Inequality I: Changes

The studies of Piketty and Saez seem to be becoming the standard for the description of inequality within the USA. Every now and then they update their figures, and recently they published an updated set that described what happened to American Inequality in 2004. There has been a rush of comments about the numbers on some economic weblogs. So I’ll collect them together here – I don’t have anything to add myself: it’s fascinating to see this kind of real-world issue being debated among experts in public.

First, the update itself is in an Excel spreadsheet here, at the web site of Emmanual Saez.

Paul Krugman (in the New York Times, but reposted in part by Mark Thoma here) describes the main feature as follows:

Thomas Piketty and Emmanuel Saez, whose
long-term estimates of income equality have become the gold standard for
research on this topic … show that even if you exclude capital gains from
a rising stock market, in 2004 the real income of the richest 1 percent of
Americans surged by almost 12.5 percent. Meanwhile, the average real income of
the bottom 99 percent of the population rose only 1.5 percent. In other words, a
relative handful of people received most of the benefits of growth.

There are a couple of additional revelations in the 2004 data. One is that
growth didn’t just bypass the poor and the lower middle class, it bypassed the
upper middle class too. Even people at the 95th percentile of the income
distribution — that is, people richer than 19 out of 20 Americans — gained only
modestly. …

The other revelation is that being highly educated was no guarantee of
sharing in the benefits of economic growth. There’s a persistent myth,
perpetuated by economists who should know better … that rising inequality …
is mainly a matter of a rising gap between those with a lot of education and
those without. But census data show that the real earnings of the typical
college graduate actually fell in 2004.

Greg Mankiw, another prominent economist who was also high up in the Bush administration until recently, saw things differently here:

Here is what I see: After rising substantially from 1986 to 2000,
income inequality is essentially the same in 2004 (the most recent year
of data) as it was in 2000.

In a separate post, Mankiw also challenges Krugman’s sentence about "a persistent myth, perpetuated by eonomists who should know better…that rising inequality…is mainly a matter of a rising gap between those with a lof of education and those without". While Krugman claims that the big story is the growth of income at the very top of the scale, Mankiw reasserts the role of a more broadly based change:

My
understanding is that there is a widespread consensus that the returns
to education have risen substantially over the past few decades. But
the education wage premium is not the whole story, as wage inequality
within education categories has also increased substantially.

…part
of the increase in inequality is measurement error, and part of the
increase is attributable to the fact that the labor force is older and
more educated–characteristics that are associated with higher residual
variance.

Brad DeLong takes up the thread, weighing in on Krugman’s side:

The big rise in inequality in the U.S. since 1980 has been
overwhelmingly concentrated among the top 1% of income earners: their
share has risen from 8% in 1980 to 16% in 2004. By contrast, the share
of the next 4% of income earners has only risen from 13% to 15%, and
the share of the next 5% of income earners has stuck at 12%. The top 1%
have gone from 8 to 16 times average income, the next 4% have gone from
3.2 to 3.7 times average income, and the next 5% have been stuck at 3
times average income.

It’s hard to attribute this pattern to a rise in the premium salary
earned by the well-educated by virtue of the skills their formal
education taught them.

But Greg Mankiw is not convinced:

I would guess that the top 1 percent of income earners (those earning
more than $276,945) are disproportionately very well educated–doctors,
lawyers, MBAs, etc. So the rise in the income of the top 1 percent
could well represent in large part a higher education premium.

What
might well be true is that the returns to education have become
increasingly non-linear: The most educated are now getting a bigger
return from a marginal year of education than those with moderate
amounts of education. In other words, two years getting an MBA from
Harvard Business School may increase a person’s income more in
percentage terms than does two years getting an Associate Degree from
Mass Bay Community College. My understanding from my labor economist
friends is that some evidence favors this hypothesis of increasing
nonlinearity.

And Mark Thoma adds his two cents:

We can debate what has happened the last few years and whether this year or
that year had special circumstances such as the problems Brad notes with using
2000 as a base year. But in doing so, we shouldn’t lose sight of the overall
upward trend in inequality.

Top Decile Income Share

Top 0.01% Income Share

Average Real Income of bottom 99% and top 1%

The little dip at the end is what the fuss is all about. But even if Greg’s claim holds up to the types of qualifications Brad talks about, and there are good reasons to worry about using 2000 as a base year, the upward trend in income inequality since the 1970s is undeniable. And in any case, as the last graph shows, real income for the bottom 99% of the distribution has been flat since the early 1970s despite large gains in productivity.

Meanwhile, in keeping with Thoma’s theme of focusing on the bigger picture, Brad Delong reminds us that

Real wages for low-paid workers aren’t rising at all. It’s not the
well-paid benefit "most." It’s that only the well-paid are, as a group,
benefitting at all.