Inequality of Opportunity and the Probability of Being Very Rich or Very Poor

Abstract

This paper models the effects of individuals' background variables on the chances they end up in the extremes of the income distribution. Taking high-quality Australian panel data, we show that factors like the education of one's father have a much stronger impact on belonging to the top 1 per cent than they have on the conditional mean. Similarly, individuals from immigrant families are more likely to belong to both the left and the right tails of income distribution. Identifying the drivers of extreme incomes is important as individuals with very high incomes exert disproportionate political power, while those with very low incomes may drive prejudice and perceptions of disadvantage.