Why U.S. Income Inequality Hasn’t Risen in a Decade

TThe United States may be the G7 nation with the most income inequality, however new research shows that the disparity has stabilized in the past decade due to the rapid rise of wages for low-paying jobs.

Sometimes it may be a while before the average American feels it.

A pair of researchers from Harvard and MIT examined data from the period between 1980 and 2020, and found that income inequality peaked in 2012 and then began to stabilize even though many of the drivers of rising inequality—such as a decline in union membership—have persisted. “After decades of rising inequality, overall earnings inequality stopped growing, and possibly declined, since 2012,” according to the research paper, titled The bottom is experiencing rapid wage growth, which has helped to offset the rising inequality in America.. This could be good news in the fight against inequality. However, the gains may not last and can be lost if the economy spirals.

“It’s got me feeling very cautiously optimistic,” says Clem Aeppli, a Harvard PhD student and co-author of the research article, which was published on Monday in the competitive PNAS journal. “Optimism in the sense that maybe the increase in inequality we’ve observed since the 1980s is not inevitable.” But Aeppli says he is also “incredibly cautious…because the stabilization in inequality seems so reliant on these very fragile market conditions.”

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Tracing income inequality can be especially messy, but the researchers say they pulled together multiple measures of earnings—from household and business surveys to Bureau of Labor Statistics data—which they say all told a similar story: Income inequality is declining as growth for low-wage workers outpaces middle- and high-wage workers.

“It’s unexpected good news for those of us who have been studying inequality trends for a while,” says Nathan Wilmers, an associate professor at MIT Sloan and co-author of the research paper.

According to separate data, Federal Reserve Bank of Atlanta, wages in America rose 4% in August compared with the 7% gain experienced by the lowest quartile of earners. Wendy Edelberg (a Brookings Institution senior fellow in economics and director for The Hamilton Project), says that wage increases have been most significant in the leisure, hospitality, and retail trade sectors. However, workers from other industries are not experiencing the same gains.

“We’ve seen big declines in real wages for every sector except those two,” she says, partly because of pandemic and inflationary pressures. “And they happen to be pretty low wage sectors.”

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Although research shows that individual income inequality has been decreasing, Census Bureau figures show a more optimistic picture of American households. They are currently facing 8.3% inflation, which is putting pressure upon living expenses. The Census Bureau’s 2021 American Community Survey, released Oct. 4, found that household income inequality was “significantly” higher than its 2019 estimate (based on a calculation of the Gini index, a summary measure of income inequality used across the world). Contrary to the two scholars’ findings about individual income, the Census Bureau found that household income inequality increased over the last year for the first time since 2011 due to declines in real income—which takes inflation into account—at the bottom of the income distribution. The scholars attribute this difference to changes in the Bureau’s data collection and processing methods. “That report is looking at household income inequality rather than inequality in individual earnings,” Aeppli says. “It’s a different unit of analysis and different quantity. And even when we correct for that difference, we still observed that household income inequality seems to be stabilizing in the last decade—it just isn’t as pronounced.”

Research in related fields seems to support the scholars’ findings. According to Chris Wimer (director of Columbia University’s Center on Poverty and Social Policy), Americans are living lower than ever as low-wage workers earn more. A variety of policies have been implemented to counter rising prices, such as employment expansions and stimulus payments. “But some of those policies are going away,” Wimer says, “so families coping with inflation no longer have the same policy support.”

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But, the Harvard and MIT studies suggest that policies have not had as much impact on market dynamics than they did. It argues that a tight labor market is what’s driving these changes in inequality rather than other factors like minimum wage legislation, labor action or a shortage of workers. In the first months of the pandemic frontline workers were at greatest risk. This led to workers leaving in droves in many sectors, including retail and food services. They found that raising the minimum wage to $15 an hour would likely increase earnings for those at the bottom. But, in most cases, minimum wages were not raised in cities until 2021. Due to the labor shortage, some employers made it a point to offer higher salaries in order for these workers.

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Despite the research paper’s hopeful indicators, experts say we’re still nowhere near making a dent in overall inequality. “We’re not even in the ballpark, let alone within spitting distance, to the kinds of changes we need to make,” the Brookings Institution’s Edelberg says. Overall income inequality, she argues, is not just driven by hourly wages—as the report tracks—but also by who’s working and how many hours they are working.

In fact, it may take years—or decades—for low-wage workers to start feeling the effects of declining income inequality, even if the downward trend continues. Inflation has been so severe that prices for almost all things have risen. “We’ve seen positive movement with the lowest wage sectors having the biggest gains,” Edelberg says, “but there’s no way I think we want to declare mission accomplished.”

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