Policy Debate: What accounts for recent increases in income inequality?

Income inequality in the United States has risen over the past two decades. Its very persistence means that this trend will be difficult to change. Even recognizing the reversal when it does occur will be difficult enough, because statistical analysis cannot easily distinguish a decisive turnaround in inequality from a relatively brief pause in its rise. Because of this uncertainty, continued vigilance is required to find ways to help alleviate inequality, particularly to the extent that it can reduce hardship for those at the bottom of the economic ladder.
~ Economic Report of the President 1997

During the mid- to late-1990s, the United States enjoyed a strong economy with low levels of inflation and unemployment. The strong economy during this period, however, did not result in a steady rise in income for all Americans. In fact, for the last twenty-five years, the gap in income between rich and poor has increased. What accounts for the recent increases in income inequality in the United States?

There is no simple answer or single factor behind this increase in income inequality. In fact, some economists contend that what appears to be an increase in income inequality is a misinterpretation of the economic data. Other economists argue that, while the increase in income inequality is a reality, this phenomenon in itself is not necessarily bad as long as the standard of living for all improves. Those economists who do agree that income inequality has increased cite different and varying reasons for this phenomenon:

• changing technology,
• increased trade competition from low wage countries,
• increased immigration,
• declines in the real minimum wage, and
• declines in unionism.

Few issues resonate more with Americans than income and poverty. Hence, many of the policy solutions recently proposed attempt to solve, in one fashion or another, the income inequality puzzle.

Primary Resources and Data

• 1997 Economic Report of the President
  http://www.umsl.edu/services/govdocs/erp/1997/
  The 1997 Economic Report of the President provides data and economic analysis addressing possible reasons for the increase in income inequality. In particular, see Chapter 5, Inequality and Economic Rewards. The Economic Report of the President is available in two formats: as Hypertext Markup Language (HTML), viewable in your browser; or as Adobe Portable Document Format (PDF) files, viewable in Adobe Acrobat. You may download Acrobat Reader for free at http://www.adobe.com/prodindex/acrobat/readstep.html.

• U.S. Department of Commerce, Bureau of the Census
  http://www.census.gov/
  The Census Bureau provides current and historical data on income and poverty.

• Economic Statistics Briefing Room (ESBR)
  http://www.whitehouse.gov/fsbr/esbr.html
  The Whitehouse maintains the ESBR to provide easy access to current Federal economic indicators, including income and employment statistics. The ESBR provides links to information produced by a number of Federal agencies.

• World Bank, "PovertyNet"
  http://www.worldbank.org/poverty/inequal/data.htm
  At this web site, the World Bank maintains a set of links to sources of data and statistics on income inequality across countries. Data analysis tools are also available from links on this site.

• World Institute for Development Economics Research, "World Income Inequality Database"
  http://www.wider.unu.edu/wiid/wiid.htm
  The World Institute for Development Economics Research provide online access to data from the World Income Inequality Database through this website. This data is available in Microsoft Excel format. This data collection provides income inequality data for a very large collection of countries.

• Inequality.org
  http://www.inequality.org
  This web site, created by The Inequality Project, is designed to provide journalists and others with information on income inequality in The U.S. This site contains an extensive collection of online articles and links to other sites that deal with this issue.

• Jared Bernstein and Lawrence Mishel, "Has wage inequality stopped growing?"
  http://stats.bls.gov/opub/mlr/1997/12/art1full.pdf
  Jared Bernstein and Lawrence Mishel examine the trend in wage inequality in this December 1997 Monthly Labor Review article. In this study, they investigate some measurement problems associated with determining the extent of wage inequality.

• Gregory Acs and Megan Gallagher, "Income Inequality among America's Children"
  http://newfederalism.urban.org/html/series_b/b6/anf_b6.html
  This January 2000 Urban Institute report examines the incidence of income inequality in households with children present. Using data from the 1997 National Survey of America's Families, Acs and Gallagher find that children are twice as likely as adults to be poor. Child poverty is higher in single-parent households, and varies substantially across and within states.

Different Perspectives in the Debate

• National Center for Policy Analysis, "Income and Wages"
  http://www.ncpa.org/~ncpa/pd/economy/econ7.html
  This site contains summaries of recent studies that attempt to explain the sources of income inequality.

• Robert I. Lerman, "Is Earnings Inequality Really Increasing?"
  http://www.urban.org/publications/307029.html
  Robert I. Lerman, director of the Human Resources Policy Center at the Urban Institute and professor of economics at American University, disagrees that income inequality has increased over the last fifteen years. "When the whole earnings distribution is taken into account and the focus is on earnings per hour," Lerman writes, "U.S. earnings inequality has not risen since 1984."

• Thomas I. Palley, "The Role of Institutions and Policies in Creating High European Unemployment: The Evidence "
  http://www.levy.org/pubs/wp/336.pdf
  Thomas I. Palley, Assistant Director of Public Policy for the AFL-CIO, investigates the causes of European unemployment in this August 2001 Levy Institute working paper. He finds that the major causes of unemployment are macroeconomic in nature and are not the result of minimum wage laws or unionization. Palley argues that unions and minimum wage laws play an important role in reducing income inequality. (The Adobe Acrobat viewer plugin is required to view this document. You may download this viewer by clicking here.)

• Lawrence Mishel, "Rising Tides, Sinking Wages"
  http://www.prospect.org/web/page.ww?section=root&name=ViewPrint&articleId=4988
  Lawrence Mishel, Research Director of the Economic Policy Institute, argues that, first, we must recognize that income inequality is a problem and, second, that the solution lie in governmental policy initiatives to increase wages for all Americans. "The living standards of the broad middle class have remained in continuous decline despite the robust aggregate performance," Mishel states. "This recovery has demonstrated that improved competitiveness, productivity, and overall economic growth do not necessarily translate into improved incomes for most families." Rather, Mishel argues, government should adopt "policies to regenerate broad-based wage growth."

• Herbert Stein, "The Income Inequality Debate"
  http://www.aei.org/publications/pubID.6480,filter.all/pub_detail.asp
  Herbert Stein, Senior Fellow at the American Enterprise Institute and former Chairman of the Council of Economic Advisers during the Nixon administration, agrees that income inequality is a major problem in the United States, but the effects have greater social rather than economic ramifications. "[T]he gap between the very poor and the very rich is not the problem," Stein writes. "The problem that deserves urgent attention is the condition of a number of people who have incomes far below the national average and who also suffer from associated ills, such as illegitimacy, low education, persistent unemployment, and exposure to crime."

• Isabel V. Sawhill and Daniel P. McMurrer, "Economic Mobility in the United States"
  http://www.urban.org/publications/406722.html
  Isabel V. Sawhill and Daniel P. McMurrer examine the extent of U.S. economic mobility in this December 1996 online Urban Institute article. They note that the increase in income inequality would not be as troubling if it were accompanied by an increase in the amount of economic mobility. Sawhill and McMurrer examine a variety of studies of economic mobility and observe that the evidence suggests a substantial amount of economic mobility for individuals, but there is no compelling evidence that the amount of mobility has improved during recent decades.

• David Howell, "The Skills Myth"
  http://www.prospect.org/print/V5/18/howell-d.html
  A common explanation for the increase in income inequality is the decline in non-skilled jobs. David Howell, professor of economics at the New School for Social Research and a research associate at New York University, believes the answer is not this simple. "Almost everyone seems to believe that workers are losing income because they lack the proper skills," Howell contends, "But there's a better explanation: they've lost bargaining power."

• Gary Burtless, "Worsening American Income Inequality: Is World Trade to Blame?"
  http://www.brookings.edu/press/review/spring96/burtless.htm
  Gary Burtless, Senior Fellow at The Brookings Institution and former economist under the Carter administration at the U.S. Departments of Labor and Health, Education and Welfare, argues that free trade policies with the rest of the world have contributed to the increase in income inequality. Trade in itself is not the primary reason for this increase, however, nor is it necessarily the most significant. "Liberal trade with the newly industrializing countries of the world has certainly played a part in worsening the job prospects of America's unskilled workers," Burtless writes. "[Yet] international trade, it seems, has not been the decisive factor in the trend toward greater earnings inequality. Other developments have been at least as influential, if not more so." "Worsening American Income Inequality: Is World Trade to Blame?" originally appeared in The Brookings Review, Spring 1996 Vol. 14 No. 2. Pages 26-31. Only the print version contains tables and figures.

• Isaac Shapiro, "New IRS Data Show Income Inequality is Again on the Rise"
  http://www.cbpp.org/10-17-05inc.htm
  In this October 17, 2005 Center on Budget and Policy Priorities article, Isaac Shapiro discusses recent IRS data that indicate a growth in income inequality between 2002 and 2003. He observes that a household in the top 1% of the income distribution received an average increase of 8.5% in after-tax income. Individuals in the bottom 75% of the income distribution, on average, experienced a decline in after-tax income. Longer term trends are also presented that suggest an increase in income inequality over the past two decades. Recent changes in after-tax income are attributed to changes in the tax code that provided substantially larger tax cuts to high-income households.

• Paul Krugman, "Graduates vs. Oligarchs"
  http://www.truthout.org/cgi-bin/artman/exec/view.cgi/48/17995
  In this February 27, 2006 article, Paul Krugman critiques Ben Bernanke's arguments that rising inequality is caused by a growing skill premium. Krugman summarizes statistics that indicate that growing income inequality is primarily the result of the very rapid growth of income of those at the very top of the income distribution. He notes that, between 1972 and 2001, "income at the 99th percentile rose 87 percent; income at the 99.9th percentile rose 181 percent; and income at the 99.99th percentile rose 497 percent." Krugman expresses concern over the growth of a small, but very wealthy, elite in U.S. society.

• Ian Dew-Becker and Robert J. Gordon, "Where did the Productivity Growth Go? Inflation Dynamics and the Distribution of Income"
  http://faculty-web.at.northwestern.edu/economics/gordon/BPEA_Meetingdraft_Complete_051118.pdf
  In this December 2005 article, Ian Dew-Becker and Robert J. Gordon examine income growth during the period from 1966-2001. They find that only the top 10% of the income distribution experienced a rate of wage growth at or above the rate of productivity growth during this period. They suggests that the growing disparity in income is the result of increasingly high rents paid to CEOs, athletes, and performers, combined with stagnating wages for in the bottom 90% of the income distribution (due to deunionization, global competition, and immigration). (The Adobe Acrobat viewer plugin is required to view this document. You may download this viewer by clicking here.)

• Gary S. Becker, "Is the Increased Earnings Inequality among Americans Bad?"
  http://www.becker-posner-blog.com/archives/2006/04/is_the_increase.html
  In this April 23, 2006 blog posting, Gary S. Becker argues that rising income inequality is not a problem as long as poverty continues to decline and that wages are based on market forces. He argues that much of the increase in income inequality is the result of a growing reward to higher levels of education, combined with a greater wage penalty for high school dropouts. Becker notes that, while overall income inequality increased during the past 25 years, income inequality by race and gender has been declining (particularly for college graduates) during this period. He argues that increased income inequality caused by a higher rate of return to education is desirable because it encourages more individuals to acquire higher education, therevy increasing the overall rate of economic growth. He suggests that efforts should be devoted to encouraging individuals from low-income households to acquire more education.

• Richard Posner, "Why Rising Income Inequality in the United States Should Be a Nonissue"
  http://www.becker-posner-blog.com/archives/2006/04/why_rising_inco.html
  In this April 23, 2006 response to Gary Becker's blog posting, Richard Posner agrees with Becker's analysis and suggests that "as society becomes more competitive and more meritocratic, income inequality is likely to rise simply as a consequence of the underlying inequality... between people that is due to differences in IQ, energy, health, social skills, character, ambition, physical attractiveness, talent, and luck." Posner argues that income inequality is not a very serious problem in U.S. society since the average level of income is relatively high and is growing over time.

• Yuliya Demyanyk, "Time for Predatory Lending Laws?"
  http://stlouisfed.org/publications/re/2006/d/pages/income_inequality.html
  In this October, 2006 article in Regional Economist (published by the Federal Reserve Bank of St. Louis), Yuliya Demyanyk argues that states are more likely to adopt predatory lending laws when the level of income inequality within the state is above average for the U.S. as a whole. She raises concerns over the growth of income inequality in the U.S. since "it can cause slower economic growth, an increase in crime, worse overall well-being, poor educational outcomes and even higher death rates, the same way a higher level of poverty (absolute, not relative) would."