Policy Debate: What accounts for recent increases in income inequality?
Issues and Background
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:
Other reasons often mentioned are the changing makeup of the family, the increased number of
women in the labor force, and changes in unearned income.
- 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
Primary Resources and Data
- 1997 Economic Report of the President
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
The Census Bureau provides current and historical data on income
- Economic Statistics Briefing Room (ESBR)
The Whitehouse maintains the ESBR to provide easy access to current
Federal economic indicators, including income
statistics. The ESBR provides links to information produced by a number
of Federal agencies.
- World Bank, "PovertyNet"
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"
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.
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?"
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"
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"
This site contains summaries of recent studies that attempt to explain the sources of income inequality.
- Robert I. Lerman, "Is Earnings Inequality Really Increasing?"
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 "
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"
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"
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"
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"
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?"
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"
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
- Paul Krugman, "Graduates vs. Oligarchs"
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"
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?"
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"
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?"
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."