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

Kitov, Ivan and Kitov, Oleg (2013): The dynamics of personal income distribution and inequality in the United States.

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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.

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