among America’s Dependents Christina M. Gibson-Davis, Christine Percheski

Children and the Elderly: Wealth Inequality Among America’s Dependents

Author: Christina M. Gibson-Davis, Christine Percheski
Publisher: Demography
Date: 06/2018

Life cycle theory predicts that elderly households have higher levels of wealth than households with children, but these wealth gaps are likely dynamic, responding to changes in labor market conditions, patterns of debt accumulation, and the overall economic context. Using Survey of Consumer Finances data from 1989 through 2013, we compare wealth levels between and within the two groups that make up America’s dependents: the elderly and child households (households with a resident child aged 18 or younger). Over the observed period, the absolute wealth gap between elderly and child households in the United States increased substantially, and diverging trends in wealth accumulation exacerbated preexisting between-group disparities. Widening gaps were particularly pronounced among the least-wealthy elderly and child households. Differential demographic change in marital status and racial composition by subgroup do not explain the widening gap. We also find increasing wealth inequality within child households and the rise of a “parental 1 %.” During a time of overall economic growth, the elderly have been able to maintain or increase their wealth, whereas many of the least-wealthy child households saw precipitous declines. Our findings suggest that many child households may lack sufficient assets to promote the successful flourishing of the next generation.