Thursday, December 13, 2018

What's Really Going on with Income Inequality?

Let's face it, different studies really disagree on the magnitude of change in income and income inequality. Everyone quotes Piketty and Saez but even Piketty and Saez (+Zucman) report different results at different times using different methodologies. So how to separate the signal from the noise?
Wisdom starts with understanding the different datasets, methodologies and adjustments the different studies make. My old friend Stephen Rose does an admirable job summarizing these differences in a new publication from the Urban Institute. His conclusion on what these studies in aggregate are telling us:
"Researchers’ estimates of income inequality differ significantly because they use different units of analysis, definitions of income, adjustments for family size, capital income measures (if any), and adjustments for inflation. And some studies provide estimates of both post- and pretax incomes.
The results from at least four studies were compared for three measures of income change: change in median incomes, share of growth captured by the top 10 percent, and the changing income share of the top 1 percent. In all cases, Piketty and Saez (2003) were the outlier, showing the most increased inequality. And in all three measures of income change, Piketty, Saez, and Zucman (2018) found much less growth in income inequality than Piketty and Saez (2003).
This brief does a meta-analysis of different findings to estimate a “consensus” level of change. Applying Canberra Expert Group (2001, 2011) recommendations, I find that:
* instead of stagnating, real median incomes grew by just over 40 percent (1 percent a year) from 1979 to 2014;
* the top 10 percent of the income ladder captured 45 percent of income growth from 1979 to 2014; and
* the share of the top 1 percent grew 3.5 percentage points.
All studies find that income inequality rose after 1979, but common perceptions that all income gain went to the top 10 percent and middle class incomes stagnated (or even declined) are wrong."
I also recommend Timothy Taylor's writeup of Rose's study on the Conversable Economist.
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Studies of income inequality use different measures of income, and unsurprisingly, reach some different results. Steven J. Rose lays out som...

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