Evolution of the personal income distribution in the USA: High incomes

TL;DR

This paper models the evolution of the high-income segment of the US personal income distribution, predicting how income levels and age-related distribution change over time using a microeconomic approach.

Contribution

It introduces a microeconomic model that simulates the entire income distribution evolution, including the Pareto threshold, based on income production and dissipation processes.

Findings

Model accurately predicts income distribution dependence on work experience and GDP growth.

Forecasts show younger individuals will have fewer high incomes in the future.

Power law distribution at high incomes may explain socialist countries' low performance.

Abstract

The personal income distribution (PID) above the Pareto threshold is studied and modeled. A microeconomic model is proposed to simulate the PID and its evolution below and above the Pareto income threshold. The model balances processes of income production and dissipation for any person above 15 years of age. The model accurately predicts the observed dependence of the number of people reaching the Pareto threshold on work experience and the functional dependence of the relationship on the per capita real GDP growth for the period from 1994 to 2002. Predictions of the income distribution depending on age are given for past and future. In future, relatively less rich people are observed in the younger age groups and the peak of the relative number shifts to older ages with time. The effect of the power law distribution extending itself to very high incomes is speculated to be the cause of low performance of socialist countries.