Rising Income Inequality and the Impact of r‐g$$ r\hbox{-} g $$ in the United States

This paper proposes a novel non-parametric strategy to test 'Piketty's third law,' postulating that a positive gap between the rate of return on capital <mml:math xmlns:mml="http://www.w3.org/1998/Math/MathML"><mml:mo>(</mml:mo> <mml:mi>r</mml:mi> <mml:mo>)</mml:mo></mml:math> and the economy's growth rate <mml:math xmlns:mml="http://www.w3.org/1998/Math/MathML"><mml:mo>(</mml:mo> <mml:mi>g</mml:mi> <mml:mo>)</mml:mo></mml:math> is associated with increased income inequality. The strategy is based on a decomposition of inequality changes over time that allows investigating the existence of a distributive effect of the <mml:math xmlns:mml="http://www.w3.org/1998/Math/MathML"><mml:mi>r</mml:mi> <mml:mo>-</mml:mo> <mml:mi>g</mml:mi></mml:math> gap and its relative importance with respect to other drivers of income inequality changes over time. Applying this strategy to data from the Panel Study of Income Dynamics on the last 50 years, we find support for the existence of Piketty's law in the evolution of income inequality in the United States. Whereas factors other than Piketty's income dynamics predominantly drive overall inequality, the <mml:math xmlns:mml="http://www.w3.org/1998/Math/MathML"><mml:mi>r</mml:mi> <mml:mo>-</mml:mo> <mml:mi>g</mml:mi></mml:math> gap accounts for approximately 10% of the trend in income inequality in the medium- and long-term.