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Pareto models, top incomes, and recent trends in UK income inequality

Jenkins, Stephen P. (2017) Pareto models, top incomes, and recent trends in UK income inequality. Economica, 84 (334). pp. 261-289. ISSN 0013-0427

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Identification Number: 10.1111/ecca.12217

Abstract

I determine UK income inequality levels and trends by combining inequality estimates from tax return data (for the ‘rich’) and household survey data (for the ‘non-rich’), taking advantage of the better coverage of top incomes in tax return data (which I demonstrate) and creating income variables in the survey data with the same definitions as in the tax data to enhance comparability. For top income recipients, I estimate inequality and mean income by fitting Pareto models to the tax data, examining specification issues in depth, notably whether to use Pareto I or Pareto II (generalised Pareto) models, and the choice of income threshold above which the Pareto models apply. The preferred specification is a Pareto II model with a threshold set at the 99th or 95th percentile (depending on year). Conclusions about aggregate UK inequality trends since the mid-1990s are robust to the way in which tax data are employed. The Gini coefficient for gross individual income rose by around 7% or 8% between 1996/97 and 2007/08, with most of the increase occurring after 2003/04. The corresponding estimate based wholly on the survey data is around –5%.

Item Type: Article
Official URL: http://onlinelibrary.wiley.com/
Additional Information: © 2016 The London School of Economics and Political Science
Divisions: Social Policy
Subjects: H Social Sciences > HB Economic Theory
JEL classification: C - Mathematical and Quantitative Methods > C4 - Econometric and Statistical Methods: Special Topics > C46 - Econometric and Statistical Methods: Specific Distributions
C - Mathematical and Quantitative Methods > C8 - Data Collection and Data Estimation Methodology; Computer Programs > C81 - Methodology for Collecting, Estimating, and Organizing Microeconomic Data
D - Microeconomics > D3 - Distribution > D31 - Personal Income, Wealth, and Their Distributions
Sets: Departments > Social Policy
Date Deposited: 09 Sep 2016 12:46
Last Modified: 20 Jun 2020 02:19
Projects: ES/L009153/1, DP150102409, ES/L009153/1
Funders: Economic and Social Research Council, Australian Research Council, Economic and Social Research Council
URI: http://eprints.lse.ac.uk/id/eprint/67667

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