Inequality Dynamics in USA

The Economist (15/06/06) has a special report on income inequality in the USA. They describe trends and a little about hypothesized drivers of these trends, but little about the consquences. They write:

Americans do not go in for envy. The gap between rich and poor is bigger than in any other advanced country, but most people are unconcerned. Whereas Europeans fret about the way the economic pie is divided, Americans want to join the rich, not soak them. Eight out of ten, more than anywhere else, believe that though you may start poor, if you work hard, you can make pots of money. It is a central part of the American Dream.

The political consensus, therefore, has sought to pursue economic growth rather than the redistribution of income, in keeping with John Kennedy’s adage that “a rising tide lifts all boats.” The tide has been rising fast recently. Thanks to a jump in productivity growth after 1995, America’s economy has outpaced other rich countries’ for a decade. Its workers now produce over 30% more each hour they work than ten years ago. In the late 1990s everybody shared in this boom. Though incomes were rising fastest at the top, all workers’ wages far outpaced inflation.

But after 2000 something changed. The pace of productivity growth has been rising again, but now it seems to be lifting fewer boats. After you adjust for inflation, the wages of the typical American worker—the one at the very middle of the income distribution—have risen less than 1% since 2000. In the previous five years, they rose over 6%. If you take into account the value of employee benefits, such as health care, the contrast is a little less stark. But, whatever the measure, it seems clear that only the most skilled workers have seen their pay packets swell much in the current economic expansion. The fruits of productivity gains have been skewed towards the highest earners, and towards companies, whose profits have reached record levels as a share of GDP

Several new studies show parental income to be a better predictor of whether someone will be rich or poor in America than in Canada or much of Europe. In America about half of the income disparities in one generation are reflected in the next. In Canada and the Nordic countries that proportion is about a fifth.

According to Emmanuel Saez of the University of California, Berkeley, and Thomas Piketty of the Ecole Normale Supérieure in Paris, the share of aggregate income going to the highest-earning 1% of Americans has doubled from 8% in 1980 to over 16% in 2004. That going to the top tenth of 1% has tripled from 2% in 1980 to 7% today. And that going to the top one-hundredth of 1%—the 14,000 taxpayers at the very top of the income ladder—has quadrupled from 0.65% in 1980 to 2.87% in 2004.

But the scale of America’s income concentration at the top, and the fact that no other country has seen such extreme shifts, has sent people searching for other causes. The typical American chief executive now earns 300 times the average wage, up tenfold from the 1970s. Continental Europe’s bosses have seen nothing similar. This discrepancy has fostered the “fat cat” theory of inequality: greedy businessmen sanction huge salaries for each other at the expense of shareholders.

Whichever explanation you choose for the signs of growing inequality, none of the changes seems transitory. The middle rungs of America’s labour market are likely to become ever more squeezed. And that squeeze feels worse thanks to another change that has hit the middle class most: greater fluctuations in people’s incomes.

3 thoughts on “Inequality Dynamics in USA”

  1. Income inequality in the US is simple to understand. It is driven by education levels and out of wedlock households. When adjusting for education and out of wedlock households we see a sharp reduction in the disparity in income distribution. I would suggest that more time and attention be given to these factors and less time to authoritative assertions made by this blog.

  2. Samantha

    The quote on the weblog was from the Econommist magazine.

    I would be interested in any research that identifies drivers of inequality in the USA. Any links or references to papers showing what produces the USA’s high level of inequality (compared to other rich countries) or inequaity’s research in the past few decades would be great.

    thanks Garry

  3. Samantha needs to cite studies that back her up and not just parrot GOP bull! It is total bull that controlling for education and marital status wipes out the gap, it simply shrinks it a tad. The data shows clearly that the gap is increasing and the majority of wealth is disgustingly concentrated in the upper 95th percentile…what utter BS!

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