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American Income Inequality

By now most people have heard about rising income inequality in the US. Looking at the data, it’s clear that the people at the top have done much better than the middle class in recent decades.

Between 1979 and 2007, inflation adjusted after-tax incomes for the bottom fifth of Americans have increased 16%. For the middle fifth, income gains have been slightly higher at 25%. But for the top fifth (and especially the top 1%) the gains have been dramatically higher. How did this happen?

The US Federal Reserve keeps data going back to 1947 for American productivity and compensation.

Between 1947 and the early 1970’s, worker compensation kept pace with increases in productivity. Beginning in the 1970’s, however, the average worker began to fall behind. The latest figures show that worker compensation is now 33% lower than it would have been – had it kept pace with productivity. Where did that 33% go?

Returning to the income differences between 1979 and 2007, we can calculate what incomes would have been without the increase in income inequality.

Doing this, we find that incomes for middle and lower income households would be between 23% and 34% higher than they are now – roughly in line with the gap between compensation and productivity. It seems that a large part of income inequality can be explained by the people at the top receiving most of the productivity gains since the 1970’s.

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  1. Corkie the Dog
    December 20, 2011 at 6:04 pm

    Hello Mike,

    I think you will see a somewhat different picture if you include the most recent years in your first graph.

    I’ll see if I can try to find the data, but stopping at 2007 hides a recent decline for the top tiers (as would be expected in a recession, of course.)

    Corkie the Dog

  2. December 20, 2011 at 6:10 pm

    For instance:

    “But here’s a question: Why did the report stop at 2007? The CBO didn’t say, although its report briefly acknowledged—in a footnote—that “high income taxpayers had especially large declines in adjusted gross income between 2007 and 2009.”

    “No kidding. Once these two years are brought into the picture, the share of after-tax income of the top 1% by my estimate fell to 11.3% in 2009 from the 17.3% that the CBO reported for 2007.”

    link: http://taxprof.typepad.com/taxprof_blog/2011/12/tax-rates.html

  3. December 21, 2011 at 8:34 am

    Corkie, you referenced a WSJ op-ed written by Alan Reynolds. Bad dog! Alan Reynolds has been denying rising inequality for at least 20 years.

    The CBO report stops in 2007 because whenever they do a detailed analysis of historical income or tax data, they are always a few years behind. No question the gap has closed a bit in the last few years, as it did in the 2001 recession – of course, it subsequently rose to even higher levels.

    What is undeniable is the trend. The trend also shows up in the Gini index which has been updated through 2010 by the Census Bureau:

    Gini Index

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