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posted on 11 July 2016

How Has Income Inequality Changed Over The Years?

from the St Louis Fed

Income inequality has been rising in the U.S. since World War II and reached its highest level since the 1920s in 2013, according to an article in The Regional Economist.

Assistant Vice President Michael Owyang and Senior Research Associate Hannah Shell noted that economists Thomas Piketty and Emmanuel Saez found that income inequality peaked in the 1920s, then decreased after the Great Depression.1 Top capital incomes had fallen and were unable to recover.

Using a different dataset than Piketty and Saez, Owyang and Shell examined trends in income inequality since 1947. They found that income inequality as measured by the Gini coefficient was relatively low from the start of their study through the early 1970s. (A Gini coefficient of 0 means incomes are perfectly equal, and 1 means incomes are perfectly unequal. Over this period, the Gini coefficient was flat or declining.)

That changed in the 1970s, when wages among the highest earners grew faster than wages for everyone else. The authors found that the Gini coefficient grew from 0.394 in 1970 to 0.482 in 2013. (For a figure showing the changes, see The Regional Economist article "Measuring Trends in Income Inequality.") Regarding wage growth among different earning groups, the authors cited a Congressional Budget Office report showing that:

  • Market income growth for everyone but the top 20 percent of earners averaged 16 percent between 1979 and 2011.

  • Among the top 20 percent, but excluding the top 1 percent, market income grew 56 percent.

  • The top 1 percent saw growth of 174 percent.2

Effects of the Great Recession on Income Inequality

While income inequality continued to rise after the 1970s, the 2001 and 2007-09 recessions caused top incomes to fall sharply. However, these losses were temporary. Owyang and Shell noted that the incomes of the top 1 percent captured about two-thirds of overall income growth during the period 2002-07, according to Piketty and Saez.

The authors wrote: "Further, even though top incomes fell 36.3 percent in the 2007-09 recession, the incomes of the bottom 99 percent also decreased 11.6 percent. This decrease is the largest two-year fall in the incomes of the bottom 99 percent since the Great Depression."

It's important to note that growth from 2013 to 2014 was more equal. Owyang and Shell noted that the incomes of the bottom 99 percent grew 3.3 percent, the highest in more than 10 years. It also means the Gini coefficient on household income decreased slightly, the first nonrecession decrease since 1998.

Conclusion

The authors concluded that economists have found that, in 2013, income inequality reached its highest level since the 1920s. They wrote: "Understanding the facts about inequality is the first step in assessing what can and should be done."

Notes and References

1 Piketty, Thomas; and Saez, Emmanuel. "Income Inequality in the United States, 1913-1998." The Quarterly Journal of Economics, Vol. 118, No. 1, 2003, pp. 1-39.

2 "The Distribution of Household Income and Federal Taxes, 2011." Congress of the United States: Congressional Budget Office. November 2014.

Additional Resources

Source

https://www.stlouisfed.org/on-the-economy/2016/june/how-has-income-inequality-changed-years

Disclaimer

Views expressed are not necessarily those of the Federal Reserve Bank of St. Louis or of the Federal Reserve System.

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