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The dynamics of personal income distribution and inequality in the United States

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  • Kitov, Ivan
  • Kitov, Oleg

Abstract

We model the evolution of age-dependent personal income distribution and inequality as expressed by the Gini ratio. In our framework, inequality is an emergent property of a theoretical model we develop for the dynamics of individual incomes. The model relates the evolution of personal income to the individual’s capability to earn money, the size of her work instrument, her work experience and aggregate output growth. Our model is calibrated to the single-year population cohorts as well as the personal incomes data in 10- and 5- year age bins available from March Current Population Survey (CPS). We predict the dynamics of personal incomes for every single person in the working-age population in the USA between 1930 and 2011. The model output is then aggregated to construct annual age-dependent and overall personal income distributions (PID) and to compute the Gini ratios. The latter are predicted very accurately - up to 3 decimal places. We show that Gini for people with income is approximately constant since 1930, which is confirmed empirically. Because of the increasing proportion of people with income between 1947 and 1999, the overall Gini reveals a tendency to decline slightly with time. The age-dependent Gini ratios have different trends. For example, the group between 55 and 64 years of age does not demonstrate any decline in the Gini ratio since 2000. In the youngest age group (from 15 to 24 years), however, the level of income inequality increases with time. We also find that in the latter cohort the average income decreases relatively to the age group with the highest mean income. Consequently, each year it is becoming progressively harder for young people to earn a proportional share of the overall income.

Suggested Citation

  • Kitov, Ivan & Kitov, Oleg, 2013. "The dynamics of personal income distribution and inequality in the United States," MPRA Paper 48649, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:48649
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    References listed on IDEAS

    as
    1. Kitov, Ivan, 2008. "Modeling the evolution of age-dependent Gini coefficient for personal incomes in the U.S. between 1967 and 2005," MPRA Paper 10107, University Library of Munich, Germany.
    2. Richard Burkhauser & Shuaizhang Feng & Stephen Jenkins & Jeff Larrimore, 2011. "Estimating trends in US income inequality using the Current Population Survey: the importance of controlling for censoring," The Journal of Economic Inequality, Springer;Society for the Study of Economic Inequality, vol. 9(3), pages 393-415, September.
    3. A. B. Atkinson, 2005. "Top incomes in the UK over the 20th century," Journal of the Royal Statistical Society Series A, Royal Statistical Society, vol. 168(2), pages 325-343.
    4. Atkinson, A B, 1997. "Bringing Income Distribution in from the Cold," Economic Journal, Royal Economic Society, vol. 107(441), pages 297-321, March.
    5. Anthony B. Atkinson & Thomas Piketty & Emmanuel Saez, 2011. "Top Incomes in the Long Run of History," Journal of Economic Literature, American Economic Association, vol. 49(1), pages 3-71, March.
    6. 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.
    7. Jeff Larrimore & Richard V. Burkhauser & Shuaizhang Feng & Laura Zayatz, 2008. "Consistent Cell Means for Topcoded Incomes in the Public Use March CPS (1976-2007)," NBER Working Papers 13941, National Bureau of Economic Research, Inc.
    8. Ivan Kitov, 2005. "Evolution of the personal income distribution in the USA: High incomes," Economics Bulletin, AccessEcon, vol. 28(12), pages 1.
    9. 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 1115-1127, November.
    10. Richard V. Burkhauser & Shuaizhang Feng & Stephen P. Jenkins & Jeff Larrimore, 2012. "Recent Trends in Top Income Shares in the United States: Reconciling Estimates from March CPS and IRS Tax Return Data," The Review of Economics and Statistics, MIT Press, vol. 94(2), pages 371-388, May.
    11. Ivan O. Kitov, 2005. "A model for microeconomic and macroeconomic development," Working Papers 05, ECINEQ, Society for the Study of Economic Inequality.
    12. Jacob Mincer, 1958. "Investment in Human Capital and Personal Income Distribution," Journal of Political Economy, University of Chicago Press, vol. 66, pages 281-281.
    13. Wataru Souma & Makoto Nirei, 2005. "Empirical study and model of personal income," Papers physics/0505173, arXiv.org.
    14. Jacob A. Mincer, 1974. "Schooling, Experience, and Earnings," NBER Books, National Bureau of Economic Research, Inc, number minc74-1, January.
    15. Kitov, Ivan, 2007. "Comparison of personal income inequality estimates based on data from the IRS and Census Bureau," MPRA Paper 5372, University Library of Munich, Germany.
    16. Thomas Piketty, 2003. "Income Inequality in France, 1901-1998," Journal of Political Economy, University of Chicago Press, vol. 111(5), pages 1004-1042, October.
    17. Ivan O. Kitov, 2005. "Modelling the overall personal income distribution in the USA from 1994 to 2002," Working Papers 07, ECINEQ, Society for the Study of Economic Inequality.
    18. Ivan O. Kitov, 2006. "Modelling the age-dependent personal income distribution in the USA," Working Papers 17, ECINEQ, Society for the Study of Economic Inequality.
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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. The worthless efforts of the Board of Governors of the Federal Reserve System and investment opportunities
      by Ivan Kitov in Economics as Classical Mechanics on 2016-05-29 23:28:00
    2. The French economy needs ”helicopter money” to boost labor force growth and avoid deflation
      by Ivan Kitov in Economics as Classical Mechanics on 2017-01-14 02:46:00

    Citations

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    Cited by:

    1. Ivan Kitov & Oleg Kitov, 2013. "Does Banque de France control inflation and unemployment?," Papers 1311.1097, arXiv.org.
    2. Kitov, Ivan & Kitov, Oleg, 2015. "Gender income disparity in the USA: analysis and dynamic modelling," MPRA Paper 67146, University Library of Munich, Germany.
    3. Kitov, Ivan & Kitov, Oleg, 2015. "How universal is the law of income distribution? Cross country comparison," MPRA Paper 67145, University Library of Munich, Germany.

    More about this item

    Keywords

    income dynamics; income distribution; inequality; age profiles; Gini; United States.;

    JEL classification:

    • D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation: Models and Applications
    • J1 - Labor and Demographic Economics - - Demographic Economics
    • O12 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development

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