Research Highlights Podcast
July 16, 2025
Measuring US income inequality
Matthieu Gomez discusses income inequality and why it has increased in recent years.
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US household income has significantly, but much of that growth seems to be at the very top of the distribution. Just how much inequality has increased and why it is growing is a topic of debate among economists. Part of the challenge lies in a seemingly basic question: what exactly counts as income?
In a paper in the Journal of Economic Perspectives, author disentangles the notions of income that economists frequently use and helps pinpoint what's really behind the rise in inequality.
Gomez recently spoke with Tyler Smith about defining income, recent patterns in income inequality, and the best tools for reducing inequality.
The edited highlights of that conversation are below, and the full interview can be heard using the podcast player.
Tyler Smith: What are the main ways that economists use the term income?
Matthieu Gomez: Economists usually split it in two different ways. We distinguish between labor income on one side and capital income on the other side. I think people have a good understanding of what labor income is, like wages, salaries, bonuses, etc. Capital income by contrast is a bit more complicated, and it's basically everything that people earn just from owning things. You can think of businesses, real estate, or financial assets. If you think about businesses or stock ownership that would be dividends. It would also include interest from bonds or rents from the housing stock you own. I think a lot of the disagreement about the correct definition of income is really about how to define capital income.
Smith: What are some of the ways that economists approach trying to capture capital income?
Gomez: Historically, a lot of people started by documenting inequality in wages. More recently, people have started to measure a notion of income that also includes capital income. It sounds pretty simple. It's the income you earn from owning assets. But in practice, measuring capital income is pretty messy and controversial. In the paper, I go through different notions of capital income. I start from the most minimal definition of capital income, which is basically what I call distributed income. Distributed income only counts the cash flows that you receive. It would basically be dividends or rents that you get from housing. The core issue with this definition is that capital income doesn't always show up as cash. For example, if you own stock in a company that reinvests all of its profits every year without paying any dividend, then you don't receive any money today, but your wealth is still growing. So the question is should that count as income? In the national accounts, the concept of capital income goes beyond just the distributed income like dividends and interest. It also includes all these retained earnings—the profits that firms earn but reinvest rather than distribute. That's basically the notion of capital income that a lot of recent papers are focused on and what I call the paper factor income.
Smith: Factor income doesn't necessarily capture everything either. What are some other ways that economists measure capital income?
Gomez: The concept of factor income also has conceptual difficulties. I think the first thing to realize is that retained earnings is an accounting concept, so the exact measure of retained earnings depends on exactly what the accounting standards are. Sometimes they fluctuate over time. For instance, the national accounts started treating things like software expense and R&D as investment rather than cost. Mechanically, this means that once the national accounts categorized these expenses as investments, that increases measured profits and makes capital income look bigger, even if nothing about the actual business changes. Another well-known notion of income in the literature is the notion of Haig–Simons income. Basically, it also starts from the notion of distributed income—the cash that people receive. But then, instead of including retained earnings, what this definition includes is all changes in wealth due to changes in asset prices. Typically, that's going to give a notion of capital income that is much bigger than factor income. The big advantage of this type of notion, Haig–Simons income, is that it treats all asset value increases equally, whether your wealth grows because your company reinvests profits or because the land you own becomes more valuable or because suddenly the company becomes more productive. It's all counted through the change in asset prices. The key drawback is that not all capital gains reflect real increases in future cash flows. For example, sometimes prices go up simply because interest rates fall, not because cash flows are expected to increase in the future. When that happens, your asset is suddenly worth way more on paper, but the actual cash flow it generates hasn't changed at all.
Smith: How confident can we be that there really has been increasing inequality in recent decades?
Gomez: I think there's some debate on the extent to which, if you look at the top 1 percent post-tax income, whether it has increased or not. However, I think the evidence is very clear when you focus on the very top, say, above the top 1 percent. No matter what kind of income concepts you use, all researchers have found that income at the very top has increased on a pre-tax basis. That's very consistent with what we see in our society when we look at the wealthiest people in the United States; the wealth that they have is simply unmatched by the richest people in the 1980s. It’s also something we see when we look at billionaire rankings. I think at the very top, the evidence is very hard to dispute.
Smith: There's a concern that capital is going to continue to take home more and more of the economic pie in the future, and that the labor share of income will decrease. Did you find any evidence for this worry?
Gomez: No. Actually, a common misunderstanding that people have is that a lot of the rise in inequality is driven by the fact that labor share is declining. It turns out that even though capital income has increased relative to labor income at the aggregate level, this accounts for very little of the increase in income inequality. Instead, most of the rise in income inequality is really driven by a rise of inequality among workers and among capitalists, so within labor inequality and capital inequality. One way to summarize that is that the problem is not really a shift of income earned by workers as opposed to capitalists. It's more that some workers and some capitalists are pulling far ahead of others in their own group.
When you look at people at the very top, they tend to be people that own businesses. Today, they are able to accumulate much more wealth than the top entrepreneurs in the 1960s or 1970s.
Matthieu Gomez
Smith: What's the relative contribution of capital income inequality and labor income inequality to overall income inequality?
Gomez: It depends on the periods you're looking at and also the top percentile you're looking at. If you look at the top 1 percent, most of the rise in inequality in the 80s and 90s is basically driven by a rise in labor income inequality. In contrast, after 2000, all of the rise in the top 1 percent income share is driven by an increase in capital income inequality. Now, if you look at the top 0.01 percent, then the rise in labor income inequality accounts for very little of it across the entire time period. From 1980 to 2020, almost all of it is due to a rise in capital income inequality.
Smith: What do you think the main driver of that capital income inequality is?
Gomez: When you look at people at the very top, they tend to be people that own businesses. Today, they are able to accumulate much more wealth than the top entrepreneurs in the 1960s or 1970s. If you look at the numbers, one thing that really jumps out is that since 1980, the average income share of the top 0.01 percent has been multiplied by four. That's a huge shift in a pre-tax income basis. How can we explain a fourfold increase of the top entrepreneurs’ income over that time period? Basically, it’s the fact that the income of these top entrepreneurs grows at a faster rate than people before. In particular, if you look at entrepreneurs at the top over about 25 years, you can convert this fourfold increase to an increase in the growth rate of about 6 percentage points per year. That may not sound like a lot, but that's basically the power of compounding. If you grow at a faster rate by 6 percentage points every year, after 25 years, you become much richer than other people.
Smith: What do you think your work suggests we might want to do in order to reduce inequality?
Gomez: I think a lot of the debate has focused on the fiscal side, i.e., changing the tax rates. For instance, people are debating closing loopholes for passthrough businesses, taxing retained earnings a little bit more systematically, or revisiting how we treat capital gains. The concern with this type of policy is that there's a classic tradeoff between inequality and growth. The more you tax very productive entrepreneurs, the less they potentially work for or start new businesses.
Something that is less discussed is everything that we could do to improve the market structure. A lot of the rise in inequality is basically driven by the fact that the return on capital has increased—the productivity of machines has increased even though interest rates are declining—which basically means that more profits go into the pockets of entrepreneurs. When a small number of firms consistently earn high returns and new competitors struggle to enter, I think that points to a breakdown in competitive dynamics. So I think there's a lot of value in revisiting policies that promote entry and real competition, whether that's rethinking antitrust, removing bottlenecks, or lowering entry barriers to start new businesses. I think these kinds of changes can jointly decrease inequality and also boost economic efficiency. A more competitive economy is better for almost everyone.
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“Macro Perspectives on Income Inequality” appears in the Spring 2025 issue of the Journal of Economic Perspectives. Music in the audio is by .