Rising Family Income Inequality: The Importance of Sorting

The distribution of family income reflects the distribution of personal income and the composition of families. We develop a non-parametric measure of the impact that changes in family income relationships have on the distribution of family income. Using data from Annual Social and Economic Supplement (the March files) of the Current Population Survey (CPS) (1968-2003), we find that changes in "income sorting" account for more than half of the increase in family income inequality in the United States over the last three decades. Furthermore, income sorting accounts for an even larger share of the growing gap between middle-income and low-income families. Our results demonstrate that understanding inequality of economic well-being requires going beyond labor earnings and other income sources to examine the composition and work behavior of families.