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Demographic Variables and Income Inequality

Publication Abstract

Lam, David. "Demographic Variables and Income Inequality." PSC Research Report No. 97-385. April 1997.

Demographic variables are frequently cited as important determinants of the distribution of income. The range of issues included in such discussions is broad and often imprecise. They range from issues that might be considered directly related to economic welfare, such as the tendency for increases in population size to lower wages and raise returns to land and capital, to issues that might be considered mostly empirical nuisances, such as the potential confusion in comparing income distributions of populations with different age structures. Increased attention has been given to the effect of demographic variables on inequality as researchers have documented a substantial increase in recent decades in income inequality among both families and full-time males in the United States and other high-income countries. Potential demographic explanations include effects of changing age structure, increases in female labor force participation, changing family structure, and changes in marital sorting. This paper surveys a variety of areas in which demographic variables may play an important role in the distribution of income.

The first issue analyzed in this survey is the relationship between age structure and inequality. In addition to its direct importance, the case of age structure is instructive because it demonstrates the need to carefully model the effects of compositional changes when working with measures of dispersion. While compositional effects on measures of dispersion are considerably more complex than compositional effects on means, they often lend themselves to useful analytical decompositions.

Many researchers argue that households, rather than individuals, should be used as the basis for analysis of the distribution of income. Using the household as the unit of analysis introduces a host of demographic issues relating to marriage, fertility, and household living arrangements. Section 3 of this survey focuses on the large literature that has analyzed the effects on the distribution of income among married couples of marital sorting and the joint labor supply behavior of husbands and wives. Section 4 extends the analysis beyond married couples to the household, analyzing issues related to the choice of recipient unit and the treatment of family size.

Another important topic with broad applications is the issue of changing population composition due to differential fertility, migration, and mortality by income classes. Section 5 analyzes the effects of differential fertility across income classes on the distribution of income. The analysis includes consideration of the role of intergenerational mobility across income classes. Section 6 discusses the attention given to the effects of population growth on relative wages by the classical economists and considers theoretical issues in the link between changes in factor supplies and changes in the distribution of income. Empirical evidence on the link between population growth, wages, and inequality in historical and modern populations is briefly surveyed. Section 7 discusses the substantial changes in wage inequality observed in the United States in recent decades, and considers evidence on the role of demographic variables, especially age structure, in those changes. Most research suggests that changes in labor supply associated with the baby boom played a substantial role in some of the changes in relative wages observed in the 1970s and 1980s. The empirical evidence also demonstrates, however, that demographic variables are considerably less important than changes in the structure of labor demand.

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