Searching for income patterns in America

April 17, 2002

Free Market Foundation

Are the rich getting richer, while the poor get poorer? Or is it the reverse? Economists have been trying to chart patterns of income inequality throughout the 20th century and some believe there is no pattern.

According to a recent study on the income distribution in the United States, based on data from 1913 to 1998:

The share of income going to the top 10 percent of families grew from 40 percent in the 1920s to 45 percent and remained at that level during the Great Depression then fell sharply at the beginning of America’s involvement in World War II, from 44 percent in 1940 to 32 percent in 1944.

The sudden drop in inequality during the war can be explained by wartime wage controls but they do not explain why the more equal distribution persisted for 30 years, before inequality began to rise again in the late 1970s.

Researchers suggest that the new wage patterns established during the war were difficult to reverse.

But they also discovered something quite unexpected about the composition of income received by the very rich. The primary source of their income has shifted from investments of capital to wages and salaries.

In 1916, the top 0.01 percent earned 70 percent of their income from capital investments, 24 percent from business ventures and only 6 percent from wages.

By 1998, wages and salaries accounted for 45 percent of the very top group’s income, with 33 percent from business activities, and only 22 percent from return on capital.

Because capital’s share of national income has been stable, the researchers conclude, this shift in the composition of income must involve a more equal ownership of capital.

Source: Alan B. Krueger (Princeton University), Economic Scene: When it Comes to Income Inequality, More than Just Market Forces Are at Work, New York Times, April 4, 2002; based on Thomas Piketty and Emmanuel Saez, Income Inequality in the United States, 1913-1998, NBER Working Paper No. w8467, September 2001, National Bureau of Economic Research.

For text http://www.nytimes.com/2002/04/04/business/04SCEN.html
For study text http://post.economics.harvard.edu/faculty/saez/papers/IneqUS61.pdf
For NBER abstract http://papers.nber.org/papers/W8467
For more on Income Inequality http://www.ncpa.org/iss/eco/

FMF Policy Bulletin\9 April 2002