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
Recently, the United States has enjoyed a strong economy with low levels of inflation and
unemployment. The strong economy, however, has not resulted in a steady rise in income for all
Americans. In fact, for the last twenty 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, "Inequality Data"
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.
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.
- 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."
- Kenneth L. Deavers, "Common Myths about U.S. Wage and Income Inequality"
In this July 1999 Employment Policy Foundation article, Kenneth L. Deavers argues that the
problems of poverty and income inequality are not as severe as generally perceived. He suggests
that the upward bias in the CPI is the cause of the apparent decline in real wages for low-wage
workers during the past 25 years. Deavers notes that, while income inequality has increased,
it is comparable to that in Europe. He suggests that one of the reasons for the growth of income
inequality across households is the growth in the proportion of two-earner households.
- 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.