Economic Growth and Income Inequality

The central theme of this paper is the character and causes of long-term changes in the personal distribution of income. Does inequality in the distribution of income increase or decrease in the course of a country's economic growth? What factors determine the secular level and trends of income inequalities? These are broad questions in a field of study that has been plagued by looseness in definitions, unusual scarcity of data, and pressures of strongly held opinions. While we cannot completely avoid the resulting difficulties, it may help to specify the characteristics of the size-of-income distributions that we want to examine and the movements of which we want to explain. Five specifications may be listed. First, the units for which incomes are recorded and grouped should be family-expenditure units, properly adjusted for the number of persons in each-rather than income recipients for whom the relations between receipt and use of income can be widely diverse. Second, the distribution should be complete, i.e., should cover all units in a country rather than a segment either at the upper or lower tail. Third, if possible we should segregate the units whose main income earners are either still in the learning or already in the retired stages of their life cycle-to avoid complicating the picture by including incomes not associated with full-time, full-fledged participation in economic activity. Fourth, income should be defined as it is now for national income in this country, i.e., received by individuals, including income in kind, before and after direct taxes, excluding capital gains. Fifth, the units should be grouped by secular levels of income, free of cyclical and other transient disturbances.