“The rise in American inequality has been exaggerated both in magnitude and timing. Commentators lament the large gap between the growth rates of real median household income and of private sector productivity. This paper shows that a conceptually consistent measure of this growth gap over 1979 to 2007 is only one-tenth of the conventional measure. Further, the timing of the rise of inequality is often misunderstood. By some measures inequality stopped growing after 2000 and by others inequality has not grown since 1993. This cessation of inequality’s secular rise in 2000 is evident from the growth of Census mean vs. median income, and in the income share of the top one percent of the income distribution. The income share of the 91st to 95th percentile has not increased since 1983, and the income ratio of the 90th to 10th percentile has barely increased since 1986. Further, despite a transient decline in labor’s income share in 2000-06, by mid-2009 labor’s share had returned virtually to the same value as in 1983, 1991, and 2001.
Recent contributions in the inequality literature have raised questions about previous research on skill-biased technical change and the managerial power of CEOs. Directly supporting our theme of prior exaggeration of the rise of inequality is new research showing that price indexes for the poor rise more slowly than for the rich, causing most empirical measures of inequality to overstate the growth of real income of the rich vs. the poor. Further, as much as two-thirds of the post-1980 increase in the college wage premium disappears when allowance is made for the faster rise in the cost of living in cities where the college educated congregate and for the lower quality of housing in those cities. A continuing tendency for life expectancy to increase faster among the rich than among the poor reflects the joint impact of education on both economic and health outcomes, some of which are driven by the behavioral choices of the less educated.”
Robert J. Gordon, “Misperceptions About the Magnitude and Timing of Changes in American Income Inequality”, National Bureau of Economic Research Working Paper No. 15351 (September 2009).
http://www.nber.org/papers/w15351
Robert J. Gordon is the Stanley G. Harris Professor of the Social Sciences at Northwestern University. He is considered one of the top scholars working in the areas of productivity, economic growth, and the causes of unemployment.
Income distribution has been a central question of economics since the time of Adam Smith, especially as it relates to the functional distribution of income between the main factors of production, land, labor and capital in terms of rents, wages, and interest and profits. The class distribution of income between workers and capitalists was a main concern of Karl Marx and size distribution of income among the poor, middle income, and rich segments of the population is a key concern today.
The usual picture of the trend in the household size distribution of income in the United States uses a Gini coefficient (also called an index of income concentration) to measure family income inequality. A Gini coefficient measures the extent to which the distribution of income (or, in some cases, consumption expenditure) among households deviates from a perfectly equal distribution, with a Gini index of 0 indicating perfect equality of incomes and a Gini of 1 implying perfect inequality (one family has all the income).
When measuring the distribution of income with a Gini coefficient or some other technique it matters greatly whether one focuses on pre-tax or post-tax income, whether income or consumption is measured, whether one looks at nominal or real incomes, whether supplements to income such as health care and pensions are included in the definition of wages and salaries, and whether transfers in kind and/or home-production is included in the concept of income, among many other details. As one example of these considerations, Census Bureau distribution indicators are based on gross, or pre-tax, income and for this reason tend to overstate the degree of prevailing income inequality in the United States and, consistent Professor Gordon results, probably its trend toward greater inequality as the richer segments of the population pay a higher and higher proportion of the income tax.
A separate but I would say more important consideration is that all usual measures of income distribution such as the Gini do not consider income mobility. It matters greatly whether people remain poor all their life or they rise and fall significantly along the distribution of income. There is considerable income mobility in the United States. Gini measures say nothing about income mobility.
On the basis of the standard measure used in discussions of public policy, the Gini coefficient as calculated by the Census Bureau, shows a decrease in income inequality from 1947 to 1968, that is, the overall distribution of income in the United States tended to become more equal during these years. Since 1968, however, the trend indicated by the Gini seems to have been reversed. It is important to note, however, that the methodology used by the Census Bureau to collect data changed after 1967 when the data focus became households rather than individuals. On the basis of this new data focus, the trend in income distribution was generally stable between 1967 and 1980, after which it drifted toward greater inequality when measured in terms of the Gini coefficient. Another change appeared after 1993 when, on the basis of the Gini and other standard measures of income distribution, the trend toward household income inequality tended to slow.
As mentioned above, there are major problems involved in measuring a phenomenon as complex as income distribution. For this reason, alternative measures and approaches to data collection produce different results. For this reason, the trends summarized above should be understood to be approximate and dependent upon assumptions and calculation techniques. Moreover, the Gini, like all quantitative measures, says nothing about why these changes are taking place.
The new study carried out by Professor Gordon quoted above seems to show that past efforts to measure income distribution have exaggerated measured inequality in the technical ways these measures have been constructed. Some idea of the complexity of measuring income distribution trends is reflected in the comments made above, so it should not be surprising that the question of trends in the income distribution of Americans remains an unsettled question.
What we can say is that the issue of the growing divide between the rich and the poor in this country is not obvious from the data and the we should careful before assuming that the U.S. distribution of income is becoming more unequal.
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