North American Economics

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.