Yes, Income Inequality Has Stopped Growing

(Bloomberg Opinion) -- Growth in income inequality has markedly slowed in the past decade. Yes, that’s right. Though few seem to care or have noticed, this trend has important implications for economic policy.

A recent report from the nonpartisan Congressional Budget Office has analyzed the data over the last four decades. From 1979 through 2007, inequality increased significantly, no matter how income was measured — whether or not it was based on market income (the sum of employment, business and capital income), or if it included government social insurance and safety-net payments, or if it subtracted federal tax payments. Depending on the income measure, the CBO found that inequality increased in this period between 23 percent and 31 percent.

But from 2007 through 2014, the figure stabilized. Looking at market income, inequality increased by only 3 percent. Once you add in cash payments and in-kind transfers from government safety net programs, inequality actually fell over this period.

Another measure of inequality is more straightforward than the “Gini coefficient” used by the CBO, and considers only labor-market earnings. It begins by ranking workers by how much they usually earn each week. Take the worker who earns more than 90 percent of all workers. Now take the worker who only earns more than 10 percent of workers. Compare their earnings.

If the rich are getting richer, then “ninth decile” workers will earn increasingly more than “tenth decile” workers. This is exactly what was happening until recently. In the late 1990s, the ninth-decile workers earned about 4.5 times as much as the tenth-decile workers. This shot up to 5.2 times as much by 2012. But over the past six years, inequality has stabilized, echoing the findings in the CBO report.

It is striking how at odds this reality of years of slowing inequality is with the public conversation about inequality. Public opinion surveys do not show a decline in concern about inequality that corresponds with its stabilization. And the political left shows no signs of lessening its focus on inequality, both as a political issue and as a challenge for public policy.

There are several potential explanations for the incongruence between actual income inequality in the U.S., on the one hand, and the public perception of it and political focus on it, on the other. One is that the level of inequality matters, not its rate of change. Or perhaps changes in inequality do matter, but they have to persist for a long time in order to influence public attitudes.

I’d suggest an additional explanation: Inequality may be less important than many seem to think.

It’s critical to remember that inequality — the income gap between higher- and lower-income households — is conceptually different from income and earnings growth among non-rich households. Inequality can be slowing while non-rich Americans are doing better, worse or the same.

Indeed, part of the reason inequality features so prominently in the national conversation may have less to do with the rich and more to do with the lack of employment opportunities (until very recently, at least) and income growth experienced by many Americans. The same CBO report finds that yearly growth in median household income after taxes and transfers was about 1.4 percent between 1979 through 2007. But from 2007 through 2014 — the same period over which inequality was stabilizing — median income grew by just 0.2 percent per year. It’s understandable to conclude, correctly or not, that others are doing better than you if your income is growing that slowly.

Whether the size of the gap matters more than the absolute economic condition of non-rich Americans is critical. Each implies different policy responses that are often in conflict.

If the gap matters, then policies that shrink it are good. For example, raising the minimum wage to $15 per hour and significantly strengthening labor unions may be good, because they will raise the earnings of many incumbent workers. But if we care about the economic condition of lower-income Americans, then these policies are counterproductive because they will reduce their employment opportunities.

In the conflict between promoting income equality and increasing employment opportunities for lower-income Americans, I side with employment.

Beyond avoiding harmful policies, the government should pursue a proactive agenda to increase employment and earnings among working households. This should include making work pay through expanding earnings subsidies, building workers’ skills through apprenticeship programs, removing regulatory barriers to employment like occupational licensing and instituting pro-work reforms in safety-net programs.

These policies would increase the incomes of those who aren’t rich. Oh, and they would decrease inequality, too.

©2018 Bloomberg L.P.

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