Rising inequality is the root of affordability problems
Key takeaways:
- Income inequality has skyrocketed since 1979 because of intentional policy choices that suppressed wages for typical families to accelerate income growth at the top.
- Middle-class household incomes would be roughly $30,000 higher today if their incomes had simply kept pace with average income growth since 1979.
- Recognizing that today’s affordability problems are overwhelmingly inequality problems is the key to constructing the right policy solutions.
- As a start, protecting workers’ right to organize unions, fostering long periods of very low unemployment, and keeping minimum wages high will help typical families claim their fair share of income growth.
When most people—including policymakers—complain about a lack of affordability, they think of prices being too high. But affordability is the outcome of a race between prices and incomes. After all, goods and services were a lot cheaper 90 years ago during the Great Depression, but we all know that nearly everybody is richer today than their peers back then. Bringing incomes into the affordability picture makes for better understanding and better policy.
New Congressional Budget Office (CBO) data show that rising income inequality is the main reason that affordability feels out of reach for too many U.S. families. For more than four decades, most of the income growth in the U.S. economy has been funneled to those at the very top, leaving typical families with far less than their proportionate share of the economy’s gains. If middle-class household incomes had simply kept pace with average income growth since 1979, their pay would be roughly $30,000 higher today. If we account for taxes and government transfers, incomes would still be $19,000 higher today for these middle-class households. Think of this gap as an “inequality tax”: the amount that rising inequality has cost the typical U.S. family. Life would be much more affordable for these families today if they hadn’t been hit by this inequality tax.
This inequality is not the result of competitive markets fairly rewarding people’s skills and hard work. Instead, it resulted from an intentional policy campaign of wage suppression. Labor markets in capitalist economies are inherently tilted toward employers. Fair pay and broadly shared prosperity only materialize when policy affirmatively aims to correct this power imbalance. This can happen—policy choices that bolstered workers’ leverage and bargaining power in labor markets kept growth fast and equal for decades following World War II, for example. But lawmakers rolled back these policies at the behest of capital owners and corporate managers.
The latest CBO inequality data make the scale of this policy shift visible. Figure A shows the distribution of market income growth for non-elderly households by income group since 1979. We use market income to look at pre-tax, pre-transfer outcomes to assess the equality of outcomes generated by markets. We isolate non-elderly incomes because older households tend to have very low market incomes and these older households have grown as a share over time—so we don’t want any poor performance of market incomes documented here to simply be the outcome of natural population aging. Among this non-elderly group, the top 1% have captured a hugely disproportionate share of market income growth. Between 1979 and 2022, market income for the top 1% grew 277% (from $784,573 to $2.958 million) compared with just 26% growth for the middle fifth of households (from $76,359 to $96,335). This lopsided growth is the root of America’s affordability problem. Even as the economy grew and average incomes rose, typical families fell further behind those at the top who captured most of income growth.
Figure B shows the inequality tax over time, plotting actual market income for the middle fifth of households against what their income would have been if it had grown at the same rate as overall average income. By 2022, the inequality tax reached $30,676 per household, meaning middle-class families are forgoing that much income each year because of rising inequality. The gap has widened steadily since 1979, a sign that the affordability problem facing typical families is not a recent development but rather the cumulative result of decades of policies that have shifted income upward.
Because market income for middle-class families is driven predominantly by labor income, the inequality tax in Figure B reflects the consequences of decades of wage suppression. Of course, the United States has a system of taxes and means-tested transfers (safety net programs like Medicaid and food stamps, for example) that leads to post-tax and transfer income being more equal than market income in any given year. But the tax and transfer system did not ramp up in importance as market income inequality grew after 1979, and even after accounting for its effects, inequality increased significantly. Figure C shows that even when using post-tax and transfer income, the inequality tax remained substantial at $19,320 per middle fifth household in 2022.
Figure D shows who loses and who gains from rising inequality. While the inequality tax cost middle-income families $19,320 in 2022, families at the very top benefited enormously. The 96th to 99th percentiles gained about $88,000 from rising inequality, while the top 1% gained $1.1 million in 2022.
Perhaps surprisingly, the lowest quintile also slightly gained. For this group, lower taxes and higher levels of means-tested benefits counterbalanced a significant loss of market income due to inequality (their market income inequality tax would be around $4,000). The greater fiscal transfers to the bottom fifth are an under-recognized policy achievement of recent decades. It is also an achievement under constant threat, with the latest one being the large cuts to Medicaid and food stamps coming because of the Republican tax and spending bill that passed in 2025.
Who gains and who loses from rising inequality: Difference between actual income and income if it had grown at average rate since 1979
| Income group | Gap (percentage |
|---|---|
| Lowest quintile | 2.2% |
| Second quintile | -13.1% |
| Middle quintile | -16.6% |
| Fourth quintile | -11.6% |
| 81st-90th percentile | -1.8% |
| 91st-95th percentile | 10.8% |
| 96-99th percentile | 26.7% |
| Top 1% | 119.4% |
Notes: Average post-tax and transfer incomes for non-elderly households ranked by pre-tax, pre-transfer income deflated to 2025$ using the extended chained CPI-U. Gap is the difference between 2022 actual incomes and their level had they grown at the average rate since 1979.
Source: Author's analysis of Congressional Budget Office, "The Distribution of Household Income, 2022," 2026.
U.S. families’ feeling that life is less affordable than it should be is grounded in objective realities about how the economy has failed them. And it’s understandable why so many of these families think about prices, which they see as the final barrier between them and being able to obtain what they need for a good life, whether the price is for a gallon of gas or a loaf of bread or a monthly health insurance premium.
But the forces causing this affordability crunch are far larger than any given set of prices. Instead, they are mostly the forces that led to rising income inequality by intentionally suppressing the power of workers in labor markets. This wage suppression meant that middle-class income growth was never going to outpace inflation consistently enough to ensure steadily improving economic security.
In short, today’s affordability problems are overwhelmingly inequality problems. Recognizing this fact is the key to constructing the right policy solutions. As a start, protecting workers’ right to organize unions, fostering long periods of very low unemployment, and keeping minimum wages high will help typical families claim their fair share of income growth.
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