Pareto and Piketty: The Macroeconomics of Top Income and Wealth Inequality

S ince the early 2000s, research by Thomas Piketty and Emmanuel Saez (and their coauthors, including Anthony Atkinson and Gabriel Zucman) has revolutionized our understanding of income and wealth inequality. The crucial point of departure for this revolution is the extensive data they have used, based largely on administrative tax records. Piketty’s (2014) Capital in the Twenty-First Century is the latest contribution in this line of work, especially with the new data it provides on capital and wealth. Piketty also proposes a framework for describing the underlying forces that affect inequality and wealth, and unlikely as it seems, a bit of algebra that plays an important role in Piketty’s book has even been seen on T-shirts: r > g. In this paper, I highlight some key empirical facts from this research and describe how they relate to macroeconomics and to economic theory more generally. One of the key links between data and theory is the Pareto distribution. The paper explains simple mechanisms that give rise to Pareto distributions for income and wealth and considers the economic forces that influence top inequality over time and across countries. To organize what follows, recall that GDP can be written as the sum of “labor income” and “capital income.” This split highlights several kinds of inequality that we can explore. In particular, there is “within-inequality” for each of these components: How much inequality is there within labor income? How much inequality within capital income—or more appropriately here, among the wealth itself for which capital income is just the annual flow? There is also “between-inequality” related to the Pareto and Piketty: The Macroeconomics of Top Income and Wealth Inequality