New findings on income inequality, and there's very little good news

Thomas Piketty and Emmanuel Saez are probably the world’s leading scholars of economic inequality. They, with Gabriel Zucman, just published a new working paper on the subject with updated findings.  The results of “Distributional National Accounts: Methods and Estimates for the United States” (December 2016) are not surprising, but are nevertheless extremely useful.

Their first finding is that American income inequality has been widening since circa 1980. The authors use the metaphor of “two countries” to describe the widening class gap, and it’s a good one.  In one country,

[t]he average pre-tax income of the bottom 50% has stagnated since 1980 at about $16,000 per adult (in constant 2014 dollars, using the national income deflator), while average national income has grown by 60% to $64,500 in 2014.


among working-age adults, average bottom 50% pre-tax income has collapsed since 1980: -20% for adults aged 20-45 and -8% for those between 45 and 65 years old.

In the other, much smaller, country, “the average pre-tax income of top 1% adults rose from $420,000 to about $1.3 million, and their income share increased from about 12% in the early 1980s to 20% in 2014.”

I think this is their clearest illustration:

Piketty, Saez, Zucman: bottom 50% vs top 1%_2016

You can see this even more dramatically in terms of each “country”‘s share of national income over time:

Piketty, Saez, Zucman: _bottom-50-vs-top-1_crossing_2016

Piketty, Saez, and Zucman also focus on the impact of government transfer payments on income unequality.  Piketty at least has been charged with not accounting for these in the past.  Now he gets to respond.  Unfortunately, the three authors don’t find the post-1980 social services world doing much to ameliorate the two countries’ gap.  “The progressivity of the U.S. tax system has declined significantly over the last decades.”

Transfers that go to the bottom 50% have not been large enough to lift income significantly…

The aggregate flow of individualized government transfers has increased, but these transfers are largely targeted to the elderly and the middle-class (individuals above the median and below the 90th percentile).

I think those “transfers are largely targeted to the elderly” include Medicare and Medicaid.

Related to that point, it seems that salaries and wages really flatlines for the bottom 50%, with the only bright spot being post-LBJ public medical care.  The authors argue that “almost all of the meager growth in real bottom 50% post-tax income since the 1970s comes from Medicare and Medicaid…. Bottom 50% adults do not benefit directly from cash redistribution: they pay approximatively as much in taxes as they receive in monetary transfers.”  What the bottom 50% of society receive in cash payments, they pay out in taxes.

The paper’s third finding zeroes in on the top 1%, and offers an important observation.  Do the wealthiest get that rich by working hard?  Well, they used to.

There is a widespread view that rising income inequality mostly owes to booming wages at the top end, to a rise of the “working rich.” Our results confirm that this view is correct from the 1970s to the 1990s. But in contrast to earlier decades, the increase in income concentration over the last fifteen years owes to a boom in the income from equity and bonds at the top. The working rich are either turning into or being replaced by rentiers. Top earners became younger in the 1980s and 1990s but have been growing older since then…

Put concisely, “[t]he surge in income concentration since the 1970s was first a labor income phenomenon but has been mostly a capital income phenomenon since 2000.”  This hearkens back to Piketty’s famous r>g formula.

The paper then shifts to focus on gender, and offers a conclusion eerily resonant with the November presidential election:

[T]he United States is still characterized by a spectacular glass ceiling… Up to the early 1980s there was less than 10% of women in the top 10%, top 1% and top 0.1% of the labor income distribution. Since then, this share has increased, but the increase is smaller the higher one moves up in the distribution. As of 2014, women make only about 16% of the top 1% labor income earners, and 11% of the top 0.1%…

Below that ceiling, there has been progress at reducing the gender wage gap, but not in a way that lifts all boats: “At the median, pre-tax labor income differences between men and women have diminished.”

For working-age women, the median pre-tax income has been multiplied by more than five from 1962 to 2014—largely the result of an increase in rates of labor force participation—to about $20,000 today. For working age men, median pre-tax labor income has stagnated: it is the same in 2014 as in 1964, about $35,000. There’s been no growth for the median male worker over half a century.

And that progress stalled out with the Great Recession.

Given all of these conclusions, what do Piketty, Saez, and Zucman recommend we do?  A major overhaul of society is in order:

In our view, the main conclusion is that the policy discussion should focus on how to equalize the distribution of primary assets, including human capital, financial capital, and bargaining power, rather than merely ex-post redistribution.

Which seems laughingly unlikely during a Trump administration.

What do you make of these findings?  What do they have to say to education?

PS: The first chunk of the paper is a detailed argument about new ways to measure income, and I honestly followed about one half of it.  This is pretty technical stuff, and I’d like to hear some responses from better trained readers.

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2 Responses to New findings on income inequality, and there's very little good news

  1. Thanks for pointing to this update. So important to get this out via all our channels. Really needs to reach those affected the most–Trump voters. Folks in rural areas like ours are especially tough to reach in venues that make a difference: church, school, work. They know something is wrong, hence their vote, but it is so inchoate to them, well…

    Of course they could be wrong. As Oliver Wendell Holmes once wrote, “Certitude is not the test of certainty. We have been cocksure of many things that were not so.” What spooks me most is the idea of two Americas. The binaries of have/have not just rockets to mind. Or master/slave?

    • VanessaVaile says:

      Terry, thanks for the reminder to share this widely than just ed-ish pages and networks (but there too). What you write applies to my own rural areas too — Central New Mexico and Northeast Colorado.

      Balzac’s and Dicken’s binaries of 19th century rentiers, landlords and factory owners come to mind.

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