Media Briefings

RISING AMERICAN INEQUALITY: New evidence on winners and losers

  • Published Date: February 2018

Rising inequality in the United States since 1970 has delivered large economic gains to households in the top 20% of the income distribution. For households outside this exclusive group, the losses compared with a scenario in which inequality did not rise have been significant, albeit substantially mitigated by the big increase in government redistributive transfers over this period.

These are the central findings of new research by Kevin Lansing and Agnieszka Markiewicz, published in the February 2018 issue of the Economic Journal. Their results suggest that there is room for policy actions that could offset the negative consequences of rising income inequality.

Income inequality in the United States has increased dramatically in recent decades. Data from the US Census Bureau reveal a dramatic climb in the share of before-tax income going to the top 20% of US households ranked by income. Their share rose from 43% in 1970 to 51% in 2014.

Another way to track income is by source. Labour income includes wages and other types of employee compensation. Capital income includes corporate profits, rental income and net interest income. The share of total income attributable to capital sources increased from 35% in 1970 to 43% in 2014. During this period, the top 20% of households ranked by income owned more than 90% of total financial wealth.

Given this highly skewed wealth distribution, the increase in capital’s share of income would be expected to benefit households in the top 20% of the income distribution disproportionately. But as a mitigating factor, government transfer payments to individuals approximately doubled, rising from about 7% of GDP in 1970 to nearly 15% in 2014.

The researchers study the welfare consequences – that is, the economic gains or losses for households – of this pattern of rising US income inequality and transfers. They use an economic model designed to replicate exactly the observed paths of numerous US macroeconomic variables from 1970 to 2014, focusing on shifts in the income distribution.

The economic model includes two groups: capital owners, who represent the top 20% of the income distribution; and workers, who represent the remainder. The top income group in the model owns 100% of the economy’s financial wealth – a set-up that roughly approximates the highly skewed distribution of US financial wealth. Income inequality in the model rises due to technological shifts in business production methods that favour capital owners.

The welfare consequences of rising income inequality depend crucially on how it affects household consumption. The researchers compare consumption in the actual scenario with rising inequality and transfers to consumption in a hypothetical alternative scenario in which inequality and transfers do not increase. Specifically, the alternative scenario holds household income shares and government transfers constant relative to output at their 1970 levels.

The results indicate that the increase in income inequality since 1970 has delivered large welfare gains to households in the top 20% of the income distribution. But for households outside this exclusive group, the welfare losses relative to the alternative scenario appear to have been significant, albeit substantially mitigated by the large increase in government redistributive transfers since 1970.

Analysing other scenarios with the model shows that a relatively modest boost in the historical growth rate of redistributive transfers, accompanied by modestly higher average tax rates, could have achieved small but equal welfare gains for households throughout the income distribution.

Overall, these results suggest that there is room for policy actions that could offset the negative consequences of rising income inequality.

ENDS


Notes for editors: ‘Top Incomes, Rising Inequality, and Welfare’ by Kevin J. Lansing and Agnieszka Markiewicz is published in the February 2018 issue of the Economic Journal.

Kevin Lansing is a senior economist at the Federal Reserve Bank of San Francisco. Agnieszka Markiewicz is at Erasmus University Rotterdam.

For further information: contact Romesh Vaitilingam on +44-7768-661095 (email: romesh@vaitilingam.com; Twitter: @econromesh); or Kevin Lansing via email: kevin.j.lansing@gmail.com