Top Incomes, Rising Inequality, and Welfare

By Kevin Lansing and Agnieszka Markiewicz

http://d.repec.org/n?u=RePEc:san:cdmawp:1304&r=dge

This paper develops a general-equilibrium production model of skill-biased technological change that approximates the dramatic upward shift in the share of total income going to the top decile of U.S. households since 1980. Under realistic assumptions, we show that all agents in the economy can benefit from the technology change, provided that the observed rise in U.S. redistributive transfers over this period is taken into account. We show that the increase in capital’s share of total income and the presence of capital-entrepreneurial skill complementarity are two key features that help support the wages of ordinary workers as the new technology diffuses.

Interesting paper about a topic much discussed in mainstream media. But, for once, it uses theory and modelling to understand the rise of top incomes, provides an explanation of where it may come from, offers a welfare evaluation for different groups of the population and gives encouraging policy implications. This is how the public debate about top incomes should be.