Pareto Models, Top Incomes and Recent Trends in UK Income Inequality

29 Pages Posted: 28 Mar 2017

See all articles by Stephen P. Jenkins

Stephen P. Jenkins

London School of Economics & Political Science (LSE) - Department of Social Policy and Administration; Institute for the Study of Labor (IZA); University of Essex - Institute for Social and Economic Research (ISER)

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Date Written: April 2017

Abstract

I determine UK income inequality levels and trends by combining inequality estimates from tax return data (for the ‘rich’) and household survey data (for the ‘non‐rich’), taking advantage of the better coverage of top incomes in tax return data (which I demonstrate) and creating income variables in the survey data with the same definitions as in the tax data to enhance comparability. For top income recipients, I estimate inequality and mean income by fitting Pareto models to the tax data, examining specification issues in depth, notably whether to use Pareto I or Pareto II (generalized Pareto) models, and the choice of income threshold above which the Pareto models apply. The preferred specification is a Pareto II model with a threshold set at the 99th or 95th percentile (depending on year). Conclusions about aggregate UK inequality trends since the mid‐1990s are robust to the way in which tax data are employed. The Gini coefficient for individual gross income rose by around 7% or 8% between 1996/7 and 2007/8, with most of the increase occurring after 2003/4. The corresponding estimate based wholly on the survey data is around −5%.

Suggested Citation

Jenkins, Stephen P., Pareto Models, Top Incomes and Recent Trends in UK Income Inequality (April 2017). Economica, Vol. 84, Issue 334, pp. 261-289, 2017, Available at SSRN: https://ssrn.com/abstract=2941826 or http://dx.doi.org/10.1111/ecca.12217

Stephen P. Jenkins (Contact Author)

London School of Economics & Political Science (LSE) - Department of Social Policy and Administration ( email )

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Institute for the Study of Labor (IZA)

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University of Essex - Institute for Social and Economic Research (ISER) ( email )

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