Study: Income inequality in America is overstated

September 23, 2009

First the summary of new research from economist Robert Gordon:

The rise in American inequality has been exaggerated both in magnitude and timing. Commentators lament the large gap between the growth rates of real median household income and of private sector productivity. This paper shows that a conceptually consistent measure of this growth gap over 1979 to 2007 is only one-tenth of the conventional measure. Further, the timing of the rise of inequality is often misunderstood. By some measures inequality stopped growing after 2000 and by others inequality has not grown since 1993. This cessation of inequality’s secular rise in 2000 is evident from the growth of Census mean vs. median income, and in the income share of the top one percent of the income distribution. The income share of the 91st to 95th percentile has not increased since 1983, and the income ratio of the 90th to 10th percentile has barely increased since 1986. Further, despite a transient decline in labor’s income share in 2000-06, by mid-2009 labor’s share had returned virtually to the same value as in 1983, 1991, and 2001.

Recent contributions in the inequality literature have raised questions about previous research on skill-biased technical change and the managerial power of CEOs. Directly supporting our theme of prior exaggeration of the rise of inequality is new research showing that price indexes for the poor rise more slowly than for the rich, causing most empirical measures of inequality to overstate the growth of real income of the rich vs. the poor. Further, as much as two-thirds of the post-1980 increase in the college wage premium disappears when allowance is made for the faster rise in the cost of living in cities where the college educated congregate and for the lower quality of housing in those cities. A continuing tendency for life expectancy to increase faster among the rich than among the poor reflects the joint impact of education on both economic and health outcomes, some of which are driven by the behavioral choices of the less educated.

Me: Indeed, part of this is the Wal-Mart factor where lower-income households have been able to substitute less expensive goods, giving their real spending power a big boost.

One comment

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Despicable and ignorant. Maybe it’s not alright that people HAVE TO shop at Walmart just to stretch their dollars… using that kind of barometer to say everything is alright for people who have to spend every dollar they make to make ends meet, I think that says a lot about the author. I would love to propose to anyone who thinks that people are better off today than, say, ten years ago try this simple test: try to only spend what you could make working 50hrs a week (ie two part time jobs) at Walmart or MacDonald’s (after taxes, so roughly $300/wk) for a whole month. That’s food, utilities, gasoline. Let’s see how you feel about the economy after that exercise. Maybe, if you live alone, you’re ok, but try it with 2 or more dependants (kids). If you don’t starve first, comeback afterwards and write a commentary in this blog.

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