Rising Household Income Inequality: The Importance of Sorting

Deborah S. Reed, Public Policy Institute of California (PPIC)

Household income reflects the distribution of personal income and the composition of households. Theoretical and empirical research suggests that changes in family structure and work behavior have contributed to rising household income inequality. Demographic and labor market changes have also changed the relationship between personal and household income. We develop a non-parametric measure of the impact of changes in household income relationships on the distribution of household income. Using data from the March CPS (1968-2003), we find that were it not for changes in "income sorting," household income inequality would have fallen over the last three decades.