Capital and Labor Income Pareto Exponents in the United States, 1916-2019

TL;DR

This paper estimates the Pareto exponents for capital and labor income in the U.S. from 1916 to 2019, revealing stable inequality levels over recent decades and highlighting the significant influence of wealthy agents on the economy.

Contribution

It introduces a new estimation method using tabulated income data to accurately measure income Pareto exponents over a century in the U.S.

Findings

Pareto exponents for capital and labor income are stable at around 1.2 and 2 since 1990s.

Top tail income inequality is higher than previously thought.

Wealthy agents have twice the impact on the economy compared to earlier estimates.

Abstract

Accurately estimating income Pareto exponents is challenging due to limitations in data availability and the applicability of statistical methods. Using tabulated summaries of incomes from tax authorities and a recent estimation method, we estimate income Pareto exponents in U.S. for 1916-2019. We find that during the past three decades, the capital and labor income Pareto exponents have been stable at around 1.2 and 2. Our findings suggest that the top tail income and wealth inequality is higher and wealthy agents have twice as large an impact on the aggregate economy than previously thought but there is no clear trend post-1985.