On fairy tales about inequality

In Jason DeParle’s New York Times article today, it appears that some folks are claiming that the inequality that Occupy Wall Street has called attention to is a thing of the past and of no concern, all because income inequality declined during the recession between 2007 and 2009. Bunk! That decline is the result of the stock market decline and the very same trend occurred in the early 2000s recession only to end with inequality reestablishing and exceeding its previous heights by 2007 (as DeParle quoted Jared Bernstein saying in the article. Go Jared!).

Wage and salary data show wage inequality rising from 2009 to 2010 (recovering more than a third of lost ground), suggesting that it is too early to shed crocodile tears for the top 1 percent. Regardless of last year’s trend, it remains the case that income inequality in 2009 was still substantially greater than it was in the late 1970s. Moreover, the conclusion that a lion’s share of income gains accrued to the top 1 percent or even the top 0.1 percent, while income growth was modest for the bottom 90 percent (as Josh Bivens and I recently wrote) remains absolutely true.

As Josh and I explained, there are three dynamics at play in the shift of income up to the top 1 percent and the top 0.1 percent. First, there’s the shift upwards in the distribution of wage and salaries, which also reflects the “realized option income” provided to CEOs that are counted as wage income. Second, there’s the shift upwards in the distribution of capital income (capital gains, interest, dividends): According to the Congressional Budget Office, the top 1 percent reaped 57 percent of capital income in 2007, up from 38 percent in 1979. Last, there is a shift toward greater capital income and proportionately less labor compensation since 1979.

What’s happened to these dynamics in the recession? We know the stock market declined more than a third from 2007 to 2009 (judged by the NYSE and the S&P indices) and the realized capital gains at the top fell over 70 percent (according to the IRS data for those  with incomes $500,000 or more, which I will refer to as those with top incomes). Though capital gains comprised 36 percent of top incomes in 2007, the stock market decline and an even far greater drop in capital gains meant that capital gains contributed only 16 percent of their income in 2009. That explains a lot of the fall in inequality between 2007 and 2009. However, the 20 percent gain in the stock market in 2010 should have helped top incomes recover a bunch of lost ground, don’t you think? I would expect gains in the stock market and realized capital gains to fare better than real wages over the next few years, fueling greater inequality.

We also know that corporate profits are now substantially greater than they were before the recession. In fact, as Heidi Shierholz and I wrote in August, “In 2010 the share of corporate income going to profits was 26.2%, the highest share since the years during World War II, when national policy used wage and price controls to consciously suppress wage growth.” So, it seems that one of the dynamics causing greater inequality is certainly going strong.

I (along with research assistant Nicholas Finio) have been tracking the trends in top wages using the historical data produced by Wojciech Kopczuk, Emmanuel Saez, and Jae Song for 1979 through 2004 (developed with access to Social Security earnings microdata) and updating their analysis using wage data published by the Social Security Administration. These wage data are available for 2010 so we can get a look at part of the overall income picture to see how quickly, if at all, income inequality is recovering lost ground. As the graph shows, the share of wages earned by the top 1 percent fell from its historic high in 2007 of 14.1 percent to 12.2 percent in 2009. That is what the top 1 percent’s share of wages was back in 2003 in the last recession and what it was in 1996, seemingly reversing more than a decade of wage inequality. However, the top 1 percent’s share of wages was just 7.3 percent in 1979 so the drop by 2009 was nowhere close to reversing the three-decades growth of wage inequality.

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In 2010, the wages of those in the top 1 percent grew 6.8 percent in inflation-adjusted terms while those in the bottom 90 percent saw their real annual earnings fall 0.7 percent. Consequently, the top 1 percent’s share of wages grew to 12.9 percent, the same as in 2004, and recovered more than a third of the loss from 2007 to 2009. The shift in wage distribution has mostly occurred among the top 5 percent and hasn’t really trickled down to the bottom 90 percent, whose wage share in 2010 was 61.5 percent. That puts the bottom 90 percent’s wage share back to where it was in 2006 when it was the lowest in any year (dating back to 1937). Note, that the bottom 90 percent had 69.8 percent of all wages in 1979; so there certainly has been a tremendous growth of wage inequality since 1979 despite whatever drop there’s been in the recession. Clearly, this much ballyhooed reversal of wage inequality hasn’t meant much to the vast majority.

The graph puts this in terms of the actual growth of wages for the top earners (those in the top 0.1 percent and top 1 percent) and for the vast majority, the bottom 90 percent. Between 1979 and 2007, the wages of the top 1 percent grew 156 percent, far better than the 17 percent growth obtained by the bottom 90 percent. Even with the fall in wages for those at the top between 2007 and 2009, their wages were still 116 percent higher than in 1979 while the wages in the bottom 90 percent were just 16 percent greater. In 2010, the top 1 percent had strong real wage gains and ended up 131 percent above 1979 wage levels while those in the bottom 90 percent lost ground and had wages 15 percent ahead of their 1979 levels.

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The idea that income inequality is a thing of the past or has reversed itself is simply not true. Inequality did fall from 2007 to 2009, but remained way above the inequalities that prevailed 30 years ago. Everything we know about trends in 2010 shows inequality is recovering lost ground. I would bet that further ground will be recovered in 2011 and ensuing years and it’s just a matter of how quickly this occurs. You can bet that the income growth at the top will be far stronger than that of the vast majority over the next several years. Of course, these trends in inequality are not dictated by a law of nature or economics, and they won’t be reversed until policies are shifted to make that happen.


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  • Marvin McConoughey

    Note that the bottom 90 percent have fared quite stably over the past decade.  That does not mean that they were unaffected, but it does mean that they were not devastated.  This fact is important because the 90 percent are likely to have less resilience, less reserve capital, and less effective mobility.

  • Gary Juloian

    If you consider yourself part of the 90% and vote Republican then you have a problem with reality and reason

  • Tlsnyder42

    Thomas Sowell has refuted these arguments in his articles and his economics books. I’m more concerned that government bureaucrats earn twice as much in wages and benefits as the average worker in the private sector. How come liberal loons don’t discuss THAT inequality?