LSE: Rising US income inequality: the disproportionate gains of the highest earners

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A recent London School of Economics blog post by Kevin J. Lansing and Agnieszka Markiewicz continues to detail how rising income inequality in the U.S. continues to change the economic composition of the country. Some highlights:

 

The increase in U.S. income inequality since 1970 largely reflects gains made by households in the top 20 per cent of the income distribution. Estimates suggest that households outside this group have suffered significant losses from foregone consumption, measured relative to a scenario that holds inequality constant. A substantial mitigating factor for the losses has been the dramatic rise in government redistributive transfers, which have doubled as a share of U.S. output over the same period

Income inequality in the United States has increased dramatically in recent decades. Most of the increase can be traced to gains going to those near the top of the income distribution. As emphasised by Piketty (2014, p. 297), from 1977 to 2007 three-fourths of the income growth in the U.S. economy went to the top 10 per cent of households.

Figure-1-Rising-American-Inequality.png

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In a recent article, we use a quantitative economic model to gauge the consumption gains or losses that result from this pattern of rising U.S. income inequality. We compare consumption in the actual scenario with rising inequality and transfers to consumption in a hypothetical alternative scenario in which inequality and transfers do not increase. Specifically, the alternative scenario holds household income shares and government transfers relative to output at their 1970 levels. The results indicate that the increase in income inequality since 1970 has delivered large consumption gains to households in the top 20 per cent of the income distribution. But for households outside this exclusive group, the consumption losses relative to the alternative scenario appear to have been significant, albeit substantially mitigated by the large increase in government redistributive transfers since 1970.

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The increase in U.S. income inequality over the past half-century can be traced to gains made by those near the top of the income distribution—where financial wealth and corporate stock ownership is highly concentrated. The economic and political implications of this pattern of rising inequality have garnered substantial attention among researchers and policymakers. Overall, our results suggest that there is room for policy actions that could offset the negative consequences of rising income inequality.

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