Income inequality in the United States
|Income in the United States|
Income inequality in the United States has grown significantly since the early 1970s, after several decades of stability, and has been the subject of study of many scholars and institutions. While inequality has risen among most developed countries, and especially English-speaking ones, it is highest in the United States. According to economist Thomas Piketty, the level of inequality of income from labor in the U.S. is "probably higher than in any other society at any time in the past, anywhere in the world." Income inequality (as measured by the Gini coefficient) is not uniform among the states: after-tax income inequality in 2009 was greatest in Texas and lowest in Maine.
Most of the growth has been between the middle class and top earners, with the disparity becoming more extreme the further one goes up in the income distribution. A 2011 study by the CBO found that the top earning 1 percent of households increased their income by about 275% after federal taxes and income transfers over a period between 1979 and 2007, compared to a gain of just under 40% for the 60 percent in the middle of America's income distribution. Other sources find that the trend has continued since then. In spite of this data, only 42% of Americans think inequality has increased in the past ten years. In 2012, the gap between the richest 1 percent and the remaining 99 percent was the widest it's been since the 1920s. Incomes of the wealthiest 1 percent rose nearly 20 percent, whereas the income of the remaining 99 percent rose 1 percent in comparison.
Scholars and others differ as to the causes, solutions, and the significance of the trend, which in 2011 helped ignite the "Occupy" protest movement. Education and increased demand for skilled labor are often cited as causes, some have emphasized the importance of public policy; others believe the cause(s) of inequality's rise are not well understood. Inequality has been described both as irrelevant in the face of economic opportunity (or social mobility) in America, and as a cause of the decline in that opportunity.
Yale professor and economist Robert J. Shiller, who was among three Americans who won the Nobel prize for economics in 2013, believes that rising economic inequality in the United States and other countries is "the most important problem that we are facing now today." Pope Francis echoed this sentiment in his Evangelii Gaudium, stating that "as long as the problems of the poor are not radically resolved by rejecting the absolute autonomy of markets and financial speculation and by attacking the structural causes of inequality, no solution will be found for the world’s problems or, for that matter, to any problems." President Barack Obama referred to the widening income gap as the "defining challenge of our time."
- 1 History
- 2 Measurement
- 3 Causes
- 3.1 Inequality in general
- 3.2 Post-1980 rise in inequality
- 3.2.1 Broad breakdown
- 3.2.2 Explanations
- 3.2.3 Skill-biased technological change
- 3.2.4 Globalization
- 3.2.5 Immigration
- 3.2.6 Changes in income calculation
- 3.2.7 Political, normative, institutional
- 4 Effects
- 5 Proposed policy responses
- 6 See also
- 7 Notes
- 8 References
- 9 External links
The level of concentration of income in America has fluctuated throughout its history. Going back to the early 20th Century, when income statistics started to become available, there has been a "great economic arc" from high inequality "to relative equality and back again," in the words of Nobel laureate economist Paul Krugman. In 1915, an era in which the Rockefellers and Carnegies dominated American industry, the richest 1% of Americans earned roughly 18% of all income. By 2007, the top 1 percent account for 24% of all income. In between, their share fell below 10% for three decades. In terms of the nation's wealth rather than income, as of 2011 the top 1 percent control 40 percent.
The first era of inequality lasted roughly from the post-civil war era ("the Gilded Age") to sometime around 1937. But from about 1937 to 1947 – a period that has been dubbed the "Great Compression" – income inequality in America fell dramatically. Highly progressive New Deal taxation, the strengthening of unions, and regulation of the National War Labor Board during World War II raised the income of the poor and working class and lowered that of top earners. This "middle class society" of relatively low level of inequality remained fairly steady for about three decades ending in early 1970s, the product of relatively high wages for the US working class and political support for income leveling government policies.
Wages remained relatively high because of lack of foreign competition for American manufacturing, lack of low skilled immigrant workers, competition for US workers in general, and – arguably most important – strong trade unions. By 1947 more than a third of non-farm workers were union members, and unions both raised average wages for their membership, and indirectly and to a lesser extent, raised wages for workers in similar occupations not represented by unions. Scholars believe political support for equalizing government policies was provided by high voter turnout from union voting drives, the support of the otherwise conservative South for the New Deal, and prestige that the massive mobilization and victory of World War II had given the government.
The Great Divergence differs in some ways from the pre-Depression era inequality. Before 1937 a larger share of top earners income came from capital (interest, dividends, income from rent, capital gains). Post 1970, income of high-income taxpayers comes predominantly from "labor", i.e. employment compensation.
Until 2011, the Great Divergence had not been a major political issue in America, though stagnation of middle class income was. In 2009 the Barack Obama administration White House Middle Class Working Families Task Force convened to focus on economic issues specifically affecting middle-income Americans. In 2011, the Occupy movement drew considerable attention to income inequality in the country.
Most recent statistics
From 1992 to 2007 the top 400 earners in the U.S. saw their income increase 392% and their average tax rate reduced by 37%.[dubious ] The share of total income in America going to the top 1% of American households (also after federal taxes and income transfers) increased from 11.3% in 1979 to 20.9% in 2007. A 2013 study by Thomas Piketty, Emmanuel Saez et al., notes that the rise in the share of total annual income received by the top 1%, which has more than doubled since 1976, has had a significant effect on overall income inequality. It states: "It is tempting to dismiss the study of this group as a passing political fad due to the slogans of the Occupy movement or as the academic equivalent of reality TV. But the magnitudes are truly substantial." Also in 2013, the Economic Policy Institute noted that even though corporate profits are at historic highs, the wage and benefit growth of the vast majority has stagnated. The fruits of overall growth have accrued disproportionately to the top 1%.
However, disparity in income increased again during the 2009–2010 recovery, with the top 1% of income earners capturing 11.6% of income and capital gains, and the income of the other 99% remained flat, growing by only 0.2%. 60% of earners in the top 0.1 percent are executives, managers, supervisors, and financial professionals. More than half of them work in closely held businesses. The top 1 percent is composed of many professions, the five most common professions being managers, physicians, administrators, lawyers, and financial specialists. Doctors are more likely than any other profession to be in the 1 percent. According to PolitiFact and others, 400 Americans have more wealth than half of all Americans combined.
OECD's study in May 2013 said the richest 10 percent of society in OECD countries pocketed 9.5 times as much market income as the poorest 10 percent in 2010, up from 9 times in 2007. It also stated that the widest gap between rich and poor was found in Chile, Mexico, Turkey and the United States. By contrast, Iceland, Slovenia, Norway and Denmark were the most egalitarian societies.
Rising income inequality has been linked to the political polarization in Washington DC. According to a 2013 study published in the Political Research Quarterly, elected officials tend to be more responsive to the upper income bracket and ignore lower income groups.
|Households||Persons, age 25 or older with earnings||Household income by race|
|All households||Dual earner
|Measure||Some High School||High school graduate||Some college||Associate's degree||Bachelor's degree or higher||Bachelor's degree||Master's degree||Professional degree||Doctorate degree|
|Persons, age 25+ w/ earnings||$20,321||$26,505||$31,054||$35,009||$49,303||$43,143||$52,390||$82,473||$70,853|
|Male, age 25+ w/ earnings||$24,192||$32,085||$39,150||$42,382||$60,493||$52,265||$67,123||$100,000||$78,324|
|Female, age 25+ w/ earnings||$15,073||$21,117||$25,185||$29,510||$40,483||$36,532||$45,730||$66,055||$54,666|
|Persons, age 25+, employed full-time||$25,039||$31,539||$37,135||$40,588||$56,078||$50,944||$61,273||$100,000||$79,401|
|Bottom 10%||Bottom 20%||Bottom 25%||Middle 33%||Middle 20%||Top 25%||Top 20%||Top 5%||Top 1.5%||Top 1%|
|$0 to $10,500||$0 to $18,500||$0 to $22,500||$30,000 to $62,500||$35,000 to $55,000||$77,500 and up||$92,000 and up||$167,000 and up||$250,000 and up||$350,000 and up|
|Source: US Census Bureau, 2006; income statistics for the year 2005|
A number of studies by the US Department of Commerce, Congressional Budget Office (CBO), and Internal Revenue Service, have found that the distribution of income in the United States – most commonly measured by household or individual – has become increasingly unequal since the 1970s.
One of the most recent and comprehensive studies on the change in income inequality in America was a 2011 study by the Congressional Budget Office (CBO) – "Trends in the Distribution of Household Income Between 1979 and 2007". (It chose those two years because they both preceded an economic recession and so both were periods of "similar overall economic activity"). The report found that real household income after federal taxes and including government transfers (payments from Social Security, unemployment insurance, etc.) grew by 62%.
However, income of households in the top 1 percent of earners grew by 275%, compared to 65% for the next 19 percent, just under 40% for the next 60 percent, 18% for the bottom fifth of households. "As a result of that uneven income growth," the report noted, "the share of total after-tax income received by the 1 percent of the population in households with the highest income more than doubled between 1979 and 2007, whereas the share received by low- and middle-income households declined … The share of income received by the top 1 percent grew from about 8% in 1979 to over 17% in 2007. The share received by the other 19 percent of households in the highest income quintile (one-fifth of the population as divided by income) was fairly flat over the same period, edging up from 35% to 36%." 
According to CBO, the major reason for observed rise in unequal distribution of after-tax income was an increase in market income, that is household income before taxes and transfers. Market income for a household is a combination of labor income (such as cash wages, employer-paid benefits, employer-paid payroll taxes), business income (such as income from businesses and farms operated solely by their owners), capital gains (profits realized from the sale of assets, stock options), capital income (such as interest from deposits, dividends, rental income), and other income. Of these, capital gains accounted for 80% of the increase in market income for the households in top 20%, in the 2000–2007 period. Even over 1991–2000 period, according to CBO, capital gains accounted for 45% of the market income for the top 20% households.
Pioneers in the use of IRS income data to analyze income distribution are Emmanuel Saez and Thomas Piketty at the Paris School of Economics showed that the share of income held by the top 1 percent was as large in 2005 as in 1928. Other sources that have noted the increased inequality included economist Janet Yellen who stated, "the growth [in real income] was heavily concentrated at the very tip of the top, that is, the top 1 percent."
Economist Timothy Smeeding summed up the current trend:
Americans have the highest income inequality in the rich world and over the past 20–30 years Americans have also experienced the greatest increase in income inequality among rich nations. The more detailed the data we can use to observe this change, the more skewed the change appears to be ... the majority of large gains are indeed at the top of the distribution.
Various methods are used to determine income inequality and different sources may give different figures for gini coefficients or ratio different ratio of percentiles, etc.. The United States Census Bureau studies on inequality of household income and individual income show lower levels of inequality than some other sources (Saez and Piketty, and the CBO), but do not include data for the highest-income households where most of change in income distribution has occurred.
|Data||Total gain||Percent gain||2003||2000||1997||1994||1991||1988||1985||1982||1979||1976||1973||1970||1967|
|SOURCE: U.S. Census Bureau, 2004 (Page 44/45)|
Comparisons of income over time should adjust for changes in average age, family size, number of breadwinners, and other characteristics of a population. Measuring personal income ignores dependent children, but household income also has problems – a household of ten has a lower standard of living than one of two people, though the income of the two households may be the same.
People’s earnings tend to rise over their working lifetimes, so “snapshot measures of income inequality can be misleading.” The inequality of a recent college graduate and a 55-year-old at the peak of his/her career is not an issue if the graduate has the same career path.
Conservative researchers and organizations have focused on the flaws of household income as a measure for standard of living in order to refute claims that income inequality is growing, becoming excessive or posing a problem for society. According to sociologist Dennis Gilbert, growing inequality can be explained in part by growing participation of women in the workforce. High earning households are more likely to be dual earner households, And according to a 2004 analysis of income quintile data by the Heritage Foundation, inequality becomes less when household income is adjusted for size of household. Aggregate share of income held by the upper quintile (the top earning 20 percent) decreases by 20.3% when figures are adjusted to reflect household size.
However the Pew Research Center found household income has appeared to decline less than individual income in the twenty-first century because those who are no longer able to afford their own housing have increasingly been moving in with relatives, creating larger households with more income earners in them.
The 2011 CBO study "Trends in the Distribution of Household Income" mentioned in this article adjusts for household size so that its quintiles contain an equal number of people, not an equal number of households.
Looking at the issue of how frequently workers or households move into higher or lower quintiles as their income rises or falls over the years, the CBO found income distribution over a multi-year period "modestly" more equal than annual income. The CBO study confirms earlier studies.
Overall, according to Timothy Noah, correcting for demographic factors (today’s population is older than it was 33 years ago, and divorce and single parenthood have made households smaller), you find that income inequality, though less extreme than shown by the standard measure, is also growing faster than shown by the standard measure.
According to Janet L. Yellen, former President and CEO, Federal Reserve Bank of San Francisco,
...from 1973 to 2005, real hourly wages of those in the 90th percentile – where most people have college or advanced degrees – rose by 30% or more... among this top 10 percent, the growth was heavily concentrated at the very tip of the top, that is, the top 1 percent. This includes the people who earn the very highest salaries in the U.S. economy, like sports and entertainment stars, investment bankers and venture capitalists, corporate attorneys, and CEOs. In contrast, at the 50th percentile and below – where many people have at most a high school diploma – real wages rose by only 5 to 10% – 
Lisa Shalett of Merrill Lynch Wealth Management found that real average hourly earnings in the US "are essentially flat to down, with today’s inflation-adjusted wage equating to about the same level as that attained by workers in 1970", despite the fact that "for the last two decades and especially in the current period", productivity has "soared". The benefits of productivity during this cycle had gone "almost exclusively to corporations and their very top executives."
The Gini coefficient summarizes income inequality in a single number and is one of the most commonly used measures of income inequality. It uses a scale from 0 to 1 – the higher the number the more inequality. 0 represents perfect equality (everyone having exactly the same income), and 1 represents perfect inequality (one person having all income). (Index scores are commonly multiplied by 100 to make them easier to understand.) Gini index ratings can be used to compare inequality within (by race, gender, employment) and between countries, before and after taxes. Different sources will often give different gini values for the same country or population measured. For example, the Census Bureau's official Gini coefficient for the United States was 46.9 in 2010, up from the all-time low of 38.6 in 1968. By contrast, the OECD's Gini coefficient for income inequality in the United States is 37 (including wages and other cash transfers), which is still the highest in the developed world, with the lowest being Denmark (24.3), Norway (25.6), and Sweden (25.9).
Comparisons by state
The household income Gini index for the United States was 0.468 in 2009, according to the US Census Bureau, though it varied significantly between states. The states of Utah, Alaska and Wyoming have a pre-tax income inequality Gini coefficient that is 10% lower than the average, while Washington D.C. and Puerto Rico 10% higher. After including the effects of federal and state taxes, the U.S. Federal Reserve estimates 34 states in the USA have a Gini coefficient between 0.30 and 0.35, with the state of Maine the lowest. At the county and municipality levels, the pre-tax Gini index ranged from 0.21 to 0.65 in 2010 across the United States, according to Census Bureau estimates.
OECD estimates the pre-tax Gini index for the United States was 0.49, and after-tax Gini index was 0.38, in 2008–2009. The average pre-tax Gini index for OECD countries was 0.46, while the average after-tax Gini index was 0.31.
The UN, CIA World Factbook, and OECD have used the Gini index to compare inequality between countries, and as of 2006, the United States had one of the highest levels of income inequality among similar developed or high income countries, as measured by the index. While inequality has increased since 1981 in two-thirds of OECD countries most developed countries are in the lower, more equal, end of the spectrum, with a Gini coefficient in the high twenties to mid thirties.
The gini rating (after taxes and government income transfers) of the United States is sufficiently high, however, to put it among less developed countries. The US ranks above (more unequal than) South American countries such Guyana, Nicaragua, and Venezuela, and roughly on par with Uruguay, Nicaragua, and Venezuela, according to the CIA.
|International range||US ranking in
|UN||0.408||0.168 (Azerbaijan)||0.743 (Namibia)||77th out of 146||2000-2010|
|The World Factbook
|0.45||0.23 (Sweden, 2005)||0.707 (Namibia, 2003)||100th out of 140||1994–2009|
(after taxes and transfers)
|0.378||0.236 (Slovenia)||0.494 (Chile)||31st out of 34
(before taxes and transfers)
|0.486||0.344 (South Korea)||0.534 (Italy)||26th out of 33
Among the 34 "developed" countries of the OECD the US gini rank in income equality (27th) is higher before taxes and "transfers" are measured, than after (31st)  – i.e., the US has less income redistribution by government than some other post-industrial economies. However some developed countries, such as the Netherlands and Greece, have less inequality simply because incomes are more equal than in the US even before taxes.
Some have argued that inequality is higher in other countries than official statistics indicate because of unreported income. European countries have higher amounts of wealth in offshore holdings.
Inequality in general
Inequality can be measured before and after the effects of taxes and transfer payments.
- Market income, or income before taxes & transfers: Expertise, productiveness and work experience, inheritance, gender, and race have had a strong influence on distribution of personal income in the United States as in other countries.
- After taxes & transfers: Reducing the progressivity of the income tax system and transfers increases income inequality. CBO reported in 2011 that: "The equalizing effect of transfers declined over the 1979–2007 period primarily because the distribution of transfers became less progressive. The equalizing effect of federal taxes also declined over the period, in part because the amount of federal taxes shrank as a share of market income and in part because of changes in the progressivity of the federal tax system."
One 2013 study indicated that U.S. income inequality is comparable to other developed countries before taxes and transfers, but rated last (worst) among 22 developed countries after taxes and transfers. This means that public policy choices, rather than market factors, drive U.S. income inequality disparities relative to comparable wealthy nations.
Race and gender disparities
Income levels vary by gender and race with median income levels considerably below the national median for females compared to men with certain racial demographics.
Despite considerable progress in pursuing gender and racial equality, some social scientists attribute these discrepancies in income partly to continued discrimination.
Among women, part of the wage gap is due to employment choices and preferences. Women are more likely to consider factors other than salary when looking for employment. On average, women are less willing to travel or relocate, take more hours off and work fewer hours, and choose college majors that lead to lower paying jobs. Women are also more likely to work for governments or non-profits, that pay less than the private sector. According to this perspective certain ethnic minorities and women receive fewer promotions and opportunities for occupation and economic advancement than others. In the case of women this concept is referred to as the glass ceiling keeping women from climbing the occupational ladder.
In terms of race, Asian Americans are far more likely to be in the highest earning 5 percent than the rest of Americans. Studies have shown that African Americans are less likely to be hired than White Americans with the same qualifications. The continued prevalence of traditional gender roles and ethnic stereotypes may partially account for current levels of discrimination. In 2005, median income levels were highest among Asian and White males and lowest among females of all races, especially those identifying as African American or Hispanic. Despite closing gender and racial gaps, considerable discrepancies remain among racial and gender demographics, even at the same level of educational attainment. The economic success of Asian Americans may come from how they devote much more time to education than their peers. Asian Americans have significantly higher college graduation rates than their peers and are much more likely to enter high status and high income occupations.
Since 1953 the income gap between male and female workers has decreased considerably but remains relatively large. Women currently earn significantly more Associate's, Bachelor's, and Master's degrees than men and almost as many Doctorates. Women are projected to have passed men in Doctorates earned in 2006–2007, and to earn nearly two thirds of Associate's, Bachelor's, and Master's degrees by 2016. Despite this, some[who?] still argue that male workers still hold higher educational attainment, as the success of women in academia is a relatively new phenomenon.
Though it is important to note that income inequality between sexes remained stark at all levels of educational attainment. Between 1953 and 2005 median earnings as well as educational attainment increased, at a far greater pace for women than for men. Median income for female earners male earners increased 157.2% versus 36.2% for men, over four times as fast. Today the median male worker earns roughly 68.36% more than their female counterparts, compared to 176.25% in 1953. The median income of men in 2005 was 2% higher than in 1973 compared to a 74.6% increase for female earners.
Racial differences remained stark as well, with the highest earning sex-gender demographic of workers aged 25 or older, Asian males (who were roughly tied with white males) earning slightly more than twice as much as the lowest-earning demographic, Hispanic females. As mentioned above, inequality between races and gender persisted at similar education levels. Racial differences were overall more pronounced among male than among female income earners. In 2009, Hispanics were more than twice as likely to be poor than non-Hispanic whites, research indicates. Lower average English ability, low levels of educational attainment, part-time employment, the youthfulness of Hispanic household heads, and the 2007–09 recession are important factors that have pushed up the Hispanic poverty rate relative to non-Hispanic whites. During the early 1920s, median earnings decreased for both sexes, not increasing substantially until the late 1990s. Since 1974 the median income for workers of both sexes increased by 31.7% from $18,474 to $24,325, reaching its high-point in 2000.
|Demographic||Median personal income|
|Overall Median||High school graduate||Some college||Bachelor's degree or higher||Bachelor's degree||Masters degree||Doctorate degree|
|All racial/ethnic demographics||Male||$39,403||$32,085||$39,150||$60,493||$52,265||$67,123||$78,324|
|NOTE: The highest median for each level of educational attainment is highlighted in green, the lowest in orange.|
Income differences between the varying levels of educational attainment (usually measured by the highest degree of education an individual has completed) have increased. Expertise and skill certified through an academic degree translates into increased scarcity of an individual's occupational qualification which in turn leads to greater economic rewards. As the United States has developed into a post-industrial society more and more employers require expertise that they did not a generation ago, while the manufacturing sector which employed many of those lacking a post-secondary education is decreasing in size.
In the resulting economic job market the income discrepancy between the working class and the professional with the higher academic degrees, who possess scarce amounts of certified expertise, may be growing.
Households in the upper quintiles are generally home to more, better educated and employed working income earners, than those in lower quintiles. Among those in the upper quintile, 62% of householders were college graduates, 80% worked full-time and 76% of households had two or more income earners, compared to the national percentages of 27%, 58% and 42%, respectively. Upper-most sphere US Census Bureau data indicated that occupational achievement and the possession of scarce skills correlates with higher income.
Average earnings in 2002 for the population 18 years and over were higher at each progressively higher level of education... This relationship holds true not only for the entire population but also across most subgroups. Within each specific educational level, earnings differed by sex and race. This variation may result from a variety of factors, such as occupation, working full- or part-time, age, or labor force experience. – 
|Demographic||High school graduate||Some college||Bachelor's degree or higher||Bachelor's degree||Master's degree||First professional degree||Doctorate degree|
|Median||% +/- national median||Median||% +/- national median||Median||% +/- national median||Median||% +/- national median||Median||% +/- national median||Median||% +/- national median||Median||% +/- national median|
|Persons, age 25+ w/ earnings
|Both sexes employed full-time||$31,539||−19.8%||$37,135||−5.6%||$56,078||+42.5%||$50,944||+29.5%||$61,273||+55.8%||$100,000||+154.2%||$79,401||+101.8%|
|SOURCE: US Census Bureau, 2004/06|
Two researchers have suggested that children in low income families are exposed to 636 words an hour, as opposed to 2,153 words in high income families during the first four formative years of a child's development. This, in turn, led to low achievement in later schooling due to the inability of the low income group to verbalize concepts.
A psychologist has stated that society stigmatizes poverty. Conversely, poor people tend to believe that the wealthy have been lucky or have earned their money through illegal means. She believes that both attitudes need to be discarded if the nation is to make headway in addressing the issue of inequality. She suggests that college not be a litmus test of success; that valorizing of one profession as more important than another is a problem.
In the context of concern over income inequality, a number of economists, such as Federal Reserve Chairman Ben Bernanke, have talked about the importance of incentives: "... without the possibility of unequal outcomes tied to differences in effort and skill, the economic incentive for productive behavior would be eliminated, and our market-based economy ... would function far less effectively." Yale economist Arthur Okun argued that at some level, there is a trade-off between economic growth and economic redistribution.
Since abundant supply decreases market value, the possession of scarce skills considerably increases income. Among the American lower class, the most common source of income was not occupation, but government welfare.
Taxation and transfers
Another factor in income inequality/equality is the effective rate at which income is taxed coupled with the progressivity of the tax system. A progressive tax is a tax in which the effective tax rate increases as the taxable base amount increases. Overall income tax rates in the U.S. are below the OECD average, and until 2005 have been declining.
CBO reported in 2011 that less progressive tax and transfer policies have contributed to greater after-tax income inequality: "As a result of the diminishing effect of transfers and federal taxes, the Gini index for income after transfers and federal taxes grew by more than the index for market income. Between 1979 and 2007, the Gini index for market income increased by 23 percent, the index for market income after transfers increased by 29 percent, and the index for income measured after transfers and federal taxes increased by 33 percent."
Post-1980 rise in inequality
Most current discussion of income inequality in America centers on its rise since the mid to late 1970s, the so-called "Great Divergence". According to the United States Census Bureau, it reported that the income inequality between the richest and poorest people grew to its widest in 2012, as the census recorded 46.2 million people living in poverty.
Breaking down the proportion of the increase in income inequality between 1979 and 2007 that came from distribution of pre-tax income and how much from taxes and "government transfers", the CBO data shows that the 33% increase is composed of the following:
- 23% from changes in distribution of "market income" to households (top earners received a larger share of salaries, interest, dividends, capital gains, business income, etc.)
- 6% from changes in "government transfers" (social security, unemployment, the end of AFDC welfare, etc.)
- 4% from changes in federal taxation (overall decline in the average federal tax rate and shift in federal revenues from income taxes to less progressive payroll taxes, etc.)
Of the 23% increase in inequality from changes in pre-tax "market income", 79% came from a shift to top earners in different types of income across the board. A smaller amount (21%) came from a shift from wages and salaries to more concentrated income sources – i.e., interest, dividends, business income, and especially capital gains, which are greater among top earners than income from salaries and wages, which is more common to those with lower incomes.
According to Michael Cembalest, the chief investment officer of JPMorgan Chase, as of 2011, corporate “profit margins have reached levels not seen in decades,” and “reductions in wages and benefits explain the majority of the net improvement. ... US labor compensation is now at a 50-year low relative to both company sales and US GDP”
Lisa Shalett, chief investment officer at Merrill Lynch Wealth Management noted that, "for the last two decades and especially in the current period, ... productivity soared ... [but] U.S. real average hourly earnings are essentially flat to down, with today’s inflation-adjusted wage equating to about the same level as that attained by workers in 1970. ... So where have the benefits of technology-driven productivity cycle gone? Almost exclusively to corporations and their very top executives."
According to the CBO and others, "the precise reasons for the [recent] rapid growth in income at the top are not well understood", but "in all likelihood," an "interaction of multiple factors" was involved. "Researchers have offered several potential rationales." Some of these rationales conflict, some overlap. They include:
- the globalization hypothesis – low skilled American workers have been losing ground in the face of competition from low-wage workers in Asia and other "emerging" economies;
- skill-biased technological change – the rapid pace of progress in information technology has increased the demand for the highly skilled and educated so that income distribution favored brains rather than brawn;
- the superstar hypothesis – modern technologies of communication often turn competition into a tournament in which the winner is richly rewarded, while the runners-up get far less than in the past;
- immigration of less-educated workers – relatively high levels of immigration of low skilled workers since 1965 may have reduced wages for American-born high school dropouts;
- policy and politics – capital account liberalization, soaring executive compensation, stagnating middle income pay and more regressive taxation resulting from political decisions, not market forces. Decision such as not intervening to stop executive capture of corporate boards, the crushing of labor unions, etc. or changes in the governance and structure of executive compensation, and the failure of government policy makers to do anything about rising inequality.
- This includes less progressive taxation since 1970, particularly the reduction in the top marginal income tax rates from 91% to less than 40%; and taxes on capital gains at lower rates than income taxes;
- a decline in unionization of the workforce, leaving workers with less bargaining power in the labor market; and
- austerity, or cuts in public spending during adverse economic conditions, which can reduce wages of public employees, and reduce financial aid to the unemployed and underemployed
Analyzing the top three hypotheses, economist Paul Krugman found them to be "increasingly inadequate" as more evidence accumulated.
Globalization can explain part of the relative decline in blue-collar wages, but it can't explain the 2,500 percent rise in C.E.O. incomes. Technology may explain why the salary premium associated with a college education has risen, but it's hard to match up with the huge increase in inequality among the college-educated, with little progress for many but gigantic gains at the top. The superstar theory works for Jay Leno, but not for the thousands of people who have become awesomely rich without going on TV.
While immigration was found to have slightly depressed the wages of the least skilled and least educated American workers, it doesn't explain rising inequality among high school and college graduates. Some scholars questioning the explanation of educational attainment and workplace skills point out that other countries with similar education levels and economies have not gone the way of the US, and that the concentration of income in the US hasn't followed a pattern of "the 29% of Americans with college degrees pulling away" from those who have less education.
Skill-biased technological change
As of the mid- to late- decade of the 2000s, the most common explanation for income inequality in America was "skill-biased technological change" (SBTC)  – "a shift in the production technology that favors skilled over unskilled labor by increasing its relative productivity and, therefore, its relative demand". For example, one scholarly colloquium on the subject that included many prominent labor economists estimated that technological change was responsible for over 40% of the increase in inequality. Other factors like international trade, decline in real minimum wage, decline in unionization and rising immigration, were each responsible for 10-15% of the increase.
Numbers show the strength of education's influence on income distribution. In 2005, roughly 55% of income earners with doctorate degrees – the most educated 1.4% – were among the top 15 percent earners. Among those with Masters degrees – the most educated 10% – roughly half had incomes among the top 20 percent of earners. Only among households in the top quintile were householders with college degrees in the majority.
But while the higher education commonly translates into higher income, and the highly educated are disproportionately represented in upper quintile households, differences in educational attainment fail to explain income discrepancies between the top 1 percent and the rest of the population. Large percentages of individuals lacking a college degree are present in all income demographics, including 33% of those with heading households with six figure incomes. From 2000 to 2010, the 1.5% of Americans with an M.D., J.D., or M.B.A. and the 1.5% with a PhD saw median income gains of approximately 5%. Among those with a college or master’s degree (about 25% of the American workforce) average wages dropped by about 7%, (though this was less than the decline in wages for those who had not completed college). Post-2000 data has provided "little evidence" for SBTC’s role in increasing inequality. The wage premium for college educated has risen little and there has been little shift in shares of employment to more highly skilled occupations.
Approaching the issue from occupations that have been replaced or downgraded since the late 1970s, one scholar found that jobs that "require some thinking but not a lot" – or moderately skilled middle-class occupations such as cashiers, typists, welders, farmers, appliance repairmen – declined the furthest in wage rates and/or numbers. Employment requiring either more skill or less has been less affected. However the timing of the great technological change of the era – internet use by business starting in the late 1990s – does not match that of the growth of income inequality (starting in the early 1970s but slackening somewhat in the 1990s). Nor does the introduction of technologies that increase the demand for more skilled workers seem to be generally associated with a divergence in household income among the population. Inventions of the 20th century such as AC electric power, the automobile, airplane, radio, television, the washing machine, Xerox machine, each had an economic impact the equal of computers/microprocessors/internet but did not coincide with greater inequality.
Another explanation is that the combination of the introduction of technologies that increase the demand for skilled workers, and the failure of the American education system to provide a sufficient increase in those skilled workers has bid up those workers' salaries. An example of the slowdown in education growth in America (that began about the same time as the Great Divergence began) is the fact that the average person born in 1945 received two more years of schooling than his parents, while the average person born in 1975 received only half a year more of schooling. Author Timothy Noah's "back-of-the-envelope" estimation based on "composite of my discussions with and reading of the various economists and political scientists" is that the "various failures" in America's education system are "responsible for 30%" of the post-1978 increase in inequality.
While economists who have studied globalization agree imports have had an effect, the timing of import growth does not match the growth of income inequality. China is the world's biggest exporter and maker of manufactured products but had a per capita income in 2007 one-seventh that of the United States. By 1995 imports of manufactured goods from low-wage countries totaled less than 3% of US gross domestic product.
It wasn't until 2006 that the US imported more manufactured goods from low-wage (developing) countries than from high-wage (advanced) economies. Inequality increased during the 2000-2010 decade not because of stagnating wages for less-skilled workers, but because of accelerating incomes of the top 0.1%. Author Timothy Noah estimates that "trade", increases in imports are responsible for just 10% of the "Great Divergence" in income distribution.
Journalist James Surowiecki notes that in the last 50 years, companies and the sectors of the economy providing the most employment in the US – major retailers, restaurant chains, and supermarkets – are ones with lower profit margins and less pricing power than in the 1960s; while sectors with high profit margins and average salaries – like high technology – have relatively few employees.
Some economists claim that is it WTO-led globalization and competition from developing countries, especially China, that has resulted in the recent decline in labor’s share of income and increased unemployment in the U.S. And the Economic Policy Institute and the Center for Economic and Policy Research argue that some trade agreements such as the Trans-Pacific Partnership could result in further job losses and declining wages.
The Immigration and Nationality Act of 1965 increased immigration to America, especially of non-Europeans. From 1970 to 2007, the foreign-born proportion of America's population grew from 5% to 11%, most of whom had lower education levels and incomes than native-born Americans. But the contribution of this increase in supply of low-skill labor seem to have been relatively modest. One estimate stated that immigration reduced the average annual income of native-born "high-school dropouts" ("who roughly correspond to the poorest tenth of the workforce") by 7.4% from 1980 to 2000. The decline in income of better educated workers was much less. Author Timothy Noah estimates that "immigration" is responsible for just 5% of the "Great Divergence" in income distribution.
Changes in income calculation
One observer who denies that household income has become more unequal is Alan Reynolds, senior fellow with the Cato Institute. Reynolds has declared that income inequality is a statistical illusion brought about by technical changes in the tax law that alter what income gets reported to the Internal Revenue Service and what income does not. This claim has been criticized as "a mountain of hard-to-follow, often irrelevant, and sometimes entirely erroneous statistical quibbles" or "intellectual three-card monte."
Reynolds points out that all the data gathered to calculate income inequality is based on federal tax returns. Income that is not on tax returns is not included in the data. Not surprisingly, what income is required and not required to be reported has changed. Prior to the 1980s, interest in municipal bonds and executive stock options did not need to be reported as taxable income. In addition, many corporations filed as C-Corporations and therefore their income did not show up on individual tax returns. After the 1986 tax reform legislation and tax cuts under President Reagan, many corporations switched to being S-Corporations and therefore paid the personal income tax rate rather than the corporate tax rate. As a result of these and other changes, during and after the 1980s lots of new income began to show up on the tax returns of top earners that had really been earned all along. For this reason it is not surprising that studies done by Pikkety/Saez and others show most of the increase in the top 1%'s share of annual income occurring in the 1986–1988 period. Furthermore, tax-deferred accounts began to show income disappearing from the returns of the holders of the accounts as they appeared in the 1980s. A 2001 Federal Reserve study showed that just 5.5% of the top 1%'s assets were held in tax deferred accounts, while 14.5% of the 50th–95th percentile's assets were held in tax deferred accounts. Transfer payments are also largely ignored by most studies, but the proportion of income the absorb has risen from 5.9% in 1970 to 14.2% in 2004. These payments generally go to lower-income families and therefore their absence has steadily made the statistics more and more flawed over the years. Reynolds' argument is that the changes have eliminated income from the middle while adding income to the top, exacerbating the situation statistically but in reality changing little to nothing.
Political, normative, institutional
Critics of technological change as an explanation for the "Great Divergence" of income levels in America point to public policy and party politics, or "stuff the government did, or didn't do". They argue these have led to a trend of declining labor union membership rates and resulting diminishing political clout, decreased expenditure on social services, and less government redistribution. Moreover, the United States is the only advanced economy without a labor-based political party.
As of 2011, several state legislatures have launched initiatives aimed at lowering wages, labor standards, and workplace protections for both union and non-union workers.
Political parties and presidents
Examining average annual pre-tax income growth from 1948 to 2005, Bartel shows that under Democratic presidents (from Harry Truman forward), the greatest income gains have been at the bottom of the income scale and tapered off as income rose. Under Republican presidents, in contrast, gains were much less but what growth there was concentrated towards the top, tapering off as you went down the income scale.
Summarizing Bartels's findings, journalist Timothy Noah referred to the administrations of Democratic presidents as "Democrat-world", and GOP administrations as "Republican-world":
In Democrat-world, pre-tax income increased 2.64% annually for the poor and lower-middle-class and 2.12% annually for the upper-middle-class and rich. There was no Great Divergence. Instead, the Great Compression – the egalitarian income trend that prevailed through the 1940s, 1950s, and 1960s – continued to the present, albeit with incomes converging less rapidly than before. In Republican-world, meanwhile, pre-tax income increased 0.43 percent annually for the poor and lower-middle-class and 1.90 percent for the upper-middle-class and rich. Not only did the Great Divergence occur; it was more greatly divergent. Also of note: In Democrat-world pre-tax income increased faster than in the real world not just for the 20th percentile but also for the 40th, 60th, and 80th. We were all richer and more equal! But in Republican-world, pre-tax income increased slower than in the real world not just for the 20th percentile but also for the 40th, 60th, and 80th. We were all poorer and less equal! Democrats also produced marginally faster income growth than Republicans at the 95th percentile, but the difference wasn't statistically significant.
The pattern of distribution of growth appears to be the result of a whole host of policies,
including not only the distribution of taxes and benefits but also the government's stance toward unions, whether the minimum wage rises, the extent to which the government frets about inflation versus too-high interest rates, etc., etc.
Noah admits the evidence of this correlation is "circumstantial rather than direct", but so is "the evidence that smoking is a leading cause of lung cancer."
Non-party political action
According to political scientists Jacob Hacker and Paul Pierson writing in the book Winner-Take-All Politics, the important policy shifts were brought on not by the Republican Party but by the development of a modern, efficient political system, especially lobbying, by top earners—and particularly corporate executives and the financial services industry. the end of the 1970s saw a transformation of American politics away from a focus on the middle class, with new, much more effective, aggressive and well-financed lobbyists and pressure groups acting on behalf of upper income groups. Executives successfully eliminated any countervailing power or oversight of corporate managers (from private litigation, boards of directors and shareholders, the Securities and Exchange Commission or labor unions).
The financial industry's success came from successfully pushing for deregulation of financial markets, allowing much more lucrative but much more risky investments from which it privatized the gains while socializing the losses with government bailouts. (the two groups formed about 60% of the top 0.1 percent of earners.) All top earners were helped by deep cuts in estate and capital gains taxes, and tax rates on high levels of income.
Arguing against the proposition that the explosion in pay for corporate executives – which grew from 35X average worker pay in 1978 to over 250X average pay before the 2007 recession – is driven by an increased demand for scarce talent and set according to performance, Krugman points out that multiple factors outside of executives' control govern corporate profitability, particularly in short term when the head of a company like Enron may look like a great success. Further, corporate boards follow other companies in setting pay even if the directors themselves disagree with lavish pay "partly to attract executives whom they consider adequate, partly because the financial market will be suspicious of a company whose CEO isn't lavishly paid." Finally "corporate boards, largely selected by the CEO, hire compensation experts, almost always chosen by the CEO" who naturally want to please their employers.
Lucian Arye Bebchuk, Jesse M. Fried, the authors of Pay Without Performance, critique of executive pay, argue that executive capture of corporate governance is so complete that only public relations, i.e. public `outrage`, constrains their pay. This in turn has been reduced as traditional critics of excessive pay – such as politicians (where need for campaign contributions from the richest outweighs populist indignation), media (lauding business genius), unions (crushed) – are now silent.
In addition to politics, Krugman postulated change in norms of corporate culture have played a factor. In the 1950s and 60s, corporate executives had (or could develop) the ability to pay themselves very high compensation through control of corporate boards of directors, they restrained themselves. But by the end of the 1990s, the average real annual compensation of the top 100 C.E.O.'s skyrocketed from $1.3 million – 39 times the pay of an average worker – to $37.5 million, more than 1,000 times the pay of ordinary workers from 1982 to 2002. Journalist George Packer also sees the dramatic increase in inequality in America as a product of the change in attitude of the American elite, which (in his view) has been transitioning itself from pillars of society to a special interest group. Author Timothy Noah estimates that what he calls "Wall Street and corporate boards' pampering" of the highest earning 0.1% is "responsible for 30%" of the post-1978 increase in inequality.
Decline of unions
The era of inequality growth has coincided with a dramatic decline in labor union membership from 20% of the labor force in 1983 to about 12% in 2007. Economists have traditionally thought that since the chief purpose of a union is to maximize the income of its members, a strong but not all-encompassing union movement led to increased income inequality. Given the increase in income inequality of the past few decades, either the sign of the effect must be reversed, the magnitude of the effect small, or a much larger opposing force overridden it, since unionization has decreased in that period.
However more recently research has shown that unions' ability to reduce income disparities among members outweighed other factors and its net effect has been to reduce national income inequality. The decline of unions has hurt this leveling effect among men, and one economist (Berkeley economist David Card) estimating about 15–20% of the "Great Divergence" among that gender is the result of declining unionization.
Still other researchers think it is the labor movement's loss of national political power to promote equalizing "government intervention and changes in private sector behavior" has had the greatest impact on inequality in the US. Timothy Noah estimates the "decline" of labor union power "responsible for 20%" of the Great Divergence. While the decline of union power in the US has been a factor in declining middle class incomes, they have retained their clout in Western Europe.
How much tax policy change over the last thirty years has contributed to income inequality is disputed. In their comprehensive 2011 study of income inequality (Trends in the Distribution of Household Income Between 1979 and 2007), the CBO found that,
The top fifth of the population saw a 10-percentage-point increase in their share of after-tax income. Most of that growth went to the top 1 percent of the population. All other groups saw their shares decline by 2 to 3 percentage points. In 2007, federal taxes and transfers reduced the dispersion of income by 20 percent, but that equalizing effect was larger in 1979. The share of transfer payments to the lowest-income households declined. The overall average federal tax rate fell.
However, a more recent CBO analysis indicates that with changes to 2013 tax law, the effective federal tax rates for the highest earning household will increase to levels not seen since 1979.
According to journalist Timothy Noah, "you can't really demonstrate that U.S. tax policy had a large impact on the three-decade income inequality trend one way or the other. The inequality trend for pre-tax income during this period was much more dramatic." Noah estimates tax changes account for 5% of the Great Divergence.
But many – such as economist Paul Krugman – emphasize the effect of changes in taxation – such as the 2001 and 2003 Bush administration tax cuts which cut taxes far more for high-income households than those below – on increased income inequality.
Part of the growth of income inequality under Republican administrations (described by Larry Bartels) has been attributed to tax policy. A study by Thomas Piketty and Emmanuel Saez found that "large reductions in tax progressivity since the 1960s took place primarily during two periods: the Reagan presidency in the 1980s and the Bush administration in the early 2000s."
During Republican President Ronald Reagan's tenure in office the top marginal income tax rate was reduced from over 70 to 28 percent, high top marginal rates like 70% being the sort in place during much of the period of great income equality following the "Great Compression". The lowest marginal rate for the bottom fell from 14 to 11 percent. However the effective rate on top earners before Reagan's tax cut was much lower because of loopholes and charitable contributions. President Ronald Reagan's 1981 cut in the top rate on unearned income reduced the maximum capital gains rate to only 20% – its lowest level since the Hoover administration.
During the Republican administration under George W. Bush, the tax rate on capital gains and qualifying dividends – a disproportionate source of income for top earners – fell to 15%, less than half the 35% top rate on ordinary income. Rising inequality has also been attributed to President Bush's veto of tax harmonization, as this would have prohibited offshore tax havens.
One study found reductions of total effective tax rates were most significant for individuals with highest incomes. (see "Federal Tax Rate by Income Group" chart) For those with incomes in the top 0.01 percent, overall rates of Federal tax fell from 74.6% in 1970, to 34.7% in 2004 (the reversal of the trend in 2000 with a rise to 40.8% came after the 1993 Clinton deficit reduction tax bill), the next 0.09 percent falling from 59.1% to 34.1%, before leveling off with a relatively modest drop of 41.4 to 33.0% for the 99.5–99.9 percent group. Although the tax rate for low-income earners fell as well (though not as much), these tax reductions compare with virtually no change – 23.3% tax rate in 1970, 23.4% in 2004 – for the US population overall.
The study found the decline in progressivity since 1960 was due to the shift from allocation of corporate income taxes among labor and capital to the effects of the individual income tax. Paul Krugman also supports this claim saying, "The overall tax rate on these high income families fell from 36.5% in 1980 to 26.7% in 1989."
From the White House's own analysis, the federal tax burden for those making greater than $250,000 fell considerably during the late 1980s, 1990s and 2000s, from an effective tax of 35% in 1980, down to under 30% from the late 1980s to 2011.
Many studies argue that tax changes of S-type Corporations confound the statistics prior to 1990. However, even after these changes inflation-adjusted average after-tax income grew by 25% between 1996 and 2006 (the last year for which individual income tax data is publicly available). This average increase, however, obscures a great deal of variation. The poorest 20% of tax filers experienced a 6% reduction in income while the top 0.1 percent of tax filers saw their income almost double. Tax filers in the middle of the income distribution experienced about a 10% increase in income. Also during this period, the proportion of income from capital increased for the top 0.1 percent from 64% to 70%.
Among economists and related experts, most agree that America's growing income inequality is "deeply worrying", unjust, a danger to democracy/social stability, or a sign of national decline. Yale professor Robert Shiller, who was among three Americans who won the Nobel prize for economics in 2013, said after receiving the award, "The most important problem that we are facing now today, I think, is rising inequality in the United States and elsewhere in the world." Economist Thomas Piketty, who has spent nearly 20 years studying inequality primarily in the US, warns that “The egalitarian pioneer ideal has faded into oblivion, and the New World may be on the verge of becoming the Old Europe of the twenty-first century’s globalized economy.”
Inequality in land and income ownership is negatively correlated with subsequent economic growth. A strong demand for redistribution will occur in societies where a large section of the population does not have access to the productive resources of the economy. Rational voters must internalize such issues. High unemployment rates have a significant negative effect when interacting with increases in inequality. Increasing inequality harms growth in countries with high levels of urbanization. High and persistent unemployment also has a negative effect on subsequent long-run economic growth. Unemployment may seriously harm growth because it is a waste of resources, because it generates redistributive pressures and distortions, because it depreciates existing human capital and deters its accumulation, because it drives people to poverty, because it results in liquidity constraints that limit labor mobility, and because it erodes individual self-esteem and promotes social dislocation, unrest and conflict. Policies to control unemployment and reduce its inequality-associated effects can strengthen long-run growth.
Concern extends even to such supporters (or former supporters) of laissez-faire economics and private sector financiers. Former Federal Reserve Board chairman Alan Greenspan, has stated reference to growing inequality: "This is not the type of thing which a democratic society – a capitalist democratic society – can really accept without addressing." Some economists (David Moss, Paul Krugman, Raghuram Rajan) believe the "Great Divergence" may be connected to the financial crisis of 2008. Money manager William H. Gross, managing director of PIMCO, criticized the shift in distribution of income from labor to capital that underlies some of the growth in inequality as unsustainable, saying:
"Even conservatives must acknowledge that return on capital investment, and the liquid stocks and bonds that mimic it, are ultimately dependent on returns to labor in the form of jobs and real wage gains. If Main Street is unemployed and undercompensated, capital can only travel so far down Prosperity Road."
On the other side of the issue are those who have claimed that the increase is not significant, that it doesn't matter because America's economic growth and/or equality of opportunity are what's important, that it is a global phenomenon which would be foolish to try to change through US domestic policy, that it "has many economic benefits and is the result of ... a well-functioning economy", and has or may become an excuse for "class-warfare rhetoric", and may lead to policies that "reduce the well-being of wealthier individuals". 
Consumption and debt
Conservative researchers have argued that income inequality is not significant because consumption, rather than income should be the measure of inequality, and inequality of consumption is less extreme than inequality of income in the US. Will Wilkinson of the libertarian Cato Institute states that "the weight of the evidence shows that the run-up in consumption inequality has been considerably less dramatic than the rise in income inequality," and consumption is more important than income. According to Johnson, Smeeding, and Tory, consumption inequality was actually lower in 2001 than it was in 1986. The debate is summarized in "The Hidden Prosperity of the Poor" by journalist Thomas B. Edsall.
Other studies have not found consumption inequality less dramatic than household income inequality, and the CBO's study found consumption data not "adequately" capturing "consumption by high-income households" as it does their income, though it did agree that household consumption numbers show more equal distribution than household income.
Others dispute the importance of consumption over income, pointing out that if middle and lower income are consuming more than they earn it is because they are saving less or going deeper into debt. A "growing body of work" suggests that income inequality has been the driving factor in the growing household debt, as high earners bid up the price of real estate and middle income earners go deeper into debt trying to maintain what once was a middle class lifestyle. Between 1983 and 2007, the top 5 percent saw their debt fall from 80 cents for every dollar of income to 65 cents, while the bottom 95 percent saw their debt rise from 60 cents for every dollar of income to $1.40. Economist Krugman has found a strong correlation between inequality and household debt in America over the last hundred years.
Deep debt may lead to bankruptcy and researchers Elizabeth Warren and Amelia Warren Tyagi found a fivefold increase in the number of families filing for bankruptcy between 1980 and 2005. The bankruptcies came not from increased spending "on luxuries", but from an "increased spending on housing, largely driven by competition to get into good school districts." Intensifying inequality may mean a dwindling number of ever more expensive school districts that compel middle class – or would-be middle class – to "buy houses they can't really afford, taking on more mortgage debt than they can safely handle".
Central Banking economist Raghuram Rajan argues that "systematic economic inequalities, within the United States and around the world, have created deep financial 'fault lines' that have made [financial] crises more likely to happen than in the past" — the Financial crisis of 2007–08 being the most recent example. To compensate for stagnating and declining purchasing power, political pressure has developed to extend easier credit to the lower and middle income earners — particularly to buy homes — and easier credit in general to keep unemployment rates low. This has given the American economy a tendency to go "from bubble to bubble" fueled by unsustainable monetary stimulation.
The growth of inequality has provoked a political protest movement – the Occupy movement – starting in Wall Street and spreading to 600 communities across the United States in 2011. Its main political slogan – "We are the 99%" – references its dissatisfaction with the concentration of income in the top 1%.
A December 2011 Gallup poll found a decline in the number of Americans who felt reducing the gap in income and wealth between the rich and the poor was extremely or very important (21 percent of Republicans, 43 percent of independents, and 72 percent of Democrats). In 2012, several surveys of voters attitudes toward growing income inequality found the issue ranked less important than other economic issues such as growth and equality of opportunity, and relatively low in affecting voters "personally".  In 1998 a Gallup poll had found 52% of Americans agreeing that the gap between rich and the poor was a problem that needed to be fixed, while 45% regarded it as "an acceptable part of the economic system". In 2011, those numbers are reversed: Only 45% see the gap as in need of fixing, while 52% do not. However, there was a large difference between Democrats and Republicans, with 71% of Democrats calling for a fix.
In contrast, a January 2014 poll found 61% of Republicans, 68% of Democrats and 67% of independents accept the notion that income inequality in the US has been growing over the last decade. The Pew Center poll also indicated that 69% of Americans supported the government doing "a lot" or "some" to address income inequality and that 73% of Americans supported raising the minimum wage from $7.25 to $10.10 per hour.
Opinion surveys of what respondents thought was the right level of inequality have found Americans no more accepting of income inequality than other citizens of other nations, but more accepting of what they thought the level of inequality was in their country, being under the impression that there was less inequality than there actually was. Dan Ariely and Michael Norton show in a study (2011) that US citizens across the political spectrum significantly underestimate the current US wealth inequality and would prefer a more egalitarian distribution of wealth. Joseph Stiglitz in "The Price of Inequality" has argued that this sense of unfairness has led to distrust in government and business.
Impact on democracy and society
Economists Jared Bernstein and Paul Krugman have attacked the concentration of income as variously "unsustainable" and "incompatible" with real democracy. American political scientists Jacob S. Hacker and Paul Pierson quote a warning by Greek-Roman historian Plutarch: `An imbalance between rich and poor is the oldest and most fatal ailment of all republics.` Some academic researchers have written that the US political system risks drifting towards a form of oligarchy, through the influence of corporations, the wealthy, and other special interest groups.
An April, 2014 study by Princeton University faculty stated that when a majority of citizens disagrees with economic elites or organized interests, they generally lose. The average voter has little influence on government, the study found, but the well-to-do hold tremendous sway. The study indicated wealthy move national policy in the US, and average Americans are effectively powerless. Policies supported by economic elites and business interest groups were far more likely to become law than those they opposed, the authors found. Supreme Court decisions like Citizens United and the more recent McCutcheon v. FEC have made it easier for corporations and wealthy individuals to spend money for political purposes, which could increase their influence over elections and eventually policy decisions. Economic élites have a disproportionate influence in Washington, D.C. Their views and interests distort policy in ways that don’t necessarily benefit the majority. The study said that average citizens only get what they want if economic elites or interest groups also want it. In contrast, the preferences of economic elites and interest groups — especially economic elites — are each quite influential, when the preferences of the other two groups are held constant. The U.S. government represents not the interests of the majority of citizens but those of the rich and powerful.
Two journalists concerned about social separation in the US are economist Robert Frank, who notes that:
Today's rich had formed their own virtual country .. [T]hey had built a self-contained world unto themselves, complete with their own health-care system (concierge doctors), travel network (Net jets, destination clubs), separate economy. .... The rich weren't just getting richer; they were becoming financial foreigners, creating their own country within a country, their own society within a society, and their economy within an economy. 
and George Packer,
Inequality hardens society into a class system ... Inequality divides us from one another in schools, in neighborhoods, at work, on airplanes, in hospitals, in what we eat, in the condition of our bodies, in what we think, in our children's futures, in how we die. Inequality makes it harder to imagine the lives of others.
Loss of income by the middle class relative to the top-earning 1% and 0.1% is both a cause and effect of political change, according to journalist Hedrick Smith. In the decade starting around 2000, business groups employed 30 times as many Washington lobbyists as trade unions and 16 times as many lobbyists as labor, consumer, and public interest lobbyists combined.
From 1998 through 2010 business interests and trade groups spent $28.6 billion on lobbying compared with $492 million for labor, nearly a 60-to-1 business advantage.
The result, according to Smith, is a political landscape dominated in the 1990s and 2000s by business groups, specifically "political insiders" – former members of Congress and government officials with an inside track – working for "Wall Street banks, the oil, defense, and pharmaceutical industries; and business trade associations." In the decade or so prior to the Great Divergence, middle-class-dominated reformist grassroots efforts – such as civil rights movement, environmental movement, consumer movement, labor movement – had considerable political impact.
Economist Joseph Stiglitz argues that hyper-inequality may explain political questions – such as why America's infrastructure (and other public investments) are deteriorating, or the country's recent relative lack of reluctance to engage in military conflicts such as the 2003 invasion of Iraq. Top-earning families, wealthy enough to buy their own education, medical care, personal security, and parks, have little interest in helping pay for such things for the rest of society, and the political influence to make sure they don't have to. So too, the lack of personal or family sacrifice involved for top earners in the military intervention of their country – their children being few and far between in the relatively low-paying all-volunteer military – may mean more willingness by influential wealthy to see its government wage war.
Concentration of resources in a smaller segment of the population may affect charitable giving. Contrary to the image of the wealthy being great benefactors of charity, researchers[who?] have found higher-income groups donate less not more to charity than lower income. In 2011, the top 20 percent income group donated 1.3% of their income, the bottom 20 percent, 3.2%. Donations among the economic elite were more likely to go to elite colleges, universities, museums and arts organizations; and less likely to go to social-service organizations, such as the United Way, Salvation Army, or Feeding America.
The relatively high rates of health and social problems (obesity, mental illness, homicides, teenage births, Incarceration, child conflict, drug use) and lower rates of social goods (life expectancy, educational performance, trust among strangers, women's status, social mobility, even numbers of patents issued per capita), in the US compared to other developed countries may be related to its high income inequality. Using statistics from 23 developed countries and the 50 states of the US, British researchers Richard G. Wilkinson and Kate Pickett have found such a correlation which remains after accounting for ethnicity, national culture, and occupational classes or education levels. Their findings, based on UN Human Development Reports and other sources, locate the United States at the top of the list in regards to inequality and various social and health problems among developed countries. The authors argue inequality creates psychosocial stress and status anxiety that lead to social ills. According to The Earth Institute, life satisfaction in the US has been declining over the last several decades, which has been attributed to soaring inequality, lack of social trust and loss of faith in government.
Paul Krugman argues that the much lamented long-term funding problems of Social Security and Medicare can be blamed in part on the growth in inequality as well as the usual culprits like longer life expectancies. The traditional source of funding for these social welfare programs – payroll taxes – is inadequate because it does not capture income from capital, and income above the payroll tax cap, which make up a larger and larger share of national income as inequality increases.
Disagreeing with this focus on the top-earning 1%, and urging attention to the economic and social pathologies of lower-income/lower education Americans, is conservative journalist David Brooks. Whereas in the 1970s, high school and college graduates had "very similar family structures", today, high school grads are much less likely to get married and be active in their communities, and much more likely to smoke, be obese, get divorced, or have "a child out of wedlock."
The zooming wealth of the top one percent is a problem, but it’s not nearly as big a problem as the tens of millions of Americans who have dropped out of high school or college. It’s not nearly as big a problem as the 40 percent of children who are born out of wedlock. It’s not nearly as big a problem as the nation’s stagnant human capital, its stagnant social mobility and the disorganized social fabric for the bottom 50 percent.
Contradicting most of these arguments, classical liberals such as Friedrich Hayek have maintained that because individuals are diverse and different, state intervention to redistribute income is inevitably arbitrary and incompatible with the concept of general rules of law, and that "what is called 'social' or distributive' justice is indeed meaningless within a spontaneous order". Those who would use the state to redistribute, "take freedom for granted and ignore the preconditions necessary for its survival." 
Opportunity, growth and equality
Conservatives and libertarians such as economist Thomas Sowell, and Congressman Paul Ryan (R., Wisc.) argue that more important than the level of equality of results is America's equality of opportunity, especially relative to other developed countries such as western Europe.
Economic growth and inequality
In response to the Occupy movement Richard A. Epstein defended inequality in a free market society, maintaining that "taxing the top one percent even more means less wealth and fewer jobs for the rest of us." According to Epstein, "the inequalities in wealth ... pay for themselves by the vast increases in wealth", while "forced transfers of wealth through taxation ... will destroy the pools of wealth that are needed to generate new ventures. Stiglitz on the other hand concludes that moving money from the bottom to the top through income inequality lowers consumption because higher-income individuals consume a smaller proportion of their income than do lower-income individuals (those at the top save 15 to 25 percent of their income, those at the bottom spend all of their income).
Some (while specifically advocating redistribution of income through taxation) have not found a "tradeoff" between greater equality and economic growth; but according to economist Branko Milanovic, while traditionally economists thought inequality was good for growth
"The view that income inequality harms growth – or that improved equality can help sustain growth – has become more widely held in recent years. ... The main reason for this shift is the increasing importance of human capital in development. When physical capital mattered most, savings and investments were key. Then it was important to have a large contingent of rich people who could save a greater proportion of their income than the poor and invest it in physical capital. But now that human capital is scarcer than machines, widespread education has become the secret to growth."
"Broadly accessible education" is both difficult to achieve when income distribution is uneven and tends to reduce "income gaps between skilled and unskilled labor."
Economic sociologist Lane Kenworthy has found no correlation between levels of inequality and economic growth among developed countries, among states of the US, or in the US over the years from 1947 to 2005. Jared Bernstein found a nuanced relation he summed up as follows: "In sum, I’d consider the question of the extent to which higher inequality lowers growth to be an open one, worthy of much deeper research".
In a December 2013 Associated Press survey of three dozen economists, the majority claim that widening income disparity is harming the US economy. They argue that wealthy Americans are receiving higher pay, but they spend less than middle class consumers, the majority of the population, whose incomes have largely stagnated. Economists Gar Alperovitz and Robert Reich argue that with so much wealth concentrated at the top, there's simply not enough purchasing power to make the rest of the system function.
Mobility during a lifetime
The centrist Brookings Institution said in March 2013 that income inequality was increasing and becoming permanent, sharply reducing social mobility in the US. A 2007 study (by Kopczuk, Saez and Song in 2007) found the top population in America "very stable" and "not mitigated the dramatic increase in annual earnings concentration since the 1970s."
Economist Paul Krugman, attacks conservatives for resorting to "extraordinary series of attempts at statistical distortion". He argues that while in any given year, some of the people with low incomes will be "workers on temporary layoff, small businessmen taking writeoffs, farmers hit by bad weather" – the rise in their income in succeeding years is not the same 'mobility' as poor people rising to middle class or middle income rising to wealth. It's the mobility of "the guy who works in the college bookstore and has a real job by his early thirties."
Studies by the Urban Institute and the US Treasury have both found that about half of the families who start in either the top or the bottom quintile of the income distribution are still there after a decade, and that only 3 to 6% rise from bottom to top or fall from top to bottom.
On the issue of whether most Americans do not stay put in any one income bracket, Krugman quotes from 2011 CBO distribution of income study
Household income measured over a multi-year period is more equally distributed than income measured over one year, although only modestly so. Given the fairly substantial movement of households across income groups over time, it might seem that income measured over a number of years should be significantly more equally distributed than income measured over one year. However, much of the movement of households involves changes in income that are large enough to push households into different income groups but not large enough to greatly affect the overall distribution of income. Multi-year income measures also show the same pattern of increasing inequality over time as is observed in annual measures.
In other words, "many people who have incomes greater than $1 million one year fall out of the category the next year – but that’s typically because their income fell from, say, $1.05 million to 0.95 million, not because they went back to being middle class."
Mobility between generations
Several studies have found the ability of children from poor or middle-class families to rise to upper income – known as "upward relative intergenerational mobility" – is lower in the US than in other developed countries – and at least two economists have found lower mobility linked to income inequality.
In their "Great Gatsby" curve, White House Council of Economic Advisers Chairman Alan B. Krueger and labor economist Miles Corak show a negative correlation between inequality and social mobility. The curve plotted "intergenerational income elasticity" – i.e. the likelihood that someone will inherit their parents' relative position of income level – and inequality for a number of countries.
In the words of journalist Timothy Noah
you can't really experience ever-growing income inequality without experiencing a decline in Horatio Alger-style upward mobility because (to use a frequently-employed metaphor) it's harder to climb a ladder when the rungs are farther apart.
Aside from the proverbial distant rungs, the connection between income inequality and low mobility can be explained by the lack of access for un-affluent children to better (more expensive) schools and preparation for schools crucial to finding high-paying jobs; the lack of health care that may lead to obesity and diabetes and limit education and employment.
Krueger estimates that "the persistence in the advantages and disadvantages of income passed from parents to the children" will "rise by about a quarter for the next generation as a result of the rise in inequality that the U.S. has seen in the last 25 years."
Greater income inequality can increase the poverty rate, as more income shifts away from lower income brackets to upper income brackets. Jared Bernstein wrote: "If less of the economy’s market-generated growth — i.e., before taxes and transfers kick in — ends up in the lower reaches of the income scale, either there will be more poverty for any given level of GDP growth, or there will have to be a lot more transfers to offset inequality’s poverty-inducing impact." The Economic Policy Institute estimated that greater income inequality would have added 5.5% to the poverty rate between 1979 and 2007, other factors equal. Income inequality was the largest driver of the change in the poverty rate, with economic growth, family structure, education and race other important factors. An estimated 16% of Americans lived in poverty in 2012, versus 26% in 1967.
Proposed policy responses
Proposed public policy responses addressing causes and deleterious effects of income inequality include: progressive tax incidence adjustments, strengthening social safety net provisions such as Aid to Families with Dependent Children, welfare, the food stamp program, Social Security, Medicare, and Medicaid, increasing and reforming higher education subsidies, increasing infrastructure spending, and placing limits on and taxing rent-seeking.
Increase public spending and expand welfare state
Lane Kenworthy advocates incremental reforms to the U.S. welfare state in the direction of the Nordic social democratic model, thereby increasing economic security and equal opportunity. Currently, the U.S. has the weakest social safety net of all developed nations.
Raise taxes on the wealthy
CBO reported that less progressive tax and transfer policies contributed to an increase in after-tax income inequality between 1979 and 2007. This indicates that more progressive income tax policies (e.g., higher income taxes on the wealthy and a higher earned-income tax credit) would reduce after-tax income inequality.
The economists Emmanuel Saez and Thomas Piketty recommend much higher top marginal tax rates on the wealthy, up to 50 percent, or 70 percent or even 90 percent. Ralph Nader, Jeffrey Sachs, the United Front Against Austerity, among others, call for a financial transactions tax (also known as the Robin Hood tax) to bolster the social safety net and the public sector.
The Pew Center reported in January 2014 that 54% of Americans supported raising taxes on the wealthy and corporations to expand aid to the poor. By party, 29% of Republicans and 75% of Democrats supported this action.
Raise the minimum wage
In his 2013 State of the Union address, Barack Obama highlighted the need to raise the federal minimum wage. The progressive economic think tank the Economic Policy Institute agrees with this position, stating: "Raising the minimum wage would help reverse the ongoing erosion of wages that has contributed significantly to growing income inequality." In response to the fast-food worker strikes of 2013, Labor Secretary Thomas Perez said that it was another sign of the need to raise the minimum wage for all workers: "It's important to hear that voice... For all too many people working minimum wage jobs, the rungs on the ladder of opportunity are feeling further and further apart."
The Economist wrote in December 2013: "A minimum wage, providing it is not set too high, could thus boost pay with no ill effects on jobs....America's federal minimum wage, at 38% of median income, is one of the rich world's lowest. Some studies find no harm to employment from federal of state minimum wages, others see a small one, but none finds any serious damage."
The U.S. minimum wage was last raised to $7.25 per hour in July 2009. As of December 2013, there were 21 states with minimum wages above the Federal minimum, with the State of Washington the highest at $9.32. Ten states index their minimum wage to inflation.
The Pew Center reported in January 2014 that 73% of Americans supported raising the minimum wage from $7.25 to $10.10 per hour. By party, 53% of Republicans and 90% of Democrats favored this action. Also in January 2014, six hundred economists sent the President and Congress a letter urging for a minimum wage hike to $10.10 an hour by 2016.
Implement a maximum wage
Amalgamated Transit Union international president Lawrence J. Hanley has called for a maximum wage law, which "would limit the amount of compensation an employer could receive to a specified multiple of the wage earned by his or her lowest paid employees." CEO pay at the largest 350 U.S. companies was 20 times the average worker pay in 1965; 58 times in 1989 and 273 times in 2012.
Subsidies and income guarantees
Others argue for a Basic income guarantee, ranging from civil rights leader Martin Luther King, Jr. to libertarians such as Milton Friedman (in the form of negative income tax), Robert Anton Wilson, Gary Johnson (In the form of the fair tax "prebate") and Charles Murray to the Green Party.
Limit rent seeking
Expand "economic democracy"
The economists Richard D. Wolff and Gar Alperovitz claim that greater economic equality could be achieved by extending democracy into the economic sphere. In an essay for Harper's Magazine, investigative journalist Erik Reece argues that "With the political right entrenched in its opposition to unions, worker-owned cooperatives represent a less divisive yet more radical model for returning wealth to the workers who earned it."
- American Dream
- Economic inequality
- Economic mobility
- Economy of the United States
- Educational attainment in the United States
- The Great Compression
- The Great Divergence (inequality)
- High-net-worth individual
- Homelessness in the United States
- Inequality for All. A 2013 documentary film presented by Robert Reich
- Income inequality metrics
- Legatum Prosperity Index
- List of countries by income equality
- List of countries by inequality-adjusted HDI
- Median income per household member
- Racism in the United States
- Racial Inequality in the United States
- Second Bill of Rights
- Social justice
- Socio-economic mobility in the United States
- The Divide: American Injustice in the Age of the Wealth Gap (book)
- The Spirit Level: Why More Equal Societies Almost Always Do Better (book)
- Tax Policy and Economic Inequality in the United States
- Wealth inequality in the United States
- We are the 99%
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- Wall Street Bolshevism, Part 3| Timothy Noah| tnr.com| 5 October 2011 |]
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- Inequality and taxes: Equality doesn't always mean redistribution | The Economist
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- Tax Rates, Inequality and the 1% By ALAN REYNOLDS 6 December 2011
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- Intellectual Garbage Collection: The Unreliability of Alan Reynolds
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- chart of Income Growth Rates 1948–2005 under Democratic presidents and under Republican presidents. Graphics by Catherine Mulbrandon
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- Investment Outlook| October 2011 |Six Pac(k)in'
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- see also Hassett and Mathur: Consumption and the Myths of Inequality| BY KEVIN A. HASSETT AND APARNA MATHUR| online.wsj.com| October 24, 2012
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- The Way Forward| By Daniel Alpert, Westwood Capital; Robert Hockett, Professor of Law, Cornell University; and Nouriel Roubini, Professor of Economics, New York University| New America Foundation| October 10, 2011
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- Inequality and crises: coincidence or causation? Paul Krugman (see last chart: Inequality and household debt)
- Vanishing Trials: The Bankruptcy Experience Elizabeth Warren*
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- Income inequality in the United States at Google Books By Robert Frank
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- This is despite the fact that low income taxpayers are less likely to be able to deduct their giving for tax purposes as they are less likely to use itemized deductions on their income tax.
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- Explanations for this effect include the rise of gated communities and general isolation of the well off from exposure to social problems of poverty, and a correlation of ambition for monetary gain with lack of interest in others and their problems. Why the Rich Don't Give to Charity
- A study confined to non-Hispanic whites in US and England also showed the effect. (Pickett and Wilkinson, The Spirit Level, 2011, p.177)
- Countries of similar cultures and different levels of equality – Spain and Portugal – showed difference in the index, while countries with very different cultures and ways of achieving equality – Nordic countries and Japan – charted closer to each other. (Pickett and Wilkinson, The Spirit Level, 2011, p.183)
- The effect was worse among low class/education level in high inequality countries, but continued through all occupational classes and was still significant among the highest. (Pickett and Wilkinson, The Spirit Level, 2011, p. 178–79)
- Statistics and graphs from Wilkinson and Pickett research.
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- see also The White Underclass By NICHOLAS D. KRISTOF| 8 February 2012
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- Paul Ryan on Income Inequality and Upward Mobility Diane Ellis, Ed. · 28 November 2011
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- Three Cheers for Income Inequality
- Stiglitz, Joseph E. (2012-06-04). The Price of Inequality: How Today's Divided Society Endangers Our Future (p. 85). Norton. Kindle Edition. See also: Karen E. Dynan, Jonathan Skinner, and Stephen P. Zeldes, “Do the Rich Save More?,” Journal of Political Economy 112, no. 2 (2004): 397– 444.
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- 1% Wall Street Sales Tax. UFAA.
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- U.S. Department of Labor-History of Federal Minimum Wage Rates-Retrieved January 11, 2013
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5. ^"Shapiro, E. (October 17, 2005) New IRS Data Show Income Inequality is Again on the rise. Center. Center on Budget and Policy Priorities"
|Wikimedia Commons has media related to Income distribution in the United States.|
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- A Giant Statistical Round-up of the Income Inequality Crisis in 16 Charts from The Atlantic
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- The United States of Inequality – a 10 part exposé and visual guide by Slate magazine
- Recent Trends in Household Wealth in the United States: Rising Debt and the Middle-Class Squeeze – by Dr. Edward Wolff
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- It's the Inequality, Stupid: 11 Charts that Explain Everything that's Wrong with America – March 2011 issue of Mother Jones
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- What Percent Are You? (Enter your household income and see how you rank) New York Times 14 January 2012
- America's Disappearing Middle Class: Implications for Public Policy and Politics by Trevor Beltz, May, 2012
- Islands of High Income
- Bill Moyers: The United States of Inequality
- Richard Wilkinson: How economic inequality harms societies. TED, Oct 2011.
- Economic Inequality is Real, Personal, Expensive, and it was Created. We'll show you how. Economic Policy Institute, 2013.
- TED talk on inequality given by Nick Hanauer. on YouTube
- This Map Will Show You The Staggering Growth In Income Inequality Over The Past 40 Years. The Huffington Post, September 2013.
- The End of Illth: In search of an economy that won’t kill us. Harper's Magazine, October 4, 2013.
- Center on Budget & Policy Priorities-A Guide to Statistics on Historical Trends in Income Inequality-December 2013
- Five Economic Reforms Millennials Should Be Fighting For. Rolling Stone, January 3, 2014.
- "Wealth Gap" - A Guide (AP News - January, 2014).