The Effects of Competing Definitions of Income on Trends in U.S. Income Inequality
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Income is an important indicator of a person’s quality of life and a critical variable in social science research. However, little such research makes explicit and justifies its definition of income, and many social scientific results might change if the definition of income were to change. This article makes two contributions to this unresolved situation. First, it demonstrates the empirical consequences of using various income definitions which expand the concept beyond the default wages-only model, reviewing the conceptual costs and benefits along the way. It does so with respect to one particularly important topic, trends in U.S. income inequality, finding that the use of most possible income definitions which go beyond the wages-only model result in increased inequality trends. Second, the paper highlights significant inconsistencies in two important expanded definitions of income and recommends its own definition: compensation for market activity, net of the costs of producing it.
Slides here.