Unpacking transatlantic income inequality

This paper uses newly harmonized survey and register data on incomes and labor market outcomes as the basis for consistent comparisons of inequalities across 17 North American and European countries over the period 1995–2021. We examine trends in disposable income inequality in the working-age population, defined as persons aged 25 to 60, as well as its component parts of market income inequality and redistribution through government tax and transfer systems. We adjust incomes to allow for changes in education, population aging, and household structure in each country. We test for convergence across countries in demographically-adjusted disposable income inequality, along with market income inequality and redistribution. There is strong evidence of convergence over time in disposable income inequality across the 17 countries, despite a divergence in the dispersion of market income inequality driven by very heterogeneous trends for hours of work and the number of workers in households across countries. Consistent with this we find a strong convergence across countries in the dispersion of our measure of redistribution. There are reductions over time in inequality-reducing redistribution in the Nordic countries and increases in some other European and North American countries, with the net effect being more similarity across countries, a lower average level of redistribution, and a higher average level of disposable income inequality. These trends are being driven by the bottom 95% of the income distribution. Our results are robust to a variety of alternative specifications including the measure of inequality, trimming of data outliers, and sample period.