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Pareto's Law of Income Distribution: Evidence for Germany, the United Kingdom, and the United States

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  • F. Clementi
  • M. Gallegati

Abstract

We analyze three sets of income data: the US Panel Study of Income Dynamics PSID), the British Household Panel Survey (BHPS), and the German Socio-Economic Panel (GSOEP). It is shown that the empirical income distribution is consistent with a two-parameter lognormal function for the low-middle income group (97%-99% of the population), and with a Pareto or power law function for the high income group (1%-3% of the population). This mixture of two qualitatively different analytical distributions seems stable over the years covered by our data sets, although their parameters significantly change in time. It is also found that the probability density of income growth rates almost has the form of an exponential function.

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File URL: http://arxiv.org/pdf/physics/0504217
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Paper provided by arXiv.org in its series Papers with number physics/0504217.

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Date of creation: Apr 2005
Date of revision: Mar 2006
Publication status: Published in Chatterjee, A., Yarlagadda, S., and Chakrabarti B. K. (2005). Econophysics of Wealth Distributions. Milan: Springer-Verlag Italia. (pp. 3-14)
Handle: RePEc:arx:papers:physics/0504217

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References

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  1. John Sutton, 2001. "The Variance of Firm Growth Rates: The Scaling Puzzle," STICERD - Economics of Industry Papers, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE 27, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
  2. Kyungsik Kim & Seong-Min Yoon, 2004. "Power Law Distributions in Korean Household Incomes," Papers cond-mat/0403161, arXiv.org.
  3. F. Clementi & M. Gallegati, 2004. "Power Law Tails in the Italian Personal Income Distribution," Papers cond-mat/0408067, arXiv.org.
  4. Nunes Amaral, Luís A & Buldyrev, Sergey V & Havlin, Shlomo & Maass, Philipp & Salinger, Michael A & Eugene Stanley, H & Stanley, Michael H.R, 1997. "Scaling behavior in economics: The problem of quantifying company growth," Physica A: Statistical Mechanics and its Applications, Elsevier, Elsevier, vol. 244(1), pages 1-24.
  5. Youngki Lee & Luis A. N. Amaral & David Canning & Martin Meyer & H. Eugene Stanley, 1998. "Universal features in the growth dynamics of complex organizations," Papers cond-mat/9804100, arXiv.org.
  6. T. Di Matteo & T. Aste & S. T. Hyde, 2003. "Exchanges in complex networks: income and wealth distributions," Papers cond-mat/0310544, arXiv.org.
  7. Geoff Willis & Juergen Mimkes, 2004. "Evidence for the Independence of Waged and Unwaged Income, Evidence for Boltzmann Distributions in Waged Income, and the Outlines of a Coherent Theory of Income Distribution," Microeconomics, EconWPA 0408001, EconWPA.
  8. Giulio Bottazzi & Angelo Secchi, 2002. "On the Laplace Distribution of Firms Growth Rates," LEM Papers Series, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy 2002/20, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
  9. L. A. N. Amaral & S. V. Buldyrev & S. Havlin & H. Leschhorn & P. Maass & M. A. Salinger & H. E. Stanley & M. H. R. Stanley, 1997. "Scaling behavior in economics: I. Empirical results for company growth," Papers cond-mat/9702082, arXiv.org.
  10. Adrian Dragulescu & Victor M. Yakovenko, 2001. "Exponential and power-law probability distributions of wealth and income in the United Kingdom and the United States," Papers cond-mat/0103544, arXiv.org, revised Mar 2001.
  11. Kaniadakis, G., 2001. "Non-linear kinetics underlying generalized statistics," Physica A: Statistical Mechanics and its Applications, Elsevier, Elsevier, vol. 296(3), pages 405-425.
  12. Adrian A. Dragulescu, 2003. "Applications of physics to economics and finance: Money, income, wealth, and the stock market," Papers cond-mat/0307341, arXiv.org, revised Jul 2003.
  13. Makoto Nirei & Wataru Souma, 2007. "A Two Factor Model Of Income Distribution Dynamics," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 53(3), pages 440-459, 09.
  14. Bottazzi, Giulio & Secchi, Angelo, 2003. "A stochastic model of firm growth," Physica A: Statistical Mechanics and its Applications, Elsevier, Elsevier, vol. 324(1), pages 213-219.
  15. Levy, Moshe, 2003. "Are rich people smarter?," Journal of Economic Theory, Elsevier, Elsevier, vol. 110(1), pages 42-64, May.
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Citations

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Cited by:
  1. Victor M. Yakovenko & J. Barkley Rosser, 2009. "Colloquium: Statistical mechanics of money, wealth, and income," Papers 0905.1518, arXiv.org, revised Dec 2009.
  2. Matteo Barigozzi & Lucia Alessi & Marco Capasso & Giorgio Fagiolo, 2008. "The Distribution of Consumption-Expenditure Budget Shares. Evidence from Italian Households," LEM Papers Series, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy 2008/18, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
  3. Frank A Cowell, 2011. "Inequality among the Wealthy," CASE Papers, Centre for Analysis of Social Exclusion, LSE /150, Centre for Analysis of Social Exclusion, LSE.
  4. Barigozzi, Matteo & Alessi, Lucia & Capasso, Marco & Fagiolo, Giorgio, 2009. "The distribution of households consumption-expenditure budget shares," Working Paper Series, European Central Bank 1061, European Central Bank.
  5. Fabio Fiorillo & Agnese Sacchi, 2012. "The Political Economy of the Standard Level of Services: The Role of Income Distribution," CESifo Working Paper Series 3696, CESifo Group Munich.
  6. Lin Ma, 2014. "Globalization And Top Income Shares," Working Papers, Center for Economic Studies, U.S. Census Bureau 14-07, Center for Economic Studies, U.S. Census Bureau.
  7. Alberto Russo, 2009. "On the evolution of the Italian bank branch distribution," Economics Bulletin, AccessEcon, vol. 29(3), pages 2063-2078.
  8. L. Crosato & P. Ganugi, 2007. "Statistical regularity of firm size distribution: the Pareto IV and truncated Yule for Italian SCI manufacturing," Statistical Methods and Applications, Springer, Springer, vol. 16(1), pages 85-115, June.
  9. Giorgio Fagiolo & Lucia Alessi & Matteo Barigozzi & Marco Capasso, 2010. "On the distributional properties of household consumption expenditures: the case of Italy," Empirical Economics, Springer, Springer, vol. 38(3), pages 717-741, June.
  10. Chakrabarti, Anindya S. & Chakrabarti, Bikas K., 2010. "Statistical theories of income and wealth distribution," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy, vol. 4(4), pages 1-31.
  11. Yi Wen, 2009. "When does heterogeneity matter?," Working Papers, Federal Reserve Bank of St. Louis 2009-024, Federal Reserve Bank of St. Louis.
  12. Pierpaolo Andriani & Bill McKelvey, 2007. "Beyond Gaussian averages: redirecting international business and management research toward extreme events and power laws," Journal of International Business Studies, Palgrave Macmillan, vol. 38(7), pages 1212-1230, December.
  13. Drechsler, Jörg & Kiesl, Hans, 2014. "Beat the heap - an imputation strategy for valid inferences from rounded income data," IAB Discussion Paper 201402, Institut für Arbeitsmarkt- und Berufsforschung (IAB), Nürnberg [Institute for Employment Research, Nuremberg, Germany].

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