New data: Inequality runs even deeper than previously thought

Howard R. Gold | May 23, 2017

Sections Economics

Since the early 2000s, Thomas Piketty of the Paris School of Economics and Emmanuel Saez of University of California at Berkeley have published influential research on income inequality. Still, their picture of wealth and income inequality in the United States remained incomplete, mostly because of gaps in their data. Using a new data set, they find greater inequality in the US than they had previously recorded.

Prior to their latest research, Piketty and Saez had built a massive database on wealth and income distribution (wid.world) that now houses data about 34 developed and emerging economies, from Argentina to Zimbabwe, going back as far as 1800.

But much of the data focused on macroeconomic totals, while inequality studies used tax and survey data that weren’t consistent with these totals. The researchers were also unable to determine the full impact of government transfer payments and redistributions, such as social security and food stamps, on people of various income strata.

So Piketty, Saez, and Gabriel Zucman of University of California at Berkeley combined tax, survey, and national-accounts data to create distributional accounts that they say capture 100 percent of US income since 1913. The new accounts include transfer payments, employee fringe benefits, and capital income, which weren’t in previous data.

The data set reveals since 1980 a “sharp divergence in the growth experienced by the bottom 50 percent versus the rest of the economy,” the researchers write. The average pretax income of the bottom 50 percent of US adults has stagnated since 1980, while the share of income of US adults in the bottom half of the distribution collapsed from 20 percent in 1980 to 12 percent in 2014. In a mirror-image move, the top 1 percent commanded 12 percent of income in 1980 but 20 percent in 2014. The top 1 percent of US adults now earns on average 81 times more than the bottom 50 percent of adults; in 1981, they earned 27 times what the lower half earned.

Government transfer payments have “offset only a small fraction of the increase in pre-tax inequality,” Piketty, Saez, and Zucman conclude—and those payments fail to bridge the gap for the bottom 50 percent because they go mostly to the middle class and the elderly. Pretax income of the middle class (adults between the median and the 90th percentile) has grown 40 percent since 1980, “faster than what tax and survey data suggest, due in particular to the rise of tax-exempt fringe benefits,” the researchers write. “For the working-age population, post-tax bottom 50 percent income has hardly increased at all since 1980.”

And although the growth in income inequality from the 1970s to the 1990s was caused mostly by wage growth among top earners, that gap “has been a capital-driven phenomenon since the late 1990s,” the researchers contend, because of an income boom due to equity and bond holdings. “The working rich are either turning into or being replaced by rentiers,” they write, echoing a theme from Piketty’s 2014 bestselling book, Capital in the Twenty-First Century.

Finally, in an encouraging trend, the gender gap has narrowed and “mitigated the increase in inequality among adults since the late 1960s,” the researchers write. Men aged 20–64 earn on average 1.7 times more labor income than women today, versus 3.7 times more in the early 1960s. Nevertheless, the US “is still characterized by a spectacular glass ceiling,” they argue.