“The Income Inequality Boom: Where It Came From & Why

Business Should Care”A Reporter Reviews the Evidence

Presentation by Timothy Noah

October 29, 2015

Executive Forum, Center for Corporate Citizenship

Boston College

Once upon a time…

From 1934 to 1979 incomes grew more equal or the income distribution remained stable.

“The Great Compression”:

Income grew more equal 1934-1952.

Income distribution remained stable 1952-1979.

That ended in 1979.

(As a general rule of thumb, everything bad comes from the 1970s.)

Goodbye, Great Compression. Hello, Great Divergence.

From 1979 to the present, incomes have grown steadily more unequal.

Great Divergence is not one trend, but two.

TREND ONE: The top 1 percent (with family income currently exceeding $423,090) doubled its share of the nation’s income from 10 percent to 21 percent.

TREND TWO: People who lacked college or graduate degrees saw incomes increase much more slowly than people who had college or graduate degrees, and often not at all.

Story One: 1 percent inequality

(This story is fairly simple.)

Top one percent doubled its income share between 1979 and 2008.

The 1 percent and the Great Recession (2007-2009)

Top 1 percent absorbed 49 percent of income losses, 2007-2009.Their incomes fell 36 percent. (Recessions are bad for rich people!)

But top 1 percent subsequently received 58 percent of income gains during the recovery (2009-2014).

Income gain for 1 percent: 27 percent. Income gain for 99 percent: 4 percent.

Impact of taxes and transfers

What’s driving this?

Out-of-control pay increases for top executives in nonfinancial corporations (driven since the early 1990s by stock option awards).

Out-of-control growth in the finance industry (driven by Wall Street deregulation and investment banks’ shift from partnerships to publicly-owned corporations).

Growth in CEO/worker compensation ratio, 1965-2010

(source: the Atlantic)

Increase in compensation for the 0.1 percent, 1979-2005 (source: Jon Bakija, Adam Cole, and Bradley

Heim, “Jobs and Income Growth of Top Earners,” 2010).

Story Two: Skill-based inequality

(This story is complicated.)

Stagnation at the middle.Great Compression: From 1950 to 1970

median household income grew by 63 percent.

Great Divergence: From 1979 to 2013 median household income (currently $56,279) increased a mere 6 percent.

Median income as of Sept. 2015 was 1.3 percent higher than at recession’s end, 0.5 percent lower than at the recession’s start, and 1.7 percent lower than in Jan. 2000.

Why? Usual suspects are innocent:

• Race and gender. Inapplicable because black-white pay gap is virtually same as in 1979, while the male-female pay gap is narrower.

• Immigration. Largely inapplicable because the only native-born group whose pay is driven down by immigrants is high school dropouts.

• Trade. Inapplicable until 21st century, with rise of imports from China and Mexico.

What’s driving this?

Mainly

Decline of labor unions and government retreat from pro-labor policies

Rise in demand for highly skilled workers

…but for last 15-20 years, mostly the first.

Decline of labor

• Union density peaked in 1954 at about 40% of private-sector workforce.

• Today union density is about 7% of private-sector workforce—same level as in 1933.

• Main governmental source of decline: 1947’s Taft-Hartley law.

• Ronald Reagan’s politicization of the National Labor Relations Board also had an effect.

Income share for top 10 percent inverse to union membership (source: Economic Policy Institute).

Wages are a declining share of total income (Jacobson and Occhino, 2012)

Shortage of high school grads starting in the 1970s had large effect.

Cross-national differences in wage returns to skills,

2011–2013 (Autor, 2014)Reproduced with permission from Hanushek et al. [(15), table 2].

D H Autor Science 2014;344:843-851

Published by AAAS

College/high school median annual earnings

gap, 1979–2012 (Autor, 2014)

D H Autor Science 2014;344:843-851

Published by AAAS

“Strengthening education … will raise productivity and raise overall incomes in our society” but it’s “not likely, in my view, that any feasible program of improving education will have a large impact on inequality in any relevant horizon.”

--Larry Summers, quoted in the Washington Post March 3, 2015

“But inequality isn’t what matters. Opportunity is what matters.”

Does U.S. income mobility compensate for U.S. income

inequality? No.

From Economic Report to the President, Feb. 2012: Growing

income inequality shrinks income mobility.

From Harvard-Berkeley “Equality of Opportunity” project, Jan. 2014: Growing income inequality doesn’t shrink income

mobility.

What we know

• The one percent versus the 99 percent has nothing to do with education but something to do with labor’s decline.

• Skill-based inequality is caused by a shortage of skilled workers relative to demand and by labor’s decline. It hasn’t grown in 21st century.

• Income inequality may be reducing economic opportunity, but that can’t yet be proven.

What business can do

End CEO pay madness. (Promote from within?)

Welcome unions as partners. (Truman-era Chamber of Commerce President Eric Johnson: “Labor unions are woven into our economic pattern of American life, and collective bargaining is part of the democratic process. I say recognize this fact not only with our lips but with our hearts.”

Limit subcontracting and franchising & don’t misclassify workers (it’s illegal!).

Don’t abuse guest-worker programs (even though that’s legal).