The Distribution of Wealth in America (1983–2013)

This chapter covers a period of rising wealth followed by abrupt decline. Between 1983 and 2007, real median household wealth rose by 70 percent, from $80,000 to $136,000 (in 2013 dollars). This increase disappeared completely, however, in the Great Recession; by 2010, median wealth had dropped by 40 percent, to $82,000, and it did not improve by 2013. The typical household of 2013 was no wealthier than the typical household of 1983. In addition, the distribution became markedly more unequal during the Great Recession; the richest 10 percent experienced a smaller reduction of 10 percent. For families in the middle, the most important asset was their home, but in 2013, fewer of them were homeowners and home values dropped for those who were. The declines in home ownership and home values accounted for most of the loss in wealth for middle-wealth families as a group.

The Effects of the Movement of Women into the Workforce on Income Trends

This chapter presents evidence suggesting that the movement of women into the workforce, combined with changing trends in marriage, divorce, and life expectancy, may have contributed to rising household inequality. Over the past four decades, women’s labor force participation has risen, especially in skilled occupations and particularly for mothers. Women’s educational attainment has also risen, facilitating entry into professional careers in record numbers. As more women went to school and work, declining marriage rates, changing selection into marriage, and assortative mating may have contributed to a rise in high dual-income households. On the other hand, high divorce rates and higher life expectancy may have led to more single-female led low-income households. While the empirical evidence is mixed, results are generally consistent with the conclusion that women’s professional progress may have indirectly and unintentionally contributed to rising inequality.

Improving Economic Opportunity in the United States

This chapter examines barriers to economic opportunity and mobility in the United States and offers near- and long-term policies to reduce these barriers. These barriers include high levels of income inequality, unequal access to educational opportunities, residential segregation by income, inadequate investments in children and certain areas, and disparities between economic conditions in rural relative to metro areas. In the near-term, running tight labor markets, infrastructure investment, direct job creation, healthcare and other work supports, and apprenticeships could reduce these barriers. Longer term solutions invoke policy interventions targeting inequality, inadequate housing, income and wage stagnation, nutritional and health support, the criminal justice system, and educational access. It is also crucial to avoid policies that keep opportunity barriers in place, such as reducing the provision of public healthcare, regressive tax cuts, and budget cuts to programs that help low- and moderate-income families.

The Economics of Inequality in High-Wage Economies

The advent of information technology opened a window of investment opportunities that has exceeded the supply of properly trained talent while trade with low-wage economies, low-skilled immigration, trade deficits, and aging demographics have relieved constraints to low-skilled labor and risk-averse savings. As the economy devotes more resources to raising the productivity of talent, low-skilled productivity and wage growth have slowed. With a constrained supply of risk-reducing talent allocated to more productive endeavors, an unconstrained supply of risk-averse savings has lowered interest rates. With improbable innovation needed to capitalize on the value of information, high returns to success have fortunately motivated increased risk-taking, despite the declining productivity of innovators. Proponents of income redistribution have concluded that high returns to success and slowing productivity growth, despite low interest rates, are evidence of rising cronyism, notwithstanding extensive evidence to the contrary. This chapter provides an alternative explanation.

Income and Wealth Inequality

According to the author of this chapter, the first job of economists is to enlighten the debate on income and wealth inequality by providing transparent measures that the broad public can understand. Once inequality is appropriately measured, we can then understand the drivers of inequality trends and the effects of public policy on inequality. Drawing on the author’s previously published works, this chapter presents evidence on US income and wealth inequality. It presents series for top income and wealth shares and for the distribution of economic growth by income groups. The author discusses the mechanisms behind the evolution of US income and wealth inequality from historical and comparative perspectives and analyzes the role of public policy and, in particular, taxation in the evolution of inequality.

Introduction and Summary

Few topics are more certain to generate a lively debate among any group of individuals than the causes and consequences of income inequality. Economists are prone to similar, although more reasoned and empirically based, debates. This book is a curated collection of essays that explores a wide range of viewpoints about income inequality in the United States. Neither income nor income inequality is easily measured, and, consequently, economists have different views about what is the best measure. Economists also offer differing explanations for the sources of income inequality and its ultimate consequences, leading to opposing policy implications. Finally, focusing on the United States adds yet another layer of complexity. Americans have unusually high incomes and unusually high income inequality.

Explaining Race and Gender Wage Gaps

This chapter uses data from the American Community Survey (ACS) and the National Longitudinal Survey of Youth 1979 cohort (NLSY79) to calculate wage differentials. Measured wage gaps shrink and are often eliminated when accounting for a variety of factors, suggesting that discrimination may not be the primary driver of earnings differentials. When examining NLSY79 data, differences in schooling, scores on the Armed Forces Qualification Test, and lifetime work experience explain virtually all the difference in hourly pay between minority and white men. For women, controlling for these variables results in a wage premium for minority women. This does not rule out the possibility that the variables controlled for do not themselves reflect past employer discrimination; however, these effects should not be confused with current employer discrimination. The data also suggest that the gender wage gap is driven by different choices made by men and women and not gender discrimination.

Top Income Shares and the Difficulties of Using Tax Data

This chapter reconsiders income methods of estimating of inequality using US tax data. It presents a new approach that accounts for the effects of important social changes, tax reforms, technical tax issues, and the 40 percent of income missing from tax returns. Results suggest much smaller increases in top 1 percent shares of pre-tax income. After accounting for taxes and transfers, top 1 percent shares changed little since 1962. This resulted from substantial increases in transfers and increased overall progressivity of the tax system. While effective tax rates for the top 1 percent show little trend, they declined for the bottom 50 percent. Rather than stagnating, per capita real incomes of the bottom half of the population increased over time. Rather than increasing and capturing most economic growth, incomes of those starting at the top decreased while those starting with low incomes received most of the growth.

Income Growth and Its Distribution from Eisenhower to Obama

Creating comparable Current Population Survey (CPS) based income series from 1967 through 2016 coupled with decennial Census data for 1959, this chapter traces the effect of government taxes and transfers in this first survey-based look at income and its distribution from the Eisenhower through the Obama administrations. The dramatic decline in the middle class’s market income (measured as the median American tax unit or the mean value of the middle quintile of American tax units) began in 1969. However, this decline was more than offset by income from government tax and transfer programs—especially in-kind transfers. Conventional measures of median income and income inequality that exclude the market value of in-kind transfers and focus on tax units rather than the household size-adjusted income of all Americans will substantially understate the success of government policies in offsetting the stagnation of median market income growth and the rise in market income inequality since 1969.

The Ins and Outs of Measuring Income Inequality in the United States

Although measuring income inequality seems straightforward and uncontroversial, methodological issues greatly affect findings. This chapter shows that changes in real median income between 1979 and 2014 across six studies varied from negative 8 percent to positive 51 percent. Furthermore, the share of growth going to the top ten percent during these years in four studies ranged from 31 percent to 100 percent. The first choice that researchers make is choosing a dataset or linked datasets. This choice affects the income sharing unit, be it households, families, individuals, or tax units. The next choice is the definition of income, with the starting point being cash market income only—earnings, dividends, rents, interest payments, or business profits. This total can be expanded by including government cash benefits, employer benefits, the rental value of home ownership, and government and financial services that people don’t pay for. Even after the income concept is chosen, income can be presented as adjusted for family size and either before or after taxes. Finally, adjusting for inflation to change nominal incomes into inflation-adjusted incomes can be performed in a variety of ways.