The double power law in income distribution: Explanations and evidence
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.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Milton Friedman, 1953. "Choice, Chance, and the Personal Distribution of Income," Journal of Political Economy, University of Chicago Press, vol. 61, pages 277.
- Costas Meghir & Luigi Pistaferri, 2001.
"Income variance dynamics and heterogenity,"
IFS Working Papers
W01/07, Institute for Fiscal Studies.
- Robert J. Hodrick & Edward Prescott, 1981.
"Post-War U.S. Business Cycles: An Empirical Investigation,"
451, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Hodrick, Robert J & Prescott, Edward C, 1997. "Postwar U.S. Business Cycles: An Empirical Investigation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(1), pages 1-16, February.
- Giesen, Kristian & Zimmermann, Arndt & Suedekum, Jens, 2010. "The size distribution across all cities - Double Pareto lognormal strikes," Journal of Urban Economics, Elsevier, vol. 68(2), pages 129-137, September.
- Lee A. Lillard & Robert J. Willis, 1976.
"Dynamic Aspects of Earnings Mobility,"
NBER Working Papers
0150, National Bureau of Economic Research, Inc.
- Xavier Gabaix & Rustam Ibragimov, 2011.
"Rank - 1 / 2: A Simple Way to Improve the OLS Estimation of Tail Exponents,"
Journal of Business & Economic Statistics,
Taylor & Francis Journals, vol. 29(1), pages 24-39, January.
- Xavier Gabaix & Rustam Ibragimov, 2007. "Rank-1/2: A Simple Way to Improve the OLS Estimation of Tail Exponents," NBER Technical Working Papers 0342, National Bureau of Economic Research, Inc.
- Singh, S K & Maddala, G S, 1976. "A Function for Size Distribution of Incomes," Econometrica, Econometric Society, vol. 44(5), pages 963-70, September.
- Lillard, Lee A & Weiss, Yoram, 1979. "Components of Variation in Panel Earnings Data: American Scientists, 1960-70," Econometrica, Econometric Society, vol. 47(2), pages 437-54, March.
- McDonald, James B, 1984. "Some Generalized Functions for the Size Distribution of Income," Econometrica, Econometric Society, vol. 52(3), pages 647-63, May.
- Dagum, Camilo, 1980. "Inequality Measures between Income Distributions with Applications," Econometrica, Econometric Society, vol. 48(7), pages 1791-1803, November.
- MaCurdy, Thomas E., 1982. "The use of time series processes to model the error structure of earnings in a longitudinal data analysis," Journal of Econometrics, Elsevier, vol. 18(1), pages 83-114, January.
- Xavier Gabaix, 1999. "Zipf's Law for Cities: An Explanation," The Quarterly Journal of Economics, Oxford University Press, vol. 114(3), pages 739-767.
- Jacob Mincer, 1958. "Investment in Human Capital and Personal Income Distribution," Journal of Political Economy, University of Chicago Press, vol. 66, pages 281.
- Salem, A B Z & Mount, T D, 1974. "A Convenient Descriptive Model of Income Distribution: The Gamma Density," Econometrica, Econometric Society, vol. 42(6), pages 1115-27, November.
- Silver, Jonathan & Slud, Eric & Takamoto, Keiji, 2002. "Statistical Equilibrium Wealth Distributions in an Exchange Economy with Stochastic Preferences," Journal of Economic Theory, Elsevier, vol. 106(2), pages 417-435, October.
- Javier Alvarez & Martin Browning & Mette Ejrnæs, 2002.
"Modelling income processes with lots of heterogeneity,"
10th International Conference on Panel Data, Berlin, July 5-6, 2002
D2-3, International Conferences on Panel Data.
- Martin Browning & Mette Ejrnæs & Javier Alvarez, 2010. "Modelling Income Processes with Lots of Heterogeneity," Review of Economic Studies, Oxford University Press, vol. 77(4), pages 1353-1381.
- Javier Alvarez & Martin Browning & Mette Ejrnæs, 2001. "Modelling Income Processes with lots of heterogeneity," CAM Working Papers 2002-01, University of Copenhagen. Department of Economics. Centre for Applied Microeconometrics.
- Martin Browning & Mette Ejrnaes, 2006. "Modelling income processes with lots of heterogeneity," Economics Series Working Papers 285, University of Oxford, Department of Economics.
- Benoit Mandelbrot, 1963. "New Methods in Statistical Economics," Journal of Political Economy, University of Chicago Press, vol. 71, pages 421.
- Reed, William J., 2003. "The Pareto law of incomes—an explanation and an extension," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 319(C), pages 469-486.
- Majumder, Amita & Chakravarty, Satya Ranjan, 1990. "Distribution of Personal Income: Development of a New Model and Its Application to U.S. Income Data," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 5(2), pages 189-96, April-Jun.
- Xavier Gabaix, 2008.
"Power Laws in Economics and Finance,"
NBER Working Papers
14299, National Bureau of Economic Research, Inc.
- Jacob A. Mincer, 1974. "Introduction to "Schooling, Experience, and Earnings"," NBER Chapters, in: Schooling, Experience, and Earnings, pages 1-4 National Bureau of Economic Research, Inc.
- Alexis Toda, 2010. "Existence of a statistical equilibrium for an economy with endogenous offer sets," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 45(3), pages 379-415, December.
- Reed, William J., 2001. "The Pareto, Zipf and other power laws," Economics Letters, Elsevier, vol. 74(1), pages 15-19, December.
- Irle, Albrecht & Milaković, Mishael & Alfarano, Simone & Kauschke, Jonas, 2008.
"A Statistical Equilibrium Model of Competitive Firms,"
Economics Working Papers
2008,10, Christian-Albrechts-University of Kiel, Department of Economics.
- Alfarano, Simone & Milaković, Mishael & Irle, Albrecht & Kauschke, Jonas, 2012. "A statistical equilibrium model of competitive firms," Journal of Economic Dynamics and Control, Elsevier, vol. 36(1), pages 136-149.
- Foley Duncan K., 1994. "A Statistical Equilibrium Theory of Markets," Journal of Economic Theory, Elsevier, vol. 62(2), pages 321-345, April.
- Vuong, Quang H, 1989. "Likelihood Ratio Tests for Model Selection and Non-nested Hypotheses," Econometrica, Econometric Society, vol. 57(2), pages 307-33, March.
- Jacob A. Mincer, 1974. "Schooling, Experience, and Earnings," NBER Books, National Bureau of Economic Research, Inc, number minc74-1, June.
When requesting a correction, please mention this item's handle: RePEc:eee:jeborg:v:84:y:2012:i:1:p:364-381. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.