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

Nathaniel Hendren's picture Nathaniel Hendren Assistant Professor of Economics
Harvard University
Patricia A. Roos's picture Patricia A. Roos Professor of Sociology
Rutgers University-New Brunswick
Thomas A. DiPrete's picture Thomas A. DiPrete Giddings Professor of Sociology; Co-Director, Institute for Social and Economic Research and Policy
Columbia University
John Allen Logan's picture John Allen Logan Professor of Sociology
University of Wisconsin - Madison
Paul Beaudry Professor
University of British Columbia

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Income And Wealth - Other Research

Title Author Media
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.

It’s Where You Work: Increases in the Dispersion of Earnings Across Establishments and Individuals in the United States Erling Barth, Alex Bryson, James C. Davis, Richard Freeman

It’s Where You Work: Increases in the Dispersion of Earnings Across Establishments and Individuals in the United States

Author: Erling Barth, Alex Bryson, James C. Davis, Richard Freeman
Publisher: Journal of Labor Economics
Date: 02/2016

This paper analyzes the role of establishments in the upward trend in dispersion of earnings that has become a central topic in economic analysis and policy debate. It decomposes changes in the variance of log earnings among individuals into the part due to changes in earnings among establishments and the part due to changes in earnings within establishments. The main finding is that much of the 1970s–2010s increase in earnings inequality results from increased dispersion of the earnings among the establishments where individuals work. Our results direct attention to the role of establishment-level pay setting and economic adjustments in earnings inequality.

Decomposing Trends in Inequality in Earnings into Forecastable and Uncertain Components Flávio Cunha, James Heckman

Decomposing Trends in Inequality in Earnings into Forecastable and Uncertain Components

Author: Flávio Cunha, James Heckman
Publisher: Journal of Labor Economics
Date: 02/2016

A substantial empirical literature documents the rise in wage inequality in the American economy. It is silent on whether the increase in inequality is due to components of earnings that are predictable by agents or whether it is due to greater uncertainty facing them. These two sources of variability have different consequences for both aggregate and individual welfare. Using data on two cohorts of American males, we find that a large component of the rise in inequality for less skilled workers is due to uncertainty. For skilled workers, the rise is less pronounced.

The Gender Wage Gap: Extent, Trends, and Explanations Francine D. Blau, Lawrence M. Kahn

The Gender Wage Gap: Extent, Trends, and Explanations

Author: Francine D. Blau, Lawrence M. Kahn
Publisher: Journal of Economic Literature
Date: 01/2016

Using PSID microdata over the 1980-2010, we provide new empirical evidence on the extent of and trends in the gender wage gap, which declined considerably over this period. By 2010, conventional human capital variables taken together explained little of the gender wage gap, while gender differences in occupation and industry continued to be important. Moreover, the gender pay gap declined much more slowly at the top of the wage distribution that at the middle or the bottom and by 2010 was noticeably higher at the top. We then survey the literature to identify what has been learned about the explanations for the gap. We conclude that many of the traditional explanations continue to have salience. Although human capital factors are now relatively unimportant in the aggregate, women’s work force interruptions and shorter hours remain significant in high skilled occupations, possibly due to compensating differentials. Gender differences in occupations and industries, as well as differences in gender roles and the gender division of labor remain important, and research based on experimental evidence strongly suggests that discrimination cannot be discounted. Psychological attributes or noncognitive skills comprise one of the newer explanations for gender differences in outcomes. Our effort to assess the quantitative evidence on the importance of these factors suggests that they account for a small to moderate portion of the gender pay gap, considerably smaller than say occupation and industry effects, though they appear to modestly contribute to these differences.