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The double power law in income distribution: Explanations and evidence

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  • Toda, Alexis Akira

Abstract

Conditional on education and experience, the distribution of personal labor income appears to be double Pareto, a distribution that obeys the power law in both the upper and lower tails. In particular, the error term of the classical Mincer equation appears to be Laplace, or double exponential. This “double power law” is not rejected by goodness-of-fit tests. I compare two diffusion processes (one mean-reverting, the other unit root) with a stationary double Pareto distribution as a model of income dynamics. The data favors the mean-reverting process for modeling income dynamics over the unit root process.

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  • Toda, Alexis Akira, 2012. "The double power law in income distribution: Explanations and evidence," Journal of Economic Behavior & Organization, Elsevier, vol. 84(1), pages 364-381.
    • Handle: RePEc:eee:jeborg:v:84:y:2012:i:1:p:364-381
    DOI: 10.1016/j.jebo.2012.04.012
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    More about this item

    Keywords

    Anderson–Darling test; Diffusion processes; Fokker–Planck equation; Kolmogorov–Smirnov test; Laplace distribution; Mincer equation; Power law;
    All these keywords.

    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • C65 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Miscellaneous Mathematical Tools
    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • J3 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs

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