In one sense, the growth of inequality in the last part of the twentieth century comes as a surprise. In the s, the bottom part of the income distribution contained large concentrations of two kinds of families: farm families whose in-kind income was not counted in Census data, and elderly families, many of whom were ineligible for the new Social Security program. Over subsequent decades, farm families declined as a proportion of the population while increased Social Security benefits and an expanding private pension system lifted elderly incomes.
Both trends favored greater income equality but were outweighed by four main factors. Over time, the two-parent, one-earner family was increasingly replaced by low-income single-parent families and higher-income two-parent, two-earner families. Trade and technology increasingly shifted demand away from less-educated and less-skilled workers toward workers with higher education or particular skills. With improved communications and transportation, people increasingly functioned in national, rather than local, markets.
In these broader markets, persons with unique talents could command particularly high salaries. In , immigrants who had entered the country since constituted nearly 11 percent of the labor force see immigration. A relatively high proportion of these immigrants had low levels of education and increased the number of workers competing for low-paid work. These factors, however, can explain only part of the increase in inequality. One other factor that explains the particularly high incomes of the highest-paid people is that between and , the ratio of pay of chief executive officers to pay of the average worker rose from to , and pay of other high-level managers, lawyers, and people in other fields rose substantially also.
These measurements are deficient for three reasons. First, increases in governmental aid to the poor have been concentrated in nonmoney benefits such as Medicaid and food stamps and through tax credits under the Earned Income Tax Credit EITC. Nonmoney benefits are excluded from standard statistics, and EITC tax credits are typically underreported. Third, taxes themselves modify the income distribution. The U. Census has attempted to correct these definition problems for recent years by estimating the household income distribution under alternative income definitions.
Table 2 shows the effect in of moving from the standard Census definition pretax money excluding capital gains to an adjusted definition that includes the estimated effects of capital gains, taxes, the EITC, and the monetary value of private and governmental nonmoney benefits.
Similar adjustments for selected earlier years indicate that better income measurement reduces inequality in any single year. Even under the adjusted definition, though, the trend toward increasing inequality in the s and s remains, but at a slower pace. Subscriber sign in You could not be signed in, please check and try again. Username Please enter your Username.
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Sign in with your library card Please enter your library card number. The intention of the definition of these income classes is basically the graphical illustration of the density function of incomes. Drawing such income diagrams requires information on income at the percentile level, which is currently not available in the OECD Income Distribution Database.
For most OECD countries, information on income percentiles have been provided to the OECD by national data providers, and is based on those national sources that are deemed to be most representative for each country.
The information available in the OECD Income Distribution Database is more up-to-date when compared to information available through many other statistical sources, but still reflects the long time-lags that characterise data collection in this field in most OECD countries.
For most countries data on income and poverty shown in this tool refer to or To bring the figures up to date, we have adjusted them in line with changes in the consumer price index for all goods up to I am years old.
Tooltip text i. WellBeing oecd. Income distribution Income distribution Income distribution definition Compare your income app Perception of income inequality See also Related Methodology and conceptual issues Where do the data come from? How is income defined and why do we consider net income?
Why is income measured at the level of the household? For example, Congressional Budget Office estimates for indicate capital gains make up 0. When the mass of households are found clustered toward the bottom of the distribution, with a tail to the right, the distribution is said to be right-skewed or positively skewed. The group of relatively high incomes at the top pulls up the mean, so that it will exceed the median in right-skewed distributions.
Quintiles divide the population of households—ordered by income from lowest to highest—into fifths. So, e. Growth in mean income for a given quintile does not mean that all households within a given quintile experienced income growth. Some households' incomes grew at rates above their quintile average, some grew at rates below their quintile average, and some experienced income losses.
In addition, households do not necessarily stay in a given quintile from year to year. So, for example, the households that comprise the middle quintile in may not be the households that comprise the middle quintile in or Analysis of microdata is needed to examine income dynamics; see the " Patterns of Income Mobility " section of this report for further discussion.
The distance between mean incomes at the top and bottom of the distribution would have grown even if growth rates had been the same. Based on a comparison of income thresholds at the top and bottom of the income distribution, a sustained divergence in the growth rate of top quintile income relative to other quintiles appears to begin in However, other inequality measures or analyses of longer data series may indicate a different start point.
Bernadette D. Semega, and Melissa A. In , A discussion of recent U. Until , Census recorded only one racial group per respondent, and therefore could not publish separate statistics on individuals who identify with more than one race.
Some multiracial individuals will be included in the pre single-race groups, but all of them will not. This observation of distributional similarity between all households and non-Hispanic-headed households partly reflects the relatively small share of Hispanic-headed households When analysis is restricted to i.
Facundo Alvaredo, Anthony B. In general, the income threshold and average income for a given fractile e. These estimates are then adjusted to construct income distribution estimates that are consistent across time i.
Income shares for fractiles e. Each fractile is defined relative to the number of potential tax units in the United States i. Capital gains reported in IRS statistics—and thus represented in WID calculations—are realized capital gains for a given tax year net of allowable deductions for realized capital losses, some of which may be carried over from previous years.
The WID data are not without their critics. A recent discussion of its limits is in a Brookings study that compares and contrasts income trends produced by WID data and those produced using other methods. Jesse Bricker et. A significant difference between Census data examined in Figure 2 and the WID data presented in Figure 6 is the inclusion of reported capital gains in WID data see footnote 30 for details.
Analysis of the WID income series that excludes capital gains income is less volatile from year to year, but reveals similar trends overall; that is, a trend of rapid income growth among top income groups that stalled in Between and , average incomes oscillated within wide bands, but the trend was positive for all income groups i.
The pattern of mean income changes across quintiles between and is strongly influenced by significant and broad income gains in When analysis is limited to the period, only the top two quintiles experienced mean income gains during the recovery , and for the bottom quintile, the percentage loss in mean income during the recovery 8.
Additional limitations of these two data sources are discussed above in the section "Trends at the Top of the Distribution. In addition to the increase in unemployment, the number of individuals not in the labor force sharply increased around the time of the recession, which could also increase inequality if leaving the labor force reduced their incomes.
Economists believe that part of this unprecedented increase in workers not in the labor force was caused by the recession and part was caused by structural factors. The financial crisis also led to a decline in the value of nonfinancial assets, particularly in the value of primary residences, and net worth i.
In most cases, the decline in the value of primary residences does not affect the income distribution because households do not derive money income from their primary residence. The latest available data is In 3 of the 22 countries, the rise was small. The OECD is an international organization of advanced- and middle-income countries.
Some households' incomes may have grown at rates above their quintile average, some at rates below their quintile average, and some may have experience income loss. Because distributional rank describes one's placement relative to others , it is possible to change rank without any change in income levels e.
John J. These studies reveal mobility patterns that are largely similar to those found for the period. Income Distribution, - , U. Income Distribution, 1 3 , U. Social Security Administration earnings data allow individual workers' earnings records to be linked over time based on the workers' social security numbers.
This study examined income inequality and income mobility patterns for workers who were 25 to 60 years old, and had earnings from work in the commerce and industry sector.
The authors attempted to account for a number of limitations in Social Security data, including the earnings cap on payroll taxes and changes in the coverage of Social Security over time. The data do not allow the authors to consider other sources of income, such as capital income and self-employment income, over the full sample, however. The study shows instead that long-term income mobility overall has increased.
However, this result appears to be driven by significant improvements in women's earnings. The authors note "[l]ong-term mobility among males has been stable over most of the period, with a slight decrease in recent decades. The decrease in the gender earnings gap and the resulting substantial increase in upward mobility over a lifetime for women is the driving force behind the increase in long-term mobility among all workers.
The study was conducted by U. Treasury Department analysts, using official IRS data, but was published in a professional tax journal. Auten et al, , p. The study also examines the relationship between tax filers' ages and their placement in the income distribution and finds evidence that taxable incomes peak when individuals are in their early 50s.
These include a paucity of datasets that track incomes across generations, small sample sizes, and imprecise measurement of incomes. This newly-developed source of estimates is important because it minimizes the empirical hurdles identified in footnote Nonetheless it, like all data sets, has limitations. For one, "children's" incomes i.
In addition, because estimates are based on IRS records, they do not reflect the earnings of individuals not required to file taxes, reported income may be subject to fraud, and they exclude non-taxable income. Finally, access to IRS microdata is heavily restricted, and consequently the Equality of Opportunity Project estimates cannot easily be replicated. The research team examined other measures of intergenerational income mobility, including the relationship between parent's placement in the income distribution and children's college attendance, and the average distributional rank achieved by children of families at the 25 th percentile of the distribution.
For a more general discussion of efforts to assess intergenerational income mobility, see Sandra E. Black and Paul J. Orley Ashenfelter and David Card, vol. Significant geographic variation in the estimated magnitude of this relationship is a central finding from a related study.
That is, the analysis reveals that children from some U. CBO defines market income as labor income, business income, capital gains realized from the sale of assets, capital income excluding capital gains, and income received in retirement for past services or from other sources. Conceptually, these percentages underestimate labor income because they exclude business income, and some business owners contribute labor to their firms and are compensated in the form of business income in lieu of wages.
Labor income is an important resource for many low-income families i. With some exceptions, private-sector compensation in the United States is set by agreement between employers and workers, and depends fundamentally on two main factors: the value of worker productivity and workers' bargaining power. Employers care about how much workers can produce i.
Workers' productivity is enhanced by education, skills, experience, health, and technology, as well as their command of "soft skills" such as organization and the ability to work on a team. Workers' abilities to leverage their productive capacities into greater earnings depend on their bargaining power. For a discussion of automation technology and its interaction with labor markets, see David H.
See also Timothy F. Bresnahan, Erik Brynjolfsson, and Lorin M. For an overview, see Daron Acemoglu and David H. Many factors affect labor demand, including market prices of products or services generated by that labor, production technology, input factor prices i. SBTC theory does not predict that the skill premium will grow indefinitely. Workers respond to rising relative wages by adjusting their education and occupation decisions.
Mechanically, the growth in the pay gap will slow down or contract as the relative supply of highly educated workers approaches relative demand.
Moreover, perpetually rising demand for skilled labor is not guaranteed by SBTC. Growth in employers' demand for skilled workers may slow as technological improvements allow for greater task substitutions in highly-skilled occupations, or if technological change produces temporary spurts of increased labor demand.
S1 , pp. SS; hereinafter "Beaudry, Green, and Sand, The theory has less to say about the employment and earnings of the many low-skilled workers concentrated in personal services occupations, whose tasks are by and large neither complemented nor substituted by recent technological change.
Although recent technological changes may not directly affect low-skilled workers by augmenting or substituting for their work, increased earnings at the top of the distribution may have increased the demand for services supplied by low-skilled workers and affected employment patterns through that channel. Reductions in middle-skill jobs mean that low-skilled workers now compete with a larger and better-skilled pool of workers for vacancies; this additional competition can place downward pressure on low-skilled wages.
See David H. Labor Market," American Economic Review , vol. States can also set a minimum wage, and several have established a state minimum wage that is above the federal level. Katherine G. Abraham, James R. One factor limiting the federal minimum wage's influence on low-wage workers is that it is only binding for a small share of workers e. Some studies have identified a "spillover" effect, whereby changes in the minimum wage affect not only minimum wage workers but also those paid close to but above the legislated minimum.
One recent study that found evidence of this spillover—but was not able to distinguish it from measurement error in the data set—is Autor, Manning, and Smith, Average characteristics of union members and non-union members tend to differ in terms of age, skill, position, job tenure, and overall work experience. These characteristics affect wages and therefore, the information gained from a direct comparison of union and non-union pay is limited.
A wage premium for union members is generally identified in more sophisticated analyses that control for worker, firm, and industry characteristics that affect wages. See, for example, Barry T. While unions may contribute to higher wages for unionized workers, some have argued that gaining a more equal negotiating stance with firms may have broader implications for employment opportunities and future wage growth for some employees.
For example, as workers gain a larger share of profits, they could reduce incentives for firms to invest i. Further, wage and employment benefits that result from union deals may be exclusive to union members "insiders" , while non-union members "outsiders" might face greater employment barriers.
Finally, by setting wages for a group, collective agreements may limit the ability for high productivity workers to strike a better individual deal. A slightly higher share of wage and salary workers were represented by unions—e. These declining trends—in membership and representation—largely reflects private sector trends, which declined sharply over the period The relationship between the union wage premium and union density can run in the other direction as well.
That is, if higher wages in unionized firms are not offset by higher productivity or product prices , firm profitability may suffer and jobs will move to non-unionized firms, resulting in lower union density. For a fuller analysis of this channel see Barry T. Abundance and scarcity of production factors is defined relative to trade partners. For example, a country can have more unskilled workers than skilled workers but be relatively abundant in skilled labor if its ratio of skilled-to-unskilled labor is greater than its trade partner's skilled-to-unskilled labor ratio.
A year decline in manufacturing employment ended in However, manufacturing employment as a share of total employment continued to decline, albeit at a slower pace. For a discussion of U. SS; and Justin R. Pierce and Peter K. Manufacturing Employment," American Economic Review , vol.
Autor, David Dorn, and Gordon H. The results of these studies should be considered with a few caveats in mind. For one, these studies focus on gross employment changes in the manufacturing sector; they do not account for potential employment gains in other sectors e.
Also the proliferation of complex international supply chains increasingly blurs line between foreign and domestic outputs and complicates empirical analyses such as these.
Finally, these studies do not account for the potential positive impact lower-priced imports can have on the real incomes of a broad range of consumers in the economy. Census Bureau data on the volume of U. Increased job-churning and lower reemployment wages were found for displaced manufacturing workers, and attributed to increased trade from China after , by Autor, Dorn, and Hanson ; see footnote 83 for caveats to this study.
The experiences of displaced workers more generally is described in Lori G. Pierce and Schott , for example, find evidence of this "within-firm offshoring" in their study of the employment impacts of the United States establishment of permanent normal trade relations with China in A detailed discussion of what economic theory predicts about the labor market impacts of immigration for the United States, and a review of the empirical literature is in National Academies of Sciences, Engineering, and Medicine, The Economic and Fiscal Consequences of Immigration , ed.
Francine D. For example, immigration may have a neutral impact if incoming foreign-born workers fill vacancies that cannot be filled with native-born workers; alternatively, if immigration trends respond to increasing labor demand in certain industries or occupations, wage effects may be negligible.
By contrast, if immigrants compete with native-born workers for jobs and certain conditions are met e. Finally, immigration can improve productivity and employment if firms respond to increased labor supply by investing in technology that expands capacity, or if immigrant and native-born workers specialize in occupations such that native-born workers are able to upgrade their jobs.
A comprehensive review of research is in National Academies of Sciences, Engineering, and Medicine, For a discussion of foundational research on the impacts of immigration on host country labor markets, see George Borjas, "The Economic Analysis of Immigration," in Handbook of Labor Economics , eds. Over longer periods of time, the economy and labor markets national and local markets may adjust to immigration flows in ways that affect the distribution of labor incomes.
Blau and Lawrence M. Blau and Kahn also considered the compositional effects of recent immigration flows to the United States. That is, they ask if differences between the characteristics of incoming immigrant workers and those of the resident workforce affect the distribution of wages and other measures of earnings. They find that as of these effects were small, but note that they may become more important over time.
For example, banks could not operate across state lines or own nonbank subsidiaries until the s. Economies of scale refers to production technology and firm organization that permits production and profits to increase by a factor greater than the increase in inputs.
For example, economies of scale are present if 2 hours of labor produces 4 units of output, but 4 hours of labor produces 10 units of output. Another study found no relationship between firm size and executive pay before the s. One study found that inequality in pay between firms rather than within firms e.
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