Population Aging, Cohort Replacement, and the Evolution of Income Inequality in the United States

This paper examines the impact of demographic change on household income inequality in the United States, both historically and prospectively. We emphasize the distinct roles of population aging and cohort replacement and develop a methodology to study their joint compositional effect on income inequality. In the process, we also develop a novel methodology to aggregate subgroup Gini coefficients into a population-level Gini coefficient based on the principle of maximum entropy. We document that cohorts born later in the 20th century embody higher levels of income inequality compared to earlier-born cohorts, and we argue that most of the increase in inequality over the past two decades can be accounted for by demographic change. Moreover, we predict that demographic change over the next two decades will lead to further increase of the Gini coefficient by one to six percentage points