The Distribution of Income

Any summary measure of the degree of inequality in the size distribution of income is sensitive to the choice of both the demographic unit of analysis and ,the income concept. Thus, intertempora1 variation in a summary statistic will be affected not only by economic factors, but also by changes in either unit composition or sources of income. Recently, the post-World War II stability of the aggregate distribution of income has been attributed to this type of phenomenon--economic forces promoting greater equality, some have alleged, have b~en offset by demographic changes that produce greater inequality. This paper uses microeconomic data to account for the distributional impact of changes in demographic composition and of increases in government transfer payments between 1965 and 1972. We have decomposed the population into twelve demographic subgroups and used the Gini coefficient to measure income inequality. The pretransfer and posttransfer distributions of income for each of these groups are analyzed. Three major findings emerge. First, in this period the pretransfer and posttransfer distributions became more unequal for the entire population and for most of the demographic subgroups. Second, about one-half of the increase in the aggregate index of inequality cannot be accounted for by demogr~phic change. Hence, hypotheses that suggest that demographic change has offset a trend toward greater income equality are not supported by the data, at least within the 1965-1972 time period. Third, the government cash transfer system dramatically decreases inequality within certain subgroups, but it has only a modest effect on the aggregate degree of inequality. DEMOGRAPHIC CHANGE, GOVERNMENT TRANSFERS, AND THE DISTRIBUTION OF INCOME