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

Jenkins, Stephen P. (2016) Pareto models, top incomes, and recent trends in UK income inequality. Economica . ISSN 0013-0427 (In Press)

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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
Library of Congress subject classification:	H Social Sciences > HB Economic Theory
Journal of Economic Literature Classification System:	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
URL:	http://eprints.lse.ac.uk/67667/

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