Inequality in an Equal Society

Abstract

AbstractA society in which everybody of a given age has the same income will exhibit substantial income and wealth inequality. We use this idea to empirically quantify inter‐cohort inequality – the share of observed inequality attributable to life‐cycle profiles of income and wealth – using data on male earnings and household wealth. We document that recent increases in income and wealth inequality in the USA and other developed countries are larger than observed rates would suggest due to favourable demographics. That is, while demographic change played a substantial role in the dynamics of income and wealth inequality until 1990, the stark increase in inequality in the USA and elsewhere ever since is despite not because of demographic change. Moreover, we show that there is important variation across countries in the level and trends in the extent of inequality that is due to lifecycle effects, and that taking this into account gives a more nuanced view of cross‐country comparisons.