Inequality in the long run

The distribution of income and wealth is a widely discussed and controversial topic. Do the dynamics of private capital accumulation inevitably lead to the concentration of income and wealth in ever fewer hands, as Karl Marx believed in the 19th century? Or do the balancing forces of growth, competition, and technological progress lead in later stages of development to reduced inequality and greater harmony among the classes, as Simon Kuznets thought in the 20th century? What do we know about how income and wealth have evolved since the 18th century, and what lessons can we derive from that knowledge for the century now under way? For a long time, social science research on the distribution of income and wealth was based on a relatively limited set of firmly established facts together with a wide variety of purely theoretical speculations. In this Review, we take stock of recent progress that has been made in this area. We present a number of basic facts regarding the longrun evolution of income and wealth inequality in advanced countries. We then discuss possible interpretations and lessons for the future.

Data and Methods

Modern data collection on the distribution of income begins in the 1950s with the work of Kuznets (1). Shortly after having established the first national income time series for the United States, Kuznets set himself to construct time series of income distribution. He used tabulated income data coming from income tax returns—available since the creation of the U.S. federal income tax in 1913—and statistical interpolation techniques based upon Pareto laws (power laws) to estimate incomes for the top decile and percentile of the U.S. population. By dividing by national income, Kuznets obtained series of U.S. top income shares for 1913 to 1948.

In the 1960s and 1970s, similar methods using inheritance tax records were developed to construct top wealth shares (2, 3). Inheritance declarations and probate records dating back to the 18th and 19th centuries were also exploited by a growing number of scholars in France, the United States, and the United Kingdom (4–7).

.Such data collection efforts on income and wealth dynamics have started to become more systematic and broader in scope and time only since the 2000s. This is due first to the advent of information technologies, which allow much larger volumes of data to be collected and processed than were accessible to previous generations of scholars. The second reason for this time gap in using tax data is that most modern research on inequality has focused on microsurvey data that became available in the 1960s and 1970s in many countries. Survey data, however, cannot measure top percentile incomes accurately because of the small sample size and top coding. The top percentile plays a very large role in the evolution of inequality that we will discuss. Survey data also have a much shorter time span—typically a few decades—than tax data that often cover a century or more.

– Thomas Piketty, Emmanuel Saez

Read the full paper here.