The Rise of the Working Rich, Market Imperfections, and Income Inequality

This paper attempts to explain the recent substantial increase in income inequality, which is largely due to the explosion of the very top labor incomes (i.e., the rise of the working rich), in the rich countries especially the United States. This paper points to technological progress and (less importantly to) capital accumulation as the main cause of the (universal) increase in income inequality starting from the late 1970s; also, this paper points to the differences in the nature of demand as the main cause of the large cross-country differences. This paper will build a simple general equilibrium model to formalize this idea and to provide some new insights into the analysis of income inequality