To a remarkable extent, inequality, which fell during the New Deal but has risen dramatically since the late 1970s, corresponds to the rise and fall of unionization in the United States.
The passage in 1935 of the National Labor Relations Act, which protected and encouraged unions, sparked a wave of unionization that led to three decades of shared prosperity and what some call the Great Compression: when the share of national income taken by the very rich was cut by one-third. The “countervailing power” of labor unions (not just at the bargaining table but in local, state, and national politics) gave them the ability to raise wages and working standards for members and non-members alike. Both median compensation and labor productivity roughly doubled into the early 1970s. Labor unions both sustained prosperity, and ensured that it was shared; union bargaining power has been shown to moderate the compensation of executives at unionized firms.
However, over the next 30 years—an era highlighted by the filibuster of labor law reform in 1978, the Reagan administration’s crushing of the PATCO strike, and the passage of anti-worker trade deals with Mexico and China—labor’s bargaining power collapsed. The consequences are driven home by the figure below, which juxtaposes the historical trajectory of union density and the income share claimed by the richest 10 percent of Americans. Union membership has fallen and income inequality has worsened—reaching levels not seen since the 1920s.