Income inequality in the United States

Income inequality in the United States of America refers to the extent to which income is distributed in an uneven manner in the US. Data from the United States Department of Commerce, CBO, and Internal Revenue Service indicate that income inequality among households has been increasing significantly since the late 1970s, after several decades of stability. Inequality between male and female workers in the US has decreased considerably since 1953 but remains relatively large.

A 2011 study by the CBO found that the top earning 1% of households gained about 275% after federal taxes and income transfers over a period between 1979 and 2007, (although this number has decreased somewhat since 2007 as a result of the Great Recession). The lower earning 80% of American households now have less than half of the share of total income in America (also after federal taxes and income transfers). As of 2006, the United States had one of the highest levels of income inequality, as measured through the Gini index, among similar developed or high income countries.

Scholars and others differ as the causes and significance of the trend, which in 2011 helped ignite the "Occupy" protest movement. While education and increased demand for skilled labor is often cited as a cause of increased inequality, especially among conservatives, many social scientists point to conservative politics and public policy as an important cause of inequality; others believe its causes are not well understood. Inequality has been described both as irrelevant in the face of economic opportunity (or social mobility) in America and as a cause of the decline in that opportunity.

History

Share of pre-tax household income received by the top 1%, top 0.1% and top 0.01%, between 1917 and 2005.

Concentration of income in America has varied throughout its history. Nobel laureate economist Paul Krugman and others point to what Krugman calls a "great economic arc from high inequality" in the post-civil war era ("the Gilded Age") "to relative equality and back again." In 1915, an era in which the Rockefellers and Carnegies dominated American industry, the richest 1% of Americans earned roughly 18% of all income. Today, the top 1% account for 24% of all income.

From 1870 to sometime around 1937 inequality was quite high, but from about 1937 to 1947 highly progressive New Deal taxation, the strengthening of unions, and regulation of the National War Labor Board during World War II raised the income of the poor and working class and lowered that of top earners. This period has been dubbed "The Great Compression". This "middle class society" of relatively low level of inequality remained fairly steady for about three decades until the current trend of income inequality, or "income dispersion" began in late 1970s, Among the causes given for the length of time the compression of income lasted were the relatively high wages for the US working class and political support for income leveling government policies. Lack of foreign competition for American manufacturing, lack of low skilled immigrant competition for US workers in general, and — arguably most important — strong trade unions, kept wages relatively high. By 1947 more than a third of non-farm workers were union members, and unions both raised average wages for their membership, and indirectly and to a lesser extent, raised wages for workers in similar occupations not represented by unions. Providing political support were high voter turnout from union voting drives, the support of the otherwise conservative South for the New Deal, and prestige that the massive mobilization and victory of World War II had given the government.

Krugman and journalist Timothy Noah have referred to this period after 1979 as the “Great Divergence.” During this time income became more unequal almost continuously except during the recessions in 1990-91 and 2001. One difference in the income of high-income taxpayers between the two eras is that labor income has become a larger share of their income while capital income (interest, dividends, income from rent) a much smaller one.

In 2011, the Occupy movement drew considerable attention to income inequality in the country. The White House Middle Class Working Families Task Force convened in 2009 focused on economic issues specifically affecting middle-income Americans.

Measurement

Indicators

Inflation adjusted increase in after-tax household income between 1979 and 2005 for the top 1% and the four quintiles.

This graph shows the household income of the given percentiles from 1967 to 2003, in 2003 dollars. The light blue line represents the median household income. Note the numbers on the left hand side.

This graph shows the income of the given percentiles from 1947 to 2007, in 2007 dollars.

A number of studies have found that the distribution of income in the United States — most commonly measured by household or individual — has become increasingly unequal in the last three decades or so. In 2010, the top 20% of Americans earned 49.4% of the nation’s income, compared with the 3.4% earned by Americans living below the poverty line (roughly 15% of the population). This earnings ratio of 14.5 to 1 was an increase from the 13.6 to 1 ratio just two years earlier, and a significant rise from the historic low of 7.69 to 1 in 1968.

In 2011 the Congressional Budget Office (CBO) did a study of the change in income inequality in America ("Trends in the Distribution of Household Income Between 1979 and 2007"). (It chose the two years because they both preceded an economic recession and so both were periods of "similar overall economic activity"). The report found that real household income after federal taxes and including government transfers (payments from Social Security, unemployment insurance, SSI (Supplemental Security Income), AFDC, veterans benefits, etc., and in-kind benefits such as food stamps and housing assistance) grew by 62%. However, real income of households in the top 1% of earners grew by 275%, 65 percent for the next 19 percent, just under 40 percent for the next 60 percent, compared to 18% for the bottom fifth of earners. “As a result of that uneven income growth," the report noted, "the share of total after-tax income received by the 1 percent of the population in households with the highest income more than doubled between 1979 and 2007, whereas the share received by low- and middle-income households declined … The share of income received by the top 1 percent grew from about 8 percent in 1979 to over 17 percent in 2007. The share received by other households in the highest income quintile (one-fifth of the population as divided by income) was fairly flat over the same period, edging up from 35 percent to 36 percent.”

The study found two factors accounting for the changing distribution of market (before tax) income: an increase in the concentration of each source of income (different sources being: labor income, business income, capital gains, interest, etc.); and a shift in the share of income in the economy coming from sources that disproportionately go to top earners. Between 1979 and 2007 more income came from capital gains and business income, and less from labor (cash wages, salaries, employer-paid health insurance premiums, etc.). However, it should be noted that the people or households in the quintile may change over time, some falling into lower quintiles, and being replaced by those rising. The CBO found income distribution over a multi-year period "modestly" more equal than annual income.

Other sources that have noted the increase in equality included economist Janet Yellen who stated, "the growth [in real income] was heavily concentrated at the very tip of the top, that is, the top 1 percent." A 2006 analysis of IRS income data by economists Emmanuel Saez at the University of California, Berkeley and Thomas Piketty at the Paris School of Economics showed that the share of income held by the top 1% was as large in 2005 as in 1928. The data revealed that reported income increased by 9% in 2005, with the mean for the top 1% increasing by 14% and that for the bottom 90% dropping slightly by 0.6%.

Between 1979 and 2005, the mean after-tax income for the top 1% increased by 176%, compared to an increase of 69% for the top quintile overall, 20% for the fourth quintile, 21% for the middle quintile, 17% for the second quintile and 6% for the bottom quintile. For the same time span the aggregate share of after-tax income held by the top percentile increased from 7.5% to 14%. Economist Timothy Smeeding summed up the current trend of rising inequality on the pages of the Social Science Quarterly:

Americans have the highest income inequality in the rich world and over the past 20–30 years Americans have also experienced the greatest increase in income inequality among rich nations. The more detailed the data we can use to observe this change, the more skewed the change appears to be ... the majority of large gains are indeed at the top of the distribution.

Census studies on inequality of income measure both households and individuals. They have shown lower levels of inequality but do not include data for the highest-income households where most of change in income distribution has occurred.

Data	Total gain	Percent gain	2003	2000	1997	1994	1991	1988	1985	1982	1979	1976	1973	1970	1967
20th percentile	$3,982	28.4%	$17,984	$19,142	$17,601	$16,484	$16,580	$17,006	$16,306	$15,548	$16,457	$15,615	$15,844	$15,126	$14,002
Median (50th)	$9,980	29.9%	$43,318	$44,853	$42,294	$39,613	$39,679	$40,678	$38,510	$36,811	$38,649	$36,155	$37,700	$35,832	$33,338
80th percentile	$34,602	62.6%	$86,867	$87,341	$81,719	$77,154	$74,759	$75,593	$71,433	$66,920	$68,318	$63,247	$64,500	$60,148	$55,265
95th percentile	$65,442	73.8%	$154,120	$155,121	$144,636	$134,835	$126,969	$127,958	$119,459	$111,516	$111,445	$100,839	$102,243	$95,090	$88,678
SOURCE: U.S. Census Bureau, 2004 (Page 44/45)

Wage inequality

According to Janet L. Yellen, President and CEO, Federal Reserve Bank of San Francisco,

...from 1973 to 2005... real hourly wages of those in the 90th percentile—where most people have college or advanced degrees—rose by 30 percent or more... among this top 10 percent, the growth was heavily concentrated at the very tip of the top, that is, the top 1 percent. This includes the people who earn the very highest salaries in the U.S. economy, like sports and entertainment stars, investment bankers and venture capitalists, corporate attorneys, and CEOs. In contrast, at the 50th percentile and below—where many people have at most a high school diploma—real wages rose by only 5 to 10 percent –

Consumption

Household consumption is more equally distributed than household income but the data do not "adequately capture consumption by high-income households."

Gini index

Further information: Gini coefficient

Further information: List of U.S. states by income equality

The Gini coefficient summarizes income inequality in a single number and is one of the most commonly used measures of income inequality. It uses a scale from 0 to 1 -- where 0 represents perfect equality with everyone having exactly the same income, and 1 represents perfect inequality with one person having all income. Index scores are commonly multiplied by 100 to make them easier to understand. Gini index ratings can be used to compare inequality within (by race, gender, employment) and between countries. Different sources will not all agree on the same gini value for the same country or whatever they are measuring.

International comparisons

The UN, CIA World Factbook, and OECD have used the gini index to compare inequality between countries. Most post-industrial nations are in the lower, more equal, end of the spectrum, with a Gini coefficient in the high twenties to mid thirties. (Although more recently the OECD has reported an increase in inequality among many member countries from the mid-1980s to the mid-2000s.) The gini rating of the United States is sufficiently high to put it above (more unequal than) South American countries such Guyana, Nicaragua, and Venezuela, and roughly on par with Uruguay, Nicaragua, and Venezuela, according to the CIA.

Organization	US gini rating	International range		US ranking in income equality	Year(s) rated
		Most equal (lowest gini)	Least equal (highest gini)
UN	40	24.7 (Denmark)	74.3 (Namibia)	32nd out of 39	2007
The World Factbook (CIA)	45	23 (Sweden)	70.7 (Namibia)	95th out of 134	1994–2009
OECD	37.8	23.6 (Slovenia)	49.4 (Chile)	31st out of 34 (in OECD)	“late 2000s”

The US gini rank in income equality (27th) among the 34 "developed" countries of the OECD is higher before taxes and "transfers" are measured, then after (31st) -- i.e., the US has less income redistribution by government than some other post-industrial economies. However some developed countries, such as the Netherlands and Greece, have less inequality simply because incomes are more equal than in the US even before taxes.

Causes

Inequality in general

Expertise, productiveness and work experience, inheritance, gender, and race had a strong influence on personal income.

Race and gender disparities

Further information: Male-female income disparity in the United States

Income levels vary by gender and race with median income levels considerably below the national median for females compared to men with certain racial demographics.

Median personal income by gender and race in 2005.

Despite considerable progress in pursuing gender and racial equality, some social scientists attribute these discrepancies in income to continued discrimination. Others argue that the majority of the wage gap is due to women's choices and preferences. Women are more likely to consider factors other than salary when looking for employment. On average, women are less willing to travel or relocate, take more hours off and work fewer hours, and choose college majors that lead to lower paying jobs. Women are also more likely to work for governments or non-profits, that pay less than the private sector. According to this perspective certain ethnic minorities and women receive fewer promotions and opportunities for occupation and economic advancement than others. In the case of women this concept is referred to as the glass ceiling keeping women from climbing the occupational ladder. In terms of race, studies have shown that African Americans are less likely to be hired than European-Americans with the same qualifications. The continued prevalence of traditional gender roles and ethnic stereotypes may partially account for current levels of discrimination. In 2005, median income levels were highest among Asian and White males and lowest among females of all races, especially those identifying as African American or Hispanic. Despite closing gender and racial gaps, considerable discrepancies remain among racial and gender demographics, even at the same level of educational attainment.

Since 1953 the income gap between male and female workers has decreased considerably but remains relatively large. Women currently earn significantly more Associate's, Bachelor's, and Master's degrees than men and almost as many Doctorates. Women are projected to have passed men in Doctorates earned in 2006–2007, and to earn nearly two thirds of Associate's, Bachelor's, and Master's degrees by 2016. Despite this, some still argue that male workers still hold higher educational attainment, as the success of women in academia is a relatively new phenomenon. Though it is important to note that income inequality between sexes remained stark at all levels of educational attainment. Between 1953 and 2005 median earnings as well as educational attainment increased, at a far greater pace for women than for men. Median income for female earners male earners increased 157.2% versus 36.2% for men, over four times as fast. Today the median male worker earns roughly 68.36% more than their female counterparts, compared to 176.25% in 1953. The median income of men in 2005 was 2% higher than in 1973 compared to a 74.6% increase for female earners. Racial differences remained stark as well, with the highest earning sex-gender demographic of workers aged 25 or older, Asian males (who were roughly tied with white males) earning slightly more than twice as much as the lowest-earning demographic, Hispanic females. As mentioned above, inequality between races and gender persisted at similar education levels. Racial differences were overall more pronounced among male than among female income earners.

Demographic		Median personal income
		Overall Median	High school graduate	Some college	Bachelor's degree or higher	Bachelor's degree	Masters degree	Doctorate degree
White	Male	$40,432	$33,805	$40,427	$61,175	$55,129	$67,903	$77,818
	Female	$26,636	$21,306	$25,190	$40,161	$36,076	$45,555	$56,759
	Both sexes	$32,919	$27,291	$31,510	$49,879	$43,841	$52,244	$71,184
Black	Male	$30,549	$25,747	$32,758	$46,474	$41,889	$52,488	N/A
	Female	$25,435	$20,366	$25,574	$42,461	$41,263	$45,830	N/A
	Both sexes	$27,110	$22,328	$27,589	$44,460	$41,565	$47,407	$61,993
Asian	Male	$42,217	$28,486	$34,548	$61,165	$51,448	$70,979	$81,676
	Female	$30,332	$21,057	23,523	$41,442	$37,057	$48,177	$53,659
	Both sexes	$36,152	$25,285	$29,982	$51,481	$42,466	$61,452	$69,653
Hispanic	Male	$26,162	$26,579	$33,617	$48,282	$43,791	$60,194	N/A
	Female	$20,133	$18,886	$25,088	$37,405	$34,302	$47,052	N/A
	Both sexes	$23,613	$22,941	$28,698	$41,596	$37,819	$50,901	$67,274
All racial/ethnic demographics	Male	$39,403	$32,085	$39,150	$60,493	$52,265	$67,123	$78,324
	Female	$26,507	$21,117	$25,185	$40,483	$36,532	$45,730	$54,666
	Both sexes	$32,140	$26,505	$31,054	$49,303	$43,143	$52,390	$70,853
NOTE: The highest median for each level of educational attainment is highlighted in green, the lowest in orange.
SOURCE: US Bureau of Census, 2006

Household and personal income

Household income levels and gains for different percentiles in 2003 dollars.

Main article: Household income in the United States

Conservatives commonly focused on the flaws of household income as a measure for standard of living in order to refute claims that income inequality is growing, becoming excessive or posing a problem for society. According to sociologist Dennis Gilbert, growing inequality can be explained in part by growing participation of women in the workforce. High earning households are more likely to be dual earner households, Thus gross annual household income does not always accurately reflect standard of living as it does not consider household size.

Inequality can also be explained by failure to adjust for size of household. A 2004 analysis of income quintile data by the Heritage Foundation stated that the aggregate share of income held by the upper quintile (the top earning 20%) decreases by 20.3% when figures are adjusted to reflect household size.

However the 2011 CBO study "Trends in the Distribution of Household Income" mentioned in this article adjusts for household size so that its quintiles contain an equal number of people, not an equal number of households.

Main article: Personal Income in the United States

Personal income represents the earnings of individuals and, therefore, directly reflects occupational status, achievement and educational attainment. While many, though not the majority, of income earners reside in households with more than one income earner, trends in personal income are more indicative of the job market and the economy than household income.

During the early 1920s, median earnings decreased for both sexes, not increasing substantially until the late 1990s. Since 1974 the median income for workers of both sexes increased by 31.7% from $18,474 to $24,325, reaching its high-point in 2000.

Education and technology

Median personal and household income according to different education levels.

Main article: Educational attainment in the United States

Income differences between the varying levels of educational attainment (usually measured by the highest degree of education an individual has completed) have increased. Expertise and skill certified through an academic degree translates into increased scarcity of an individual's occupational qualification which in turn leads to greater economic rewards. As the United States has developed into a post-industrial society more and more employers require expertise that they did not a generation ago, while the manufacturing sector which employed many of those lacking a post-secondary education is decreasing in size.

In the resulting economic job market the income discrepancy between the working class and the professional with the higher academic degrees, who possess scarce amounts of certified expertise, may be growing.

Average earnings in 2002 for the population 18 years and over were higher at each progressively higher level of education... This relationship holds true not only for the entire population but also across most subgroups. Within each specific educational level, earnings differed by sex and race. This variation may result from a variety of factors, such as occupation, working full- or part-time, age, or labor force experience. –

Demographic		High school graduate		Some college		Bachelor's degree or higher		Bachelor's degree		Master's degree		First professional degree		Doctorate degree
		Median	% +/- national median	Median	% +/- national median	Median	% +/- national median	Median	% +/- national median	Median	% +/- national median	Median	% +/- national median	Median	% +/- national median
Persons, age 25+ w/ earnings (2005)	Both sexes	$26,505	−17.5%	$31,054	−3.5%	$49,303	+53.4%	$43,143	+34.2%	$52,390	+63.0%	$82,473	+156.6%	$70,853	+120.4%
	Males	$32,085	−18.6%	$39,150	−0.6%	$60,493	+53.5%	$52,265	+32.6%	$67,123	+70.3%	$100,000	+153.8%	$78,324	+98.8%
	Females	$21,117	−20.3%	$25,185	−5.0%	$40,483	+52.7%	$36,532	+37.82%	$45,730	+72.5%	$66,055	+149.2%	$54,666	+106.2%
	Both sexes employed full-time	$31,539	−19.8%	$37,135	−5.6%	$56,078	+42.5%	$50,944	+29.5%	$61,273	+55.8%	$100,000	+154.2%	$79,401	+101.8%
Households (2003)		$36,835	−20.5%	$45,854	−0.8%	$73,446	+58.8%	$68,728	+48.6	$78,541	+69.9%	$100,000	+116.2%	$96,830	+109.4%
SOURCE: US Census Bureau, 2004/06

According to software developer Martin Ford, the replacement by automation not only of routine, lower-skill employment but jobs at high skill levels should have an effect on income inequality of shifting it not to more educated workers but to owners of capital.

For example, the introduction of e-Discovery software has largely automated the legal discovery process, eliminating many highly-paid positions for lawyers and paralegals. When advanced technologies eliminate well-paying jobs (or de-skill the jobs so that the work can be performed by lower-wage labor), the benefits flow to top corporate executives and shareholders.

Incentives

Percent of households with 2+ income earners, and full-time workers by income.

In the context of concern over income inequality a number of economists, such as Federal Reserve chairman Ben Bernake, have talked about the importance of incentives: "... without the possibility of unequal outcomes tied to differences in effort and skill, the economic incentive for productive behavior would be eliminated, and our market-based economy ... would function far less effectively." Yale economist Arthur Okun argues there is a trade-off between economic growth and economic redistribution.

Since abundant supply decreases market value, the possession of scarce skills considerably increases income. Among the American lower class, the most common source of income was not occupation, but government welfare.

As expected, households in the upper quintiles are generally home to more, better educated and employed working income earners, than those in lower quintiles. Among those in the upper quintile, 62% of householders were college graduates, 80% worked full-time and 76% of households had two or more income earners, compared to the national percentages of 27%, 58% and 42%, respectively. Upper-most sphere US Census Bureau data indicated that occupational achievement and the possession of scarce skills correlates with higher income.

Taxation

Main article: Tax policy and economic inequality in the United States

Another factor in income inequality/equality is the effective rate at which income is taxed coupled with the progressivity of the tax system. A progressive tax is a tax by which the tax rate increases as the taxable base amount increases. The more progressive the tax system the more lower income household/persons will benefit compared to the higher income. Overall income tax rates in the United States are below the OECD average.

Post-1980 rise in inequality

Most current discussion of income inequality in America centers on its rise since the mid to late 1970s, the so-called "Great Divergence".

Broad breakdown

Breaking down how much of the increase in income inequality between 1979 and 2007 came from distribution of pre-tax income and how much from taxes and "government transfers", the CBO data shows that the 33% increase in inequality came from a

• 23% increase in inequality from changes in distribution of "market income" to households (top earners received a larger share of salaries, interest, dividends, capital gains, business income, etc.); a
• 6% increase from changes in "government transfers" (social security, unemployment, the end of AFDC welfare, etc.); and a
• 4% increase from changes in federal taxation (overall decline in the average federal tax rate and shift in federal revenues from income taxes to less progressive payroll taxes, etc.).

Of the 23% increase in inequality from changes in pre-tax "market" income, most of that (79%) came from a shift to top earners in different types of income across the board. A smaller amount of inequality increase (21%) came from a shift to more concentrated income sources. (i.e. a shift toward interest, dividends, business income and especially capital gains, which are more concentrated toward top earners than income from salaries/wages).

Explanations

According to the CBO and others, "the precise reasons for the [recent] rapid growth in income at the top are not well understood", but "in all likelihood," an "interaction of multiple factors" was involved. "Researchers have offered several potential rationales." Some of these rationales conflict, some overlap. They include:

• the globalization hypothesis—low skilled American workers have been losing ground in the face of competition from low-wage workers in Asia and other "emerging" economies;
• skill-biased technological change -- the rapid pace of progress in information technology has increased the demand for the highly skilled and educated so that income distribution favored brains rather than brawn; and
• the superstar hypothesis—modern technologies of communication often turn competition into a tournament in which the winner is richly rewarded, while the runners-up get far less than in the past
• immigration of less-educated workers -- relatively high levels of immigration of low skilled workers since the 1965 law change may have reduced wages for American-born high school dropouts by 5%
• policy and politics -- soaring executive compensation, stagnating middle income pay and more regressive taxation resulting from political decisions, not market forces—executive capture of corporate boards, the crushing of labor unions, etc.

Analyzing the top three hypotheses, economist Paul Krugman found them to be "increasingly inadequate" as more evidence accumulated.

Globalization can explain part of the relative decline in blue-collar wages, but it can't explain the 2,500 percent rise in C.E.O. incomes. Technology may explain why the salary premium associated with a college education has risen, but it's hard to match up with the huge increase in inequality among the college-educated, with little progress for many but gigantic gains at the top. The superstar theory works for Jay Leno, but not for the thousands of people who have become awesomely rich without going on TV.

Immigration was also found wanting as an explanation.

Other scholars questioning the explanation of educational attainment and workplace skills point out that other countries with similar education levels and economies have not gone the way of the US, and that concentration of income in the US hasn't followed a pattern of "the 29% of Americans with college degrees pulling away" from those who have less education.

Skill-biased technological change

As of the mid- to late- decade of the 2000s, the most common explanation for income inequality in America was "Skill-biased technological change" -- "a shift in the production technology that favors skilled over unskilled labor by increasing its relative productivity and, therefore, its relative demand". For example, one scholarly colloquium on the subject that included many prominent labor economists estimated that technological change was responsible for over 40% of the increase in inequality. Other factors like international trade, decline in real minimum wage, decline in unionization and rising immigration, were each responsible for 10-15% of the increase.

Numbers show the strength of education's influence on income distriubtion. In 2005, roughly 55% of income earners with doctorate degrees—the most educated 1.4% -- were among the top 15% earners. Among those with Masters degrees—the most educated 10% -- roughly half had incomes among the top 20% of earners. Only among households in the top quintile were householders with college degrees in the majority.

But while the higher education commonly translates into higher income, and the highly educated are disproportionately represented in upper quintile households, differences in educational attainment fail to explain income discrepancies between the top 1% and the rest of the population. Large percentages of individuals lacking a college degree are present in all income demographics, including 33% of those with heading households with six figure incomes. From 2000 to 2010, the 1.5% of Americans with an M.D., J.D., or M.B.A. and the 1.5% with a PhD saw median income gains of approximately 5%. Among those with a college or master’s degree (about 25% of the American workforce) average wages dropped by about 7 percent, (though this was less than the decline in wages for those who had not completed college).

Political, normative, institutional

Critics of technological change as an explanation for the "Great Divergence" of income levels in America point to public policy and party politics. They argue these have led to a trend of declining labor union membership rates and resulting diminishing political clout, decreased expenditure on social services, and less government redistribution.

These policy shifts were brought on by the development of a modern, efficient political system, especially lobbying, by top earners — and particularly corporate executives and the financial services industry. According to political scientists Jacob Hacker and Paul Pierson writing in the book Winner-Take-All Politics, the end of the 1970s saw a transformation of American politics away from a focus on the middle class, with new, much more effective, aggressive and well-financed lobbyists and pressure groups acting on behalf of upper income groups. Executives successfully eliminated any countervailing power or oversight of corporate managers (from private litigation, boards of directors and shareholders, the Securities and Exchange Commission or labor unions). The financial industry's success came from successfully pushing for deregulation of financial markets, allowing much more lucrative but much more risky investments from which it privatized the gains while socializing the losses with government bailouts. (the two groups formed about 60% of the top 0.1% of earners.) All top earners were helped by deep cuts in estate and capital gains taxes, and tax rates on high levels of income.

Arguing against the proposition that the explosion in pay for corporate executives is driven by an increased demand for scarce talent and set according to performance, Krugman points out that multiple factors outside of executives' control govern corporate profitability, particularly in short term when the head of a company like Enron may look like a great success. Further, corporate boards follow other companies in setting pay even if the directors themselves disagree with lavish pay "partly to attract executives whom they consider adequate, partly because the financial market will be suspicious of a company whose CEO isn't lavishly paid." Finally "corporate boards, largely selected by the CEO, hire compensation experts, almost always chosen by the CEO" who naturally want to please their employers. Lucian Arye Bebchuk, Jesse M. Fried, the authors of Pay Without Performance, critique of executive pay, argue that executive capture of corporate governance is so complete that only public relations, i.e. public `outrage`, constrains their pay. This in turn has been reduced as traditional critics of excessive pay—such as politicians (where need for campaign contributions from the richest outweighs populist indignation), media (lauding business genius), unions (crushed) -- are now silent.

In addition to politics, Krugman postulated change in norms of corporate culture have played a factor. In the 1950s and 60s, corporate executives had (or could develop) the ability to pay themselves very high compensation through control of corporate boards of directors, they restrained themselves. But by the end of the 1990s, the average real annual compensation of the top 100 C.E.O.'s skyrocketed from $1.3 million—39 times the pay of an average worker—to $37.5 million, more than 1,000 times the pay of ordinary workers from 1982 to 2002. Journalist George Packer also sees the dramatic increase in inequality in America as a product of the change in attitude of the American elite, which (in his view) has been transitioning itself from pillars of society to a special interest group.

Political parties and presidents

Political scientist Larry Bartels has found a strong correlation between the party of the president and income inequality in America since 1948. (see below)

Examining average annual pre-tax income growth from 1948 to 2005, Bartel shows that under Democratic presidents (from Harry Truman forward), the greatest income gains have been at the bottom of the income scale and tapered off as income rose. Under Republican presidents, in contrast, gains were much less but what growth there was concentrated towards the top, tapering off as you went down the income scale.

Summarizing Bartels's findings, journalist Timothy Noah referred to the administrations of Democratic presidents as "Democrat-world", and GOP administrations as "Republican-world":

In Democrat-world, pre-tax income increased 2.64% annually for the poor and lower-middle-class and 2.12% annually for the upper-middle-class and rich. There was no Great Divergence. Instead, the Great Compression—the egalitarian income trend that prevailed through the 1940s, 1950s, and 1960s—continued to the present, albeit with incomes converging less rapidly than before. In Republican-world, meanwhile, pre-tax income increased 0.43 percent annually for the poor and lower-middle-class and 1.90 percent for the upper-middle-class and rich. Not only did the Great Divergence occur; it was more greatly divergent. Also of note: In Democrat-world pre-tax income increased faster than in the real world not just for the 20th percentile but also for the 40th, 60th, and 80th. We were all richer and more equal! But in Republican-world, pre-tax income increased slower than in the real world not just for the 20th percentile but also for the 40th, 60th, and 80th. We were all poorer and less equal! Democrats also produced marginally faster income growth than Republicans at the 95th percentile, but the difference wasn't statistically significant.

The pattern of distribution of growth appears to be the result of a whole host of policies,

including not only the distribution of taxes and benefits but also the government's stance toward unions, whether the minimum wage rises, the extent to which the government frets about inflation versus too-high interest rates, etc., etc.

Taxation

How much tax policy change over the last thirty years has contributed to income inequality is disputed. In their comprehensive 2011 study of income inequality (Trends in the Distribution of Household Income Between 1979 and 2007), the CBO estimated that only 12% of the increase in inequality in the US during that time came from tax policy changes. But many — such as economist Paul Krugman — emphasize the effect of changes in taxation — such as the 2001 and 2003 Bush administration tax cuts which cut taxes far more for high-income households than those below — on increased income inequality.

Part of the growth of income inequality under Republican administrations (described by Larry Bartels) has been attributed to tax policy. A study by Thomas Piketty and Emmanuel Saez found that

Large reductions in tax progressivity since the 1960s took place primarily during two periods: the Reagan presidency in the 1980s and the Bush administration in the early 2000s.

During Republican President Ronald Reagan's tenure in office the top marginal income tax rate was reduced from over 70 to 28 percent, high top marginal rates like 70% being the sort in place during much of the period of great income equality following the “Great Compression”. President Ronald Reagan's 1981 cut in the top regular tax rate on unearned income reduced the maximum capital gains rate to only 20% — its lowest level since the Hoover administration.

During the Republican George W. Bush administration, the tax rate on capital gains and qualifying dividends fell to 15% — less than half the 35 percent top rate on ordinary income. While rates for all American taxpayers fell, top earners benefited disproportionately from the cuts because a larger proportion of their income comes from this investment income. President Bush's veto of tax harmonization has also been attributed to rising inequality, as this would have shut down offshore tax havens.

Many studies argue that tax changes of S-type Corporations confound the statistics prior to 1990. However, even after these changes inflation-adjusted average after-tax income grew by 25% between 1996 and 2006 (the last year for which individual income tax data is publicly available). This average increase, however, obscures a great deal of variation. The poorest 20% of tax filers experienced a 6% reduction in income while the top 0.1% of tax filers saw their income almost double. Tax filers in the middle of the income distribution experienced about a 10% increase in income. Also during this period, the proportion of income from capital increased for the top 0.1% from 64% to 70%.

Effects of race and gender

The black/white gap in median family income is about 3% smaller today than it was in 1979, a lack of progress that may be dismaying but excludes the disparity from explaining any part of the 30-year growth of inequality.

Gender disparity in income has also improved in during the last three decades. The gap in the median annual income between men and women working full-time has declined from 40% to 23%.

Median income for male and female workers from 1953 to 2005 in constant dollars.

Year or change	Gini index, Persons, age 25+, employed full-time			Gini index, Households
	Men	Women	Both sexes
1967	31.4	29.8	34.0	39.7
2005	42.4	35.7	40.9	46.9
Increase	35.0%	19.8%	20.3%	18.1%
SOURCE: U.S. Census Bureau, 2006

Since 1967 inequality has risen for households and for full-time workers of both sexes, but especially for male workers. (see table above) Personal income has risen considerably for female workers since 1953, less so for male workers, whose income stagnated during the 1970s 1980s, and 1990s.

It is unclear whether the dramatic increase of women in the workforce and women's income has led to greater inequality (e.g. dual earner families causing greater inequality). According to the Census Bureau, as of 2005, 42% of all U.S. households and 76% of those in the top quintile had two or more income earners. But looking at empirical studies, the CBO study "Trends in the Distribution of Household Income", found "mixed results" of the effect of dual earner families "with estimates depending on the period studied and the methodology use." The study also found that the level of inequality for household with children and (nonelderly) households without children was "virtually identical". The growth of single parent households may have led to lower incomes but most of it occurred before 1980 and in recent years the percentage of women who are actually working who are single parents has increased.

Significance of inequality

Commentators, economists, politicians do not agree on the issue of increase in inequality in America or its importance. Among economists and other experts most agree that America's growing income inequality is "deeply worrying", unjust, a danger to democracy/social stability, and/or even a sign of national decline. Concern extends even to such supporters (or former supporters) of laissez-faire economics as the former Federal Reserve Board chairman Alan Greenspan, who has stated reference to growing inequality: "This is not the type of thing which a democratic society — a capitalist democratic society — can really accept without addressing."

Others have claimed that the increase is not significant and an excuse for "class-warfare rhetoric" and may lead to policies that "reduce the well-being of wealthier individuals", that it "has many economic benefits and is the result of ... a well-functioning economy", that it is explained by lack of education, that it doesn't matter, because America's economic growth and/or equality of opportunity are what's important. income inequality has many economic benefits and is the result of—and not a detriment to—a well-functioning economy.

Public attitudes

The growth of inequality has provoked a political protest movement—the Occupy movement -- starting in Wall Street and spreading to 600 communities across the United States in 2011. Its main political slogan — "We are the 99%" — references its dissatisfaction with the concentration of income in the top 1%.

Opinion surveys asking what the right level of inequality was have found Americans no more accepting of income inequality than citizens of other nations, but thought the level of inequality was less than it actually was. However this was not because the gap was less in America but because the average American mistakenly thought there was less inequality than there is. Dan Ariely and Michael Norton show in a study (2011) that US citizens across the political spectrum significantly underestimate the current US wealth inequality and would prefer a more egalitarian distribution of wealth. A 16 December 2011 Gallup poll found a decline in the number of Americans who felt reducing the gap in income and wealth between the rich and the poor was extremely or very important. In 1998 a Gallup poll found 52 percent of Americans agreeing that the gap between rich and the poor was a problem that needed to be fixed, while 45 percent regarded it as "an acceptable part of the economic system". In 2011, those numbers are reversed: Only 45 percent see the gap as in need of fixing, while 52 percent do not. However, there was a large difference between Democrats and Republicans, with 71% of Democrats calling for a fix. In contrast, a national survey by the Pew Research Center for the People & the Press, found that respondents' sense of unfairness about taxes centered on the perception that wealthy Americans were not paying their fair share of taxes; 57% say this is what bothers them most about the tax system, an increase of 6% over a poll taken in March 2003. A more recent poll found about two-thirds of Americans now believe there are “strong conflicts” between rich and poor in the United States.

Impact on democracy and society

Economists Jared Bernstein and Paul Krugman have attacked the concentration of income as variously "unsustainable" and "incompatible" with real democracy. Political Scientist Jacob S. Hacker and Paul Pierson writing on the "Great Divergence" of income in America, quote a warning by Greek/Roman historian Plutarch: `An imbalance between rich and poor is the oldest and most fatal ailment of all republics.`

In the words of journalist Robert Frank:

Today's rich had formed their own virtual country .. [T]hey had built a self-contained world unto themselves, complete with their own health-care system (concierge doctors), travel network (Net jets, destination clubs), separate economy. .... The rich weren't just getting richer; they were becoming financial foreigners, creating their own country within a country, their own society within a society, and their economy within an economy.

and in the words of journalist George Packer,

Inequality hardens society into a class system ... Inequality divides us from one another in schools, in neighborhoods, at work, on airplanes, in hospitals, in what we eat, in the condition of our bodies, in what we think, in our children's futures, in how we die. Inequality makes it harder to imagine the lives of others.

One possible specific tangible harm to non-elites from inequality may be higher rates of bankruptcy as people go deeper into debt trying to maintain what once was a middle class lifestyle. Researchers Elizabeth Warren and Amelia Warren Tyagi found a fivefold increase in the number of families filing for bankruptcy between 1980 and 2005. The bankruptcies came not from increased spending "on luxuries", but from an "increased spending on housing, largely driven by competition to get into good school districts." Intensifying inequality may mean a dwindling number of ever more expensive school districts that compel middle class, (or would-be middle class) to "buy houses they can't really afford, taking on more mortgage debt than they can safely handle".

Disagreeing with this focus on the top earning 1% and urging attention to the economic and social pathologies of lower income/lower education Americans, is conservative journalist David Brooks. Whereas in the 1970s, high school and college graduates had "very similar family structures", today, high school grads are much less likely to get married and be active in their communities, and much more likely to smoke, be obese, get divorced, or have "a child out of wedlock."

The zooming wealth of the top one percent is a problem, but it’s not nearly as big a problem as the tens of millions of Americans who have dropped out of high school or college. It’s not nearly as big a problem as the 40 percent of children who are born out of wedlock. It’s not nearly as big a problem as the nation’s stagnant human capital, its stagnant social mobility and the disorganized social fabric for the bottom 50 percent.

Opportunity and equality

Conservatives and libertarians such as economist Thomas Sowell, and Congressman Paul Ryan (R., Wisc.) argue that more important than the level of equality of results is America's equality of opportunity, especially relative to other developed countries such as western Europe.

Individual mobility

Strong "intra-generational" or individual economic mobility between rich, middle class and poor means both that (1) a high level of inequality of annual income is made irrelevant by a more even distribution of lifetime income, and (2) however extreme the earnings at the top, they are not out of reach for the poor (or middle income) but ambitious.

Sowell claims mobility is robust.

An absolute majority of the people who were in the bottom 20 percent [of income] in 1975 have also been in the top 20 percent at some time since then. Most Americans don't stay put in any income bracket. At different times, they are both "rich" and "poor" -- as these terms are recklessly thrown around in the media. [...] There are of course some people who remain permanently in the bottom 20 percent. But such people constitute less than one percent of the American population, according to data published by the Federal Reserve Bank of Dallas in its 1995 annual report. Perhaps the intelligentsia and the politicians have been too busy waxing indignant to be bothered by anything so mundane as facts.

According to Thomas A. Garrett, studies examining quintiles of wealth levels may provide a misleading picture. For example, a U.S. Treasury study of the period from 1996 to 2005 found that "[l]ess than half (40 percent or 43 percent depending on the measure) of those in the top 1 percent in 1996 were still in the top 1 percent in 2005. Only about 25 percent of the individuals in the top 1/100th percent in 1996 remained in the top 1/100th percent in 2005."

Other have not found individual mobility so fluid. A 2007 study (by Kopczuk, Saez and Song in 2007) found the top population in America "very stable" and "not mitigated the dramatic increase in annual earnings concentration since the 1970s."

Economist Paul Krugman, attacks conservatives for resorting to "extraordinary series of attempts at statistical distortion". He argues that while in any given year, some of the people with low incomes will be "workers on temporary layoff, small businessmen taking writeoffs, farmers hit by bad weather" -- the rise in their income in succeeding years is not the same 'mobility' as poor people rising to middle class or middle income rising to wealth. It's the mobility of "the guy who works in the college bookstore and has a real job by his early thirties."

Studies by the Urban Institute and the US Treasury have both found that about half of the families who start in either the top or the bottom quintile of the income distribution are still there after a decade, and that only 3 to 6 percent rise from bottom to top or fall from top to bottom.

On the issue of whether most Americans do not stay put in any one income bracket, Krugman quotes from 2011 CBO distribution of income study

Household income measured over a multi-year period is more equally distributed than income measured over one year, although only modestly so. Given the fairly substantial movement of households across income groups over time, it might seem that income measured over a number of years should be significantly more equally distributed than income measured over one year. However, much of the movement of households involves changes in income that are large enough to push households into different income groups but not large enough to greatly affect the overall distribution of income. Multi-year income measures also show the same pattern of increasing inequality over time as is observed in annual measures.

In other words, "many people who have incomes greater than $1 million one year fall out of the category the next year — but that’s typically because their income fell from, say, 1.05 million to 0.95 million, not because they went back to being middle class."

Mobility between generations

Several studies have found the ability of children from poor or middle class families to rise to upper income — known as "upward relative intergenerational mobility" — is lower in the US than in other developed countries — and at least two economist have found this development linked to income inequality.

In their "Great Gatsby" curve, White House Council of Economic Advisers Chairman Alan B. Krueger and labor economist Miles Corak show a correlation between inequality and "intergenerational income elasticity", i.e. the likelihood that someone will inherit their parents' relative position of income level, i.e. low mobility, in a number of countries.

In the words of journalist Timothy Noah

you can't really experience ever-growing income inequality without experiencing a decline in Horatio Alger-style upward mobility because (to use a frequently-employed metaphor) it's harder to climb a ladder when the rungs are farther apart.

Aside from the proverbial distant rungs, the connection between income inequality and low mobility can be explained by the lack of access for un-affluent children to better (more expensive) schools and preparation for schools crucial to finding high-paying jobs; the lack of health care that may lead to obesity and diabetes and limit education and employment.

Krueger estimates that "the persistence in the advantages and disadvantages of income passed from parents to the children" will "rise by about a quarter for the next generation as a result of the rise in inequality that the U.S. has seen in the last 25 years."

Income at a glance

Median income levels
Households			Persons, age 25 or older with earnings			Household income by race
All households	Dual earner households	Per household member	Males	Females	Both sexes	Asian	White, non-hispanic	Hispanic	Black
$46,326	$67,348	$23,535	$39,403	$26,507	$32,140	$57,518	$48,977	$34,241	$30,134
Median personal income by educational attainment
Measure	Some High School	High school graduate	Some college	Associate's degree	Bachelor's degree or higher	Bachelor's degree	Master's degree	Professional degree	Doctorate degree
Persons, age 25+ w/ earnings	$20,321	$26,505	$31,054	$35,009	$49,303	$43,143	$52,390	$82,473	$70,853
Male, age 25+ w/ earnings	$24,192	$32,085	$39,150	$42,382	$60,493	$52,265	$67,123	$100,000	$78,324
Female, age 25+ w/ earnings	$15,073	$21,117	$25,185	$29,510	$40,483	$36,532	$45,730	$66,055	$54,666
Persons, age 25+, employed full-time	$25,039	$31,539	$37,135	$40,588	$56,078	$50,944	$61,273	$100,000	$79,401
Household	$22,718	$36,835	$45,854	$51,970	$73,446	$68,728	$78,541	$100,000	$96,830
Household income distribution
Bottom 10%	Bottom 20%	Bottom 25%	Middle 33%	Middle 20%	Top 25%	Top 20%	Top 5%	Top 1.5%	Top 1%
$0 to $10,500	$0 to $18,500	$0 to $22,500	$30,000 to $62,500	$35,000 to $55,000	$77,500 and up	$92,000 and up	$167,000 and up	$250,000 and up	$350,000 and up
Source: US Census Bureau, 2006; income statistics for the year 2005

See also

• Tax Policy and Economic Inequality in the United States
• Economy of the United States
• Educational attainment in the United States
• Homelessness in the United States
• Socio-economic mobility in the United States
• List of U.S. states by median income
• The Spirit Level: Why More Equal Societies Almost Always Do Better (book)
• We are the 99%
• Wealth inequality in the United States
• The Great Divergence (inequality)
• The Great Compression

General:

• Economic inequality
• Economic mobility
• Racism in the United States
• Income inequality metrics
  • Atkinson index
  • Gini coefficient
  • Hoover index
  • Pareto_distribution#Applications
  • Theil index
• List of countries by income equality
• Median income per household member
• Social justice

References

• The Wealth and Income of the People of the United States, Willford I. King, 1915 – at the time most comprehensive study to date

• Larry M. Bartels. Unequal Democracy: The Political Economy of the New Gilded Age. Princeton: Princeton University Press. 2008. 328 pp.

External links

• The L-Curve: A Graph of the US Income Distribution
• Google – public data: GDP and Personal Income of the U.S. (annual)
• The United States of Inequality – a 10 part exposé and visual guide by Slate magazine
• Recent Trends in Household Wealth in the United States: Rising Debt and the Middle-Class Squeeze – by Dr. Edward Wolff
• The Great Divergence 2010: What's causing America's growing income inequality?, Timothy Noah, Slate
• Income Gap Widens: 2010 Census Finds Record Gap Between Rich And Poor by Hope Yen, AP
• It's the Inequality, Stupid: 11 Charts that Explain Everything that's Wrong with America – March 2011 issue of Mother Jones
• The Top 1 Percent: What Jobs Do They Have? (What percentage of what occupations are in the top 1% income bracket) New York Times 15 January 2012
• What Percent Are You? (Enter your household income and see how you rank) New York Times 14 January 2012