US Income Inequality Data Are Deeply Flawed

For some years now, Phil Magness and myself have been working on improving the existing income inequality for the United States prior to World War II. One of the most important point we make concerns why we, as economists, ought to take data assumptions seriously. One of the most tenacious stylized facts (that we do not exactly dispute) is that income inequality in the United States has followed a U-curve trajectory over the 20th century. Income inequality was high in the early 1920s and descended gradually until the 1960s and then started to pick up again. That stylized fact comes from the work of Thomas Piketty and Emmanuel Saez with their data work (first image illustrated below). However, from the work of Auten and Splinter and Mechling et al. , we know that the increase post-1960 as measured by Piketty is somewhat overstated (see second image illustrated below). While the criticism suggest a milder post-1960 increase, me and Phil Magness believe that the real action is on the left side of the U-curve (pre-1960).