Capital and Labor Income Pareto Exponents across Time and Space

TL;DR

This paper analyzes the distribution of capital and labor income across multiple countries and years, revealing that capital income is generally more unequal and that the two income sources' inequality measures are nearly uncorrelated.

Contribution

It provides the first comprehensive empirical estimation of income Pareto exponents across many countries and years, and introduces a theoretical model explaining the observed inequality patterns.

Findings

Capital income is more unequally distributed than labor income.

The Pareto exponents for capital and labor income are nearly uncorrelated.

A theoretical model explains the differences in income inequality patterns.

Abstract

We estimate capital and labor income Pareto exponents across 475 country-year observations that span 52 countries over half a century (1967-2018). We document two stylized facts: (i) capital income is more unequally distributed than labor income in the tail; namely, the capital exponent (1-3, median 1.46) is smaller than labor (2-5, median 3.35), and (ii) capital and labor exponents are nearly uncorrelated. To explain these findings, we build an incomplete market model with job ladders and capital income risk that gives rise to a capital income Pareto exponent smaller than but nearly unrelated to the labor exponent. Our results suggest the importance of distinguishing income and wealth inequality.