Responding to Rising Inequality: Policy Brief

Accelerating Inequality

Accelerating Inequality 

In the 1970s, the United States—like other industrialized countries—experienced significant economic restructuring shaped by technological advances, increasing global economic interconnectedness and changing political dynamics. Manufacturing employment contracted, service employment increased, labor unions experienced significant decline, and the structure of wages became more polarized, with a premium paid in the highest skilled jobs.

Since the 1970s, incomes for the highest earners have risen but the wages of the majority have stagnated or declined. The middle-class, the working-class, and the poor have received a steadily shrinking share of the national income over the past four decades, as revealed in FIGURES 1 and 2. In 2012, the 20 percent of households at the top of the income distribution received more than half of the national income (an 18 percent increase since 1970) while the 20 percent of households in the middle of the income distribution received only 14 percent of the national income (a 20 percent decrease since 1970).4 Indeed, all together the 60 percent of the population with the lowest incomes received only 26 percent of the national income in 2012 (a 19 percent decrease since 1970).5

Groundbreaking research over the past decade by UC Berkeley Economics Professor and Haas Institute Economic Disparities Cluster member Emmanuel Saez has focused national attention on this income inequality. Saez has used tax records to reveal that the share of the national income received by the top one percent of residents in the United States has more than doubled over the last thirty years, rising from 9% of the total in 1976 to more than 22.5% (including capital gains) in 2012, as illustrated in FIGURE 1. 6 The average annual income for the top one percent of households in 2012 was about $1.3 million, as compared to the median household income of $51,017.7

Research findings of Hilary Hoynes, Haas Institute Economic Disparities Cluster Chair and Professor of Economics and Public Policy at UC Berkeley reveal that the recent recession has only exacerbated this inequality because its effects were not evenly distributed. In terms of unemployment rates, the recession affected men more than women, African Americans and Latinos more than whites, and younger workers more than older workers (see FIGURE 3). The recession’s impact on unemployment for black men was almost double that for white men and the impact for black women was almost triple that for white women.8

Overall, declining workforce participation rates have added a significant obstacle in the path of working and middle class families’ efforts to move further up the economic ladder and have pushed many families into poverty. These challenges are reflected, for example, in an increase in the poverty rate from 12.5% in 2007 to 15.0% in 2012. More than 1 in 5 children currently live in poverty.9

KEY FINDINGS 

  • Economic inequality pulls the rungs on the ladder of class advancement farther apart.
  • Economic mobility is highly correlated with parental income.
  • Intergenerational economic mobility varies significantly by metropolitan region.

Figure 1 includes a graph showcasing the National Income Share of the Top 1%, Including Capital Gains, 1913-2012

Figure 2 includes bar graphs showcasing the Change in Income by Decade from 1921 - 2012 [in 2012 constant dollars]

Figure 3 includes a graph showcasing the Unemployment rates for African Americans, Latinos and Whites from 2007 – 2013

A GROWING ECONOMY BUT A SHRINKING MIDDLE CLASS

As the declining share of national income received by the bottom 60 percent of earners and the rising poverty rate demonstrate, the middle class is shrinking as households are pushed further down the income distribution. Former U.S. Labor Secretary Robert Reich, a member of the Haas Institute Economic Disparities Research Cluster and Professor of Public Policy at UC Berkeley, has highlighted the effect of the growing economic inequality on the middle class and the economy overall. Between 1990 and 2012, the proportion of households with incomes between $40,000 and $100,000 (in 2012 constant dollars) fell from 43% to 39% while the proportion of households with incomes less than $40,000 (in 2012 constant dollars) increased from 35% to 39%.10 The middle class is increasingly being pushed toward poverty, but not because the U.S. economy has failed to grow. 

During the three decades following the Second World War, the United States witnessed rapid upward mobility as productivity and wages grew together and gains were relatively evenly distributed over the income scale. Since the 1980s, however, productivity has continued to grow (increasing by 78% between 1980 and 2009) yet median wages have stagnated.11 Indeed, Reich points out that in 2007 a male worker with a median wage of slightly over $45,000 earned less than a male worker with the same income level earned 30 years before (accounting for inflation, but not including fringe benefits).12 If the gains to the economy had been equally divided among Americans, Reich demonstrates, the typical person would have been 60 percent better off economically than she was in 2007.13 Where, then, did the economic gains from increased productivity go? A growing share went to the top one percent, as illustrated by FIGURE 4.

From 1993 to 2012, the incomes of the top one percent grew by 86% while the incomes of the remaining 99% grew by just 6.6% (an annual growth rate of only 0.34%). The top one percent captured over two-thirds of the overall income growth between 1993 and 2012. This disparity has only grown since the recession. Looking just at the time period since the economic recovery began in 2009, fully 95% of all of the national income gains went to the top one percent.14

Reich highlights the similarities between income inequality in 1928, just before the Great Depression, when the share of national income going to the top one percent peaked at over 23%, and income inequality in 2007, when it again peaked at over 23%, just before the recent recession, as illustrated by FIGURE 1. After 1928, the share of national income going to the top one percent declined steadily into the 1970s, when it reached about 9%, before beginning to increase again. As more income went to the very highest earners after the 1970s, the savings rate declined and the middle class took on increasing amounts of household debt (including mortgages), which rose from 55% of household income in the 1960s to 138% in 2007. Reich argues that this concentration of wealth is bad for everyone because the declining purchasing power of the middle class is limiting overall economic growth. The majority of the economy is based on consumer spending, and Reich argues that if middle class consumers don’t have the disposable income to purchase what the economy is capable of producing because that income is going to high earners who spend only a small fraction of their tremendous incomes, then the economy cannot reach its full potential.15

Figure 4 includes a graph of the Average Income, Including Capital Gains of Tax Filers by Income Percentile,1917-2012 [in 2012 constant dollars]

The polarization of the wage structure (generating more high- and low-skill jobs and fewer middle-skill jobs) has only accelerated during the recent recession and its aftermath. Although automation and international trade since the 1970s have contributed to a persistent decline in middle-skill employment, the recent recession has exacerbated this hollowing out of the middle-class. During the recession, middle-skill jobs experienced the sharpest and most lasting decline and the majority of the jobs created post recession have been in lower-skill, lower-wage occupations.16 French economist Thomas Piketty, in his book Capital in the Twenty-First Century, points out that this growing income and wealth polarization is related to the growing return to capital and the shrinking return to labor as shares of national income.

STALLED ECONOMIC MOBILITY

This growing economic inequality is of particular concern because it has the effect of pulling the rungs on the ladder of class advancement further apart, potentially affecting economic mobility. It is a longstanding pillar of faith in the United States that regardless of where one starts out, one has the opportunity to do better than one’s parents. Yet recent research by Raj Chetty, Nathaniel Hendren, Patrick Kline, Haas Institute faculty cluster member and Professor of Economics at UC Berkeley, and Emmanuel Saez finds that how much children are able to earn as adults is strongly correlated with how much their parents earned.17 While there is indeed still some mobility across classes, the majority of children retain an economic status similar to that of their parents—more than 60% of those children who grew up in families with incomes in the top fifth of income earners remain in the top two-fifths, while more than 60% of those children who grew up in families with incomes in the bottom fifth remain in the bottom two-fifths.18

Figure 5 includes a graph of Adult and Child Poverty Rates from 2007–2012

One of the most surprising findings in this research is that intergenerational mobility varies substantially by metropolitan region. The probability that a child from the bottom fifth will end up in the top fifth of income earners is only 4.4% in Charlotte but nearly three times higher in San Jose—12.9%.19 A child whose parents’ earnings were in the 20th percentile ends up, on average, in the 45th percentile in Salt Lake City, but only the 35th percentile in Indianapolis.20 In short, the geographic location where one grows up matters significantly for where one ends up economically as an adult.

KEY FINDINGS

  • Since 1970, the U.S. economy has grown significantly but middle class wages have remained relatively stagnant.
  • A rising share of national income is going to the top one percent of earners.
  • Over the past four decades, middle class households have taken on increasing amounts of debt. K
  • 4. U.S. Census Bureau 2014b, Current Population Survey, Annual Social and Economic Supplements, Historical Income Table H-2. Available at: https://www.census.gov/ hhes/www/income/data/historical/household/.
  • 5. Id
  • 6. Alvaredo, Facundo, Anthony Atkinson, Thomas Piketty, and Emmanuel Saez. 2013. “The Top 1 Percent in International and Historical Perspective.” Journal of Economic Perspectives, 27(3): 3-20.
  • 7. Id.; U.S. Census Bureau 2014c, Current Population Survey, Annual Social and Economic Supplements, Historical Income Table H-8. Available at: https://www.census.gov hhes/www/income/data/historical/household/.
  • 8. Hoynes, Hilary, Douglas Miller, and Jessamyn Schaller. 2012. “Who Suffers during Recessions?” Journal of Economic Perspectives, 26(3): 27-48.
  • 9. U.S. Census. 2012. People in Poverty by Selected Characteristics: 2011 and 2012. Available at: http://www.census.gov/hhes/www/poverty/data/incpovhlth/2012/tables.html.
  • 10. NYU Furman Center. 2014. The State of New York City’s Housing and Neighborhoods. Available at: http://furmancenter.org/research/sonychan.
  • 11. Levy, Frank and Thomas Kochan. 2012. “Addressing the Problem of Stagnant Wages.” Comparative Economic Studies 54: 739–764.
  • 12. Reich, Robert. 2010. Aftershock: The Next Economy and America’s Future. New York: Alfred A. Knopf.
  • 13. Id.
  • 14. Saez, Emmanuel. 2013. Striking it Richer: The Evolution of Top Incomes in the United States. Available at: http://elsa.berkeley.edu/~saez/saezUStopincomes-2012.pdf
  • 15. Reich, Robert. 2010. Aftershock: The Next Economy and America’s Future. New York: Alfred A. Knopf.
  • 16. Foote, Christopher L. and Richard W. Ryan. 2014. Labor-Market Polarization Over the Business Cycle. Prepared for 2014 NBER Macroeconomics Annual Conference.
  • 17. Chetty, Raj, Nathaniel Hendren, Patrick Kline, and Emmanuel Saez. 2014. “Where is the Land of Opportunity? The Geography of Intergenerational Mobility in the United States,” NBER Working Papers 19843, National Bureau of Economic Research, Inc.
  • 18. Id.
  • 19. Id.
  • 20. Id.