Modelling income distribution using the log Student’s t distribution: New evidence for European Union countries

Abstract

Income distribution remains a crucial topic in economic analysis, among other reasons, due to the increase in inequality in recent years, as one of the effects of the Great Recession. In this context, proposing parametric models that represent the full distribution through a small number of parameters arouses great interest as an instrument for economic analysis. This paper studies the ability of log Student’s t distribution to model the size distribution of income due to its potential to reproduce the effect of a mode around low-incomes as well as its precision in capturing the degree of kurtosis of empirical distributions. These characteristics make the log-t an ideal analysis tool, for instance, for exploring the effects of anti-poverty policies. The model has been fitted to income data for the EU25 and for several years. The conclusion is that the log Student’s t distribution offers the best fit in the vast majority of cases.