Capital and Labor Income Pareto Exponents Across Time and Space

Abstract

We estimate capital and labor income Pareto exponents across 475 countryyear observations that span 52 countries over half a century .We document two stylized facts: (i) capital income is more unequally distributed than labor income in the tail; namely, the capital exponent (1-3, median 1.46) is smaller than labor (2-5, median 3.35), and (ii) capital and labor exponents are nearly uncorrelated. To explain these findings, we build an incomplete market model with job ladders and capital income risk that gives rise to a capital income Pareto exponent smaller than but nearly unrelated to the labor exponent. Our results suggest the importance of distinguishing income and wealth inequality.

Consumption, Wealth, and Income Inequality: A Tale of Tails

“…Our empirical results are consistent with, extend and strengthen, prior research that explores the relative concentration of a subset of the four distributions (e.g., Dynan et al (2004); Krueger and Perri (2006); Aguiar and Bils (2015); Toda and Walsh (2015); Blundell et al (2016); Saez and Zucman (2016); Straub (2019); Lee et al (2022); Garner et al (2022); Buda et al (2022); Meyer and Sullivan (2023)) or the relative importance of type-and scale-dependent returns to capital (e.g., Fagereng et al (2020); Bach et al (2020); Xavier (2021); Balloch and Richers (2021)). Methodologically, our estimation applies and builds upon the techniques of Clauset et al (2009); Vermeulen (2016), and our theoretical analysis leverages the continuous-time techniques developed by Moll (2014); Gabaix et al (2016); Achdou et al (2022).…”

“…15 Using tabulated income data from the IRS, Lee et al (2022) compute estimates of the capital and labor income Pareto tails comparable to those we obtained in the PSID, equal to 1.2 and 2.0, respectively. Updated series from Piketty and Saez (2003) indicate that the Pareto tail coefficient of individual wage income falls within the range of 2.0 to 2.1.…”

Pareto extrapolation: An analytical framework for studying tail inequality

“…33 de Vries and Toda (2021) estimate capital and labor income Pareto exponents across 475 country‐year observations and document that capital income (hence wealth) inequality is higher than labor income inequality (median Pareto exponents 1.46 and 3.35, respectively) and the two inequalities are uncorrelated. …”