LegiStorm

Summary:

Income inequality—that is, the extent to which individuals’ or households’ incomes differ—has increased in the United States since the 1970s. Rising income inequality over this time period is driven largely by relatively rapid income growth at the top of the income distribution. For example, in 1975, the average income of households in the top fifth of income distribution was 10.3 times as large as average household income in the bottom fifth of the distribution; in 2015, average top incomes were 16.3 times as large as those at the bottom. The pace and pattern of distributional change, however, was not constant over this time period:  From the mid-1970s to 2000, incomes grew, on average, for households in each quintile (i.e., each fifth of the distribution). Income inequality increased significantly because incomes rose more rapidly for the top quintile (i.e., the top fifth or top 20% of the distribution).  Between 2000 and 2015, average incomes rose at relatively modest rates for the top two quintiles (i.e., the top 40% of the distribution) and fell for the bottom three quintiles (i.e., bottom 60%). The net effect was that income inequality continued to rise, but at a slower rate. In 2015, black and Hispanic households were disproportionately in lower income quintiles (although less so than in recent decades), whereas white and Asian households were disproportionately in higher income quintiles. Over recent decades, income inequality has also increased in most other advanced economies, although most others have more equal income distributions than the United States today and did not experience as much of an increase in inequality as the United States has recently. Households do not necessarily stay in a given quintile from year to year. A new job or profitable investment can propel a household from a lower quintile to a higher one over time; likewise, income loss can result in movement down the distributional ranks. Such movement throughout the income distribution over time is called income mobility. Mobility can be measured in different ways and over different time frames. This report considers analyses of mobility over the shortterm, the longer-term, and across generations. In general, data from governmental sources reveal three broad trends: (1) households and individuals are not perfectly mobile, that is, their current distributional rank is related to past rankings; (2) mobility is greater over longer time periods; and (3) overall income mobility has not decreased significantly in recent decades. Economists have identified several factors that are likely to have contributed to widening inequality since the 1970s. The relative importance of each factor depends on how and over what time period inequality is measured.  Labor income has become less equal because some factors have tended to curb wage growth of lower- and middle-income workers relative to higher income workers. These factors include technological change, globalization, declining unionization, and minimum wage fluctuations.  Other changes aided by globalization and technological change, such as economies of scale, winner-takes-all markets, and the superstar phenomenon may have boosted wages for very high-wage workers. Change in pay dynamics and social norms may help explain the rise in CEO pay.  The distribution of financial wealth has grown more unequal over time, which affects income inequality through the capital income that wealth generates.  The changing demographic composition of households has also contributed to income distribution patterns. Over time, there has been an increase in two earner households, single headed households, and marriages between couples with more similar earnings or educational attainment. Research has investigated the link between income inequality and economic growth. In theory, greater inequality could increase or decrease growth through many channels, and vice versa. Empirically, studies have tried to tease out the relationship between the two across a large number of countries over time. Those studies tend to find stronger evidence that inequality reduces growth in developing countries, which may be of limited relevance to the United States.