The Rise and Consequences of
Inequality
Alan B. Krueger
Chairman
Council of Economic Advisers
January 12, 2012
Figure 1: Growing Together, Growing Apart
Income Growth by Quintile, Various Periods
Annual Growth Rate of Real Income Across the Family Income Distribution
1947 to 1979
Annual Growth Rate of Real Income Across the Family Income Distribution
1979 to 2010
Percent
3.5%
Percent
3.5%
3.0%
3.0%
2.5%
2.4%
2.5%
2.4%
2.2%
2.5%
2.2%
2.0%
2.0%
1.5%
1.5%
1.2%
1.0%
1.0%
0.6%
0.5%
0.5%
0.3%
0.1%
0.0%
0.0%
Lowest fifth
2nd fifth
Mid fifth
4th fifth
Top fifth
-0.5%
-0.4%
Lowest fifth
2nd fifth
Mid fifth
4th fifth
Top fifth
Source: Census Bureau
January 12, 2012
1
Figure 2: Growing Together Again
1992-2000
Annual Growth Rate of Real Income Across the Family Income Distribution
1992-2000
Percent
4.0%
3.5%
3.5%
3.0%
2.6%
2.5%
2.0%
2.0%
1.9%
1.8%
2nd fifth
Mid fifth
1.5%
1.0%
0.5%
0.0%
Lowest fifth
4th fifth
Top fifth
Source: Census Bureau
January 12, 2012
2
Figure 3: If Real Incomes Had Grown During the 2000s as They Did
During the 1990s, the Median Household Would Have an Extra $8,900 in
Annual Income in 2010
Median Household Income
2010 Dollars
60,000
58,000
56,000
If median
household income had
grown during the 2000s
at the same rate as it
did during the 1990s
54,000
$8,900
52,000
50,000
2010
48,000
Actual
46,000
44,000
42,000
79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09
Note: Shading denotes recession.
Source: Census Bureau; CEA calculations
January 12, 2012
3
Figure 4: CBO Estimates Show Much Faster Income Growth for the
Top 1%
Growth in Real After-Tax Income, 1979-2007
Percent Change
300%
278%
250%
200%
150%
100%
65%
50%
18%
28%
35%
43%
0%
Lowest Quintile Second Quintile Middle Quintile Fourth Quintile
81st-99th
Percentiles
Top 1 Percent
Source: CBO
January 12, 2012
4
Figure 5: Income Inequality Near Record High
Share of Income Earned,1916-2009
Percent of All U.S. Income
25
20
15
Top 1%
10
Top 0.1%
5
0
1916
1926
1936
1946
1956
1966
1976
1986
1996
2006
Source: 2010 update to Piketty and Saez (2006)
January 12, 2012
5
Figure 6: The Size of the Middle-Class has Fallen
Percent of Households With Annual Income Within 50% of the Median
Percent
52
50.3
50
48
47.3
45.6
46
44.2
44
42.2
42
40
0
38
1970
1980
1990
2000
2010
Source: CEA Calculations from Current Population Survey
January 12, 2012
6
Figure 7: “The Great Gatsby Curve”
Higher income inequality associated with lower intergenerational mobility
The
. Great Gatsby Curve
Intergenerational earnings elasticity
0.6
0.6
0.5
0.5
United Kingdom
United States
France
0.4
0.4
Japan
Germany
0.3
New Zealand
Sweden
0.2
y = 2.2x - 0.27
R² = 0.76
Finland
y = 2.2x - 0.27
R² = 0.76
Norway
0.3
0.2
Denmark
0.1
0.15
0.20
0.25
0.30
0.35
0.1
0.40
Inequality
(1985 Gini Coefficient)
Source: Corak (2011), OECD, CEA estimates
January 12, 2012
7
Figure 8: “The Great Gatsby Curve”: Projection
The
. Great Gatsby Curve
Intergenerational earnings elasticity
0.6
0.6
United States
United States
(2010) (2010 Gini)
0.5
0.5
United Kingdom
United States
France
0.4
0.4
Japan
Germany
0.3
New Zealand
Sweden
0.2
0.3
y = 2.2x - 0.27
R² = 0.76
0.2
Finland
Norway
y = 2.2x - 0.27
R² = 0.76
Denmark
0.1
0.15
0.20
0.25
0.30
0.35
0.1
0.40
Inequality
(1985 Gini Coefficient)
Source: Corak (2011), OECD, CEA estimates
January 12, 2012
8
Figure 9: Causes of Higher Inequality
Box-5-3.─The Expert's Consensus on Earnings Inequality
Average percent distribution
50
40
30
20
10
0
Technological
change
Other and
unknown
International
trade
Decline in real
minimum wage
Decline in
unionization
Rising
Immigration
Source: Economic Report of the President, 1997
January 12, 2012
9
Figure 10: U.S. Tax Code is Less Progressive than
Most Other OECD Countries
Gini Coefficient Before and After Taxes and Transfers, 2010
0.6
Before tax
After tax
0.5
0.4
0.3
0.2
0.1
0
Source: OECD
January 12, 2012
10
Figure 11: Despite large tax cuts, less dynamism
Startup Employment as a Share of Total Employment
Percent
3.5
OBRA
Deficit
Reduction Act
Balanced
Budget Act
JGTRRA
EGTRRA
3.3
3.0
Average:
1993-2000
2.8
Average:
2001-2007
2.5
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
Source: Business Dynamics Statistics
January 12, 2012
11
Consequences
• Intergenerational Mobility
• Consumption
• Aggregate demand and excess leverage.
• Economic Growth
• Morale and Productivity
January 12, 2012
12
The Rise and Consequences of
Inequality
Alan B. Krueger
Chairman
Council of Economic Advisers
January 12, 2012