Capital and Labor Income Pareto Exponents Across Time and Space

We estimate capital and labor income Pareto exponents across 475 country-year observations that span 52 countries over half a century (1967-2018). 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.

Automated summary

The study found that capital income is more unequally distributed than labor income in the tail, and the exponents of the two are nearly uncorrelated. By building an incomplete market model, these findings can be explained, emphasizing the importance of distinguishing income and wealth inequality.