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Income Distribution

The ‘New Normal’ of Unbalanced Growth

Research & Commentary
September 25, 2014

by Lars Osberg

Over the past thirty years, income has grown much faster for the top 1 percent than for everyone else.

By Lars Osberg

The differential in income growth rates has been with us for decades.

The incomes of the top 1 percent have grown the fastest of all.

Everybody knows that the United States is more unequal now than in 1980. Can we expect it to continue getting more unequal? Unfortunately, yes. When the average incomes of the top 1 percent grow significantly faster than the incomes of everyone else, the inevitable result is increasing inequality. In the United States, this has become the ‘new normal.’

From the 1940s through the late 1950s, the bottom 99 percent of the income distribution saw their incomes grow much faster than those of the top 1 percent, which reduced income inequality. This was followed by a long period (from the late 1950s to the early 1980s) of roughly balanced growth. Because incomes throughout the income distribution were then growing at roughly the same rate, income inequality remained approximately constant. Since the early 1980s, the incomes of the top 1 percent have, with occasional recessionary intermissions, grown much more rapidly than those of everyone else.

Figure 1. Real Income Growth Rates – United States

larsfigure1.1Note: Average income per tax unit. Real income is expressed at 2011 US Dollars. Tax units are families. Source: The World Top Incomes Database, http://topincomes.g-mond.parisschoolofeconomics.eu/.

 

This differential in income growth rates has been with us for the last thirty years. What will happen if it continues for the next twenty? Table 1 presents the answer: a steadily widening gap between the top 1 percent and everyone else. The ratio of top 1 percent average income to median income more than doubled (8:1 to 20:1) from 1984 to 2012. A continuation of the same growth rates implies that it will almost double again (to 38:1) by 2032.

 

 Table 1. Implications of income growth at historic rates – United States

Real income in US dollars at 2012 prices

Median Household Income Top 1% average Income Absolute Gap Top 1% annual income gain Ratio of top 1% to median income
1984 47 181 383 919 336 739 13 421 8.1
2012 51 017 1 021 761 970 744 35 720 20.0
2032 53 943 2 031 476 1 977 533 71 108 37.7
Average annual growth Rate 1984-2012 0.28% 3.5%

Note: Real incomes of the top 1 percent of taxpayers and of the median household in 2012 are assumed to grow over the period 2012 to 2032 at the same compound rates observed over the period 1984-2012. Source: The World Top Incomes Database http://topincomes.g-mond.parisschoolofeconomics.eu/; Census Bureau Table H-8. Median Household Income by State: 1984 to 2012.

 

The size of these emerging income gaps may seem extreme, but what exactly will equalize the underlying income growth rates which now produce steadily widening income gaps?

Could the rate of income growth of the bottom 99 percent accelerate enough to reduce, or stabilize, inequality? Income inequality shrank substantially after 1940 because of the rapid growth of real incomes of the bottom 99 percent. However, the conditions that made that possible are unlikely to be repeated. The absorption of the mass unemployment of the 1930s into wartime production was a “once only” event – ditto the wartime price and wage controls which compressed wage differentials and profit margins. Greater urbanization, increased female labor force participation, and widespread post-secondary education were structural changes of the 1940s and 1950s which had large impacts on family incomes, but they all eventually reached a maximum. Unions also had significant influence in both workplace bargaining and social policy determination – but since 1980 their power has waned.

Overall, balanced growth is not the norm. The thirty year period 1952-1982 appears to be a happy accident of history during which income growth rates at the top and the bottom were roughly equal.

“Increasing inequality over time” and “more rapid income growth at the top” are two different ways of describing the same reality. Stabilizing income inequality requires income growth rates to be the same. Either an acceleration of the income growth rate of the bottom 99 percent or a decline in the income growth rate of the top 1 percent could accomplish this result.

However, no automatic ‘equilibrating’ mechanism is apparent in economic markets. Thus the crucial question of the next twenty years is whether political economy can rise to the challenge of preventing ever increasing inequality.

 Lars Osberg is McCulloch Professor of Economics at Dalhousie University.

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