TITLE: Rising Household Income Inequality in California: The Importance of Sorting

AUTHORS: Deborah Reed and Maria Cancian

ABSTRACT: The income gap between rich and poor households has increased dramatically in California. This study investigates the causes of growth in household income inequality in the state. We divide the determinants of growing household income inequality into two components. The first component is change in the distributions of the main sources of household income: male earnings, female earnings, and capital income. The second component is change in household "income sorting." Income sorting describes the process of combining individual incomes together to create household income. The study finds that changes in the distribution of male earnings have been more important that changes in the distribution of any other source of income. Changes in income sorting also contributed substantially to the growth in income inequality. The results suggest that rising household income inequality is substantially determined in the labor market. The income sorting results make clear that form understanding trends in household income inequality, we need to look beyond trends in individual income. A policy that alters the distribution of individual income may have a very different impact on the distribution of household income.

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