The double power law in income distribution: Explanations and evidence

Conditional on education and experience, the distribution of personal labor income appears to be double Pareto, a distribution that obeys the power law in both the upper and lower tails. In particular, the error term of the classical Mincer equation appears to be Laplace, or double exponential. This “double power law” is not rejected by goodness-of-fit tests. I compare two diffusion processes (one mean-reverting, the other unit root) with a stationary double Pareto distribution as a model of income dynamics. The data favors the mean-reverting process for modeling income dynamics over the unit root process.

► We find a double power law behavior in income distribution.
► Residuals of Mincer wage equation comes from Laplace distribution.
► We compare two income dynamics model that generates the Laplace distribution.
► The mean-reverting process is favored over the unit root process.