HOW MISLEADING ARE INCOME DISTRIBUTIONS?

Abstract

Starting from the proposition that economic welfare is better measured by the capitalized value of expected future income at age 18 than by income at a point of time, the present paper explores the bias introduced in comparison of earnings and income distributions.The earning distribution chosen for study is that for males in 1959 in the United States. It is shown that earnings distributions are biased and therfore can be considered highly misleading in most comparisons unless the comparison involves two groups with identical age distributions and identical distributions of earnings over the working life of earners.Further, a most striking effect can be discerned in comparing the earnings to the present value distributions by educational level. As one moves up the educational ladder, the within‐group distribution of lifetime income becomes more and more equal, in sharp contrast to the findings for the distribution of earnings at a point in time.The result are sufficiently interesting and striking to warrant further studies of distributions of present value of lifetime expected earnings (and income).