Pareto’s law of income distribution: evidence for Germany, the United Kingdom, and the United States

Abstract

We analyze three sets of income data: the US Panel Study of Income Dynamics
(PSID), the British Household Panel Survey (BHPS), and the German Socio-
Economic Panel (GSOEP). It is shown that the empirical income distribution is consistent
with a two-parameter lognormal function for the low-middle income group
(97%-99% of the population), and with a Pareto or power law function for the high
income group (1%-3% of the population). This mixture of two qualitatively different
analytical distributions seems stable over the years covered by our data sets,
although their parameters significantly change in time. It is also found that the
probability density of income growth rates almost has the form of an exponential
function.