The Fall and Rise of
Income Inequality in the United States
Presented to
MSU Faculty Emeriti Association
February 17, 2017
Charles L. Ballard
Department of Economics
Michigan State University
East Lansing, MI
[email protected]
The increase in income
inequality since the late
1970s is arguably the
most important
economic story in our
lifetime in the United
States.
But the decrease in
inequality in the 1930s
and 1940s, which
maintained itself until
the 1970s, was no less
stunning.
One easy way to see the
trends is to look at the
percentage of income
received by the top one
percent of households
(with incomes above about
$440,000 per year in 2015).
Percentage of Income in the United States Received by the Top One Percent of
Households, 1913-2015
25
Percent
20
15
10
5
0
Year
However, about half of
what is happening to the
top one percent can be
accounted for by the top
one-tenth of one percent
(with incomes above about
$2,000,000 per year).
Percentage of Income in the United States
Received by the Top One Percent and
Top One-Tenth of One Percent of Households, 1913-2015
25
Percent
20
Top 1 Percent
15
Top One-Tenth of 1
Percent
10
5
0
Year
The Great Convergence of the
1930s and 1940s did not just
happen.
It was the deliberate and
predictable result of public
policies.
Reasons for the Great Convergence
1. Huge increases in educational
opportunity.
2. The corporation income tax (1909)
and the 16th Amendment to the
Constitution (1913) bring progressive
income taxation to the United States.
The estate tax (1916) brings
progressive wealth taxation.
3. The Banking Act of 1933
(the Glass-Steagall Act)
makes banking boring.
4. The National Labor
Relations Act (1935) makes it
much easier for labor unions
to organize successfully.
5. The Fair Labor Standards
Act (1938) introduces a
national minimum wage.
6. During World War II, the
National War Labor Board
repeatedly rules in favor of
wage increases for lowskilled workers.
The Great Divergence that
has taken place since the
1970s did not just happen.
It is largely due to the slowing
or reversal of the policies of
the 1930s and 1940s.
1. Education slowed
down, and technology
sped up.
High-School Graduation Rates in the United States, 1870-1992
90
80
70
Percent
60
50
40
30
20
10
0
Year
Source: U.S. Department of Education (1993)
2. Financial
deregulation made
banking exciting.
Index of Financial Deregulation and Relative Wage for Workers in the
Financial-Services Sector
1.0
1.8
0.5
1.7
0.0
1.6
-0.5
1.5
-1.0
1.4
-1.5
1.3
-2.0
1.2
-2.5
1.1
-3.0
1.0
Year
Source: Philippon and Reshef (2012)
Index of Deregulation
(Left Scale)
Relative Wage (Right
Scale)
3. Social norms have
changed in ways that
exacerbate income
inequality.
One-Parent Families as a Percent of All Families with
At Least One Child Under Age 18,
In the United States, 1950-2016
35
Percent
30
25
20
15
10
5
0
Year
Average Ratio of Compensation of
Chief Executive Officers to
Worker Compensation, 1965-2013
400
350
300
250
200
150
100
50
0
Year
4. Unions weakened.
Union Members as Percentage of
U.S. Workers, 1930-2016
40
35
30
Percent
25
20
15
10
5
0
Year
5. The tax system became
less progressive.
Highest Marginal Tax Rate in the U.S. Federal Individual Income Tax, 1913-2016
100
Marginal Tax Rate, in Percentage Points
90
80
70
60
50
40
30
20
10
0
Year
6. Import competition put
pressure on the jobs and
wages of American
manufacturing workers.
United States Exports and Imports as Percent of
Gross Domestic Product, 1950-2015
20
18
16
Percent of GDP
14
12
Exports
10
Imports
8
6
4
2
0
Year
7. The increase in immigration
was dominated by immigrants
with low levels of skill.
It created a large pool of lowskill workers who could not
vote.
8. The minimum wage did
not keep up with inflation.
Real Minimum Wage (in 2014 Dollars) Per Hour
10.00
Real (Inflation-Adjusted) Federal Minimum Wage,
1938-2016 (in 2016 Dollars)
9.00
8.00
7.00
6.00
5.00
4.00
3.00
2.00
1.00
0.00
Year
The “Great Divergence” of
the last 40 years has had a
very different character in
some parts of the United
States than in others.
Percent Change in Inflation-Adjusted Income,
For Households at Selected Points in the Income Distribution,
In Michigan and the United States, 1976-78 to 2011-13
60
50
Percent Change
40
30
Michigan
20
United States
10
0
-10
10
20
30
40
50
60
70
80
90
Percentile of the Household Income Distribution
Source: Ballard and Menchik (2015)
Percent Change in Inflation Adjusted Income,
For Households at Selected Points in the Income Distribution,
In Massachusetts and the United States, 1976-78 to 2011-13
90
80
Percent Change
70
60
Massachusetts
50
40
United States
30
20
10
0
10
20
30
40
50
60
70
80
Percentile of the Household Income Distribution
Source: Ballard and Menchik (2015)
90
Percent Change in Inflation-Adjusted Income,
For Households at Selected Points in the Income Distribution,
In Alabama and the United States, 1976-78 to 2011-13
60
Percent Change
50
40
30
Alabama
20
United States
10
0
10
20
30
40
50
60
70
80
Percentile of the Household Income Distribution
Source: Ballard and Menchik (2015)
90
Political Explanations of the
Economic Explanations:
A. Social issues
B. Political organization
C. Electoral institutions
D. Voter ignorance
In my view, race is more
important than any of
the other explanations.
Michigan, My Michigan
A song to thee, fair State of mine,
Michigan, my Michigan.
But greater song than this is thine,
Michigan, my Michigan.
The whisper of the forest tree,
The thunder of the inland sea,
Unite in one grand symphony
Of Michigan, my Michigan.