A causal model of the size distribution of family income: Some overlooked determinants and policy implications

Abstract

The causes and interaction of variables affecting income inequality are complex and very little empirical research has been attempted to explain or measure these interactions. This paper employs an eclectic approach to construct a causal multiequation model that specifies a system of interrelationships to examine both the direct and indirect effects which selected socioeconomic and demographic variables have upon the size distribution of family income. This procedure has advantages over single equation models in explaining the processes through which variables affect income inequality, allowing greater accuracy in estimating the impact that variables have upon inequality by measuring both their direct and indirect effects, and facilitating the identification of policy variables and how they may be expected to work through the system of interrelationships to narrow the differentials in family earnings.