Income Distribution

Distribution was long treated as a microeconomic concern that macroeconomics could safely bracket off. The representative-agent framework made it literally invisible: one household stood for all households, so the distribution of income among them did not enter the model.

The 2008 crisis, the post-2010 expansion that left median wages flat, and the development of HANK models changed that. Distribution is now firmly inside mainstream macro -- not as a normative add-on, but as a variable that affects aggregate dynamics.

Income distribution describes how total income is divided across individuals, households, or factor types -- labor versus capital. Summary measures like the Gini coefficient compress the full distribution into one number, which makes comparisons easy but hides structure. The Lorenz curve shows the full distribution geometrically.

The macro relevance runs through marginal propensities to consume (MPC). Lower-income households spend a larger share of each additional dollar of income than higher-income households do. When income concentrates at the top, the aggregate MPC falls, reducing the fiscal multiplier and the effectiveness of policies that work through consumption.

The U.S. labor share of GDP fell from roughly 66% in 1980 to around 58% by 2020. That shift -- from labor income to capital income -- was distributed unevenly and left median household income far below what aggregate growth would predict.