Immigration and Top Income Inequality

Draft coming soon

Top income inequality rose sharply in the U.S. over the last 35 years. A majority of that can be accounted for by right-skewed salary income. Many hypotheses have been proposed to explain this phenomenon, including creative destruction by entrepreneurs and a decline in top tax rates. This paper proposes an additional channel through which highly skilled immigrants change the underlying talent distribution and thus raise top income inequality. This channel is supported by the empirical observation that immigrants are increasingly represented among top income earners. To quantify the magnitude of this channel, I construct a general equilibrium model with heterogeneous agents and polarized immigration flow as observed in the data. Based on my preliminary calculation, the change in immigration patterns can explain 10 – 15% of the observed rise in top income inequality in the U.S.