This figure is particularly elucidating. As noted earlier, the increase in inequality has largely stemmed from the increase in the dispersion of market outcomes, or what I called above the primary distribution of income (before taxes and transfers kick in).
The figure shows “Lorenz Curves”—pictures of how income is distributed across the distribution of households for different sources of income. Since the curve plots cumulative income against cumulative households (hh), ranked from poorest to richest, if every hh had the same income, the curve would hug the 45-degree line (20% of hh’s would have 20% of income, 30% would have 30%, etc.). The more space between the 45-degree line and the income lines, the greater the dispersion (the area therein is the Gini coefficient, if you’re still with me).
The figures show that income dispersion has increased for each income type—the 2007 line is further from the 45-degree line in each figure. But there’s something else going on here too.
The CBO also finds that there’s been a shift in the composition of hh income from labor, to capital and business income. Since, as you can see, these latter sources are more unequal income than labor income, that shift in the composition of income is another reason for the increase in inequality.
The first factor—increased concentration within each income source over time—accounts for about 80% of the growth in the Gini index (the inequality measure in this study), 1979-2007. The rest is due to the composition shift toward more unequal income sources.
I’ll try to write about what I think this all means throughout the week.