Economic Growth Across the Income Distribution

Yes, we already know the facts — income inequality has been increasing since the 1970’s. But it can be easy to lose sight of just how important this has been. This presentation of the data — by Claudia Goldin and my former thesis advisor Larry Katz, really hits home:

INSERT DESCRIPTIONSource: U.S. Census Bureau, Historical Income Tables, table F3, updated September 15, 2006.

Note: The figure plots the annual percentage growth rate in mean real family income by quintile and for the top 5 percent of families for 1947 to 1973 and 1973 to 2005. Incomes are converted to constant dollars using the Consumer Price Index Research Series (CPI-U-RS). The income concept used is the official U.S. Census Bureau measure of pre-tax, post-transfer money income.

Economic growth since the mid-1970’s just hasn’t delivered much for many families. Read the full Goldin and Katz posting, over at VoxEU, for a deeper understanding of why. (Hint: It’s education.)

In light of this, perhaps there’s no paradox in the fact that happiness hasn’t grown in the U.S. since the 1970’s. Rather than inferring that growing income doesn’t raise happiness, these data remind us that for most of the distribution there hasn’t been much income growth.

the Gooch

What has happened to the size of the mean family since 1947?


I often see publications of the growth income inequality, but I have never seen a cogent argument as to why it's bad. Journalists assume it is important. Your post today has the same assumption, saying it's been easy to over look how important the issue is, and then only describing the size of income inequality, not any negative (or positive) effects that income inequality has on our society or economy. I'd love to see a follow up to this post discussing the effects of income inequality.


The mean family has gotten bigger, the nice ones have remained stable.... :-)

Shows what we know - some time in the last three decades we as a nation decided the rich should get richer, the poor, well, not so much. Education alone doesn't account for it. Taxation does. We've apparently decided generational wealth is a good thing and oligarchies should run the country. And in the current political climate, I don't see it changing because it's a lot easier to get money from an oligarch than from a bunch of first-quintilers and the oligarch does expect a quid pro quo, no matter how many protestations to the contrary. And generally those with the most quo get the most quid.

Mark T

"But it can be easy to lose sight of just how important this has been."

Inequality is first and foremost a mathematical relationship. Certain voices have turned it into a political cause. But "importance" is a value judgment. I suspect you've made that judgment for yourself and are seeking to persuade others to adopt your perspective which is your First Amendment right. But nothing in the chart or post establishes the importance of the data contained therein. A dataset can't create its own importance. The data's importance is solely a function of the pre-existing views one brings to it. Perhaps one cares passionately, but others may rank it as a much smaller problem, especially when the data set is limited to Americans, who are all well off by global standards.

Now, if you were to post a chart ranking income of people all over the world, and show where the various quintiles on the above chart rank on that global chart, and attach a like importance to redressing the global inequality, I would admire your intellectual consistency. Although I also suspect you would find few takers among our fellow citizens.

Americans by and large are extremely fortunate on a global basis. That some small group among them is even more fortunate does not seem terribly important to me. Rather , to dwell on it seems to betray a lack of perspective and a resulting inconsistency of argument. Those who do dwell on it strike me as motivated by something other than altruism.

I am also struck by how progressives who extol diversity in various aspects of our society nevertheless conclude that diversity of economic lifestyle is something to be extinguished.



In other words: most of the growth since 1973 has been absorbed by the richest only.

I would ask a different question: why 1973? What happened then, that reversed the trend?

Kevin H

They aren't quite convincing me. They have convinced me that income disparity has been growing, but not that education is the cause of it.

If there is a causative link between income disparity and education rates, the obvious say to show it would be a correlation between average education and growth by pentile. Even if that data isn't available, their presentation of the available data needs some work.

First, figure 2, the predicted values are unclear and unexplained. They seem to serve only as a distraction.

Rather, critical to their argument of a race between technology and educational attainment is the relationship between figure 2 and 3. Since these are the two factors they believe are driving income inequality, the data in those two figures should be able to be combined in such a way as to accurately predict income inequality. The fit of that model would give us an idea of how much of income inequality is driven by these two factors.



Is the data presented based on households or incomes? Does it adjust for housholds with multiple income earners? A big part of inequality increases has been women entering the workforce. As more women enter the workforce, they increase their household's income significantly. The households with only one worker look a lot more poor by comparison to households with two workers, even though there is no wage difference between them.
Secondly, there is the issue of income mobility and immigration. I am in favor of free immigration, however, as low income immigrants enter the country, they make wage disparity look a lot worse than it is. A household that was in the lowest quintile in 1973 might have moved up to the middle quintile only to be replaced by poor immigrants in the lowest quintile. If you look at global inequality, this movement would look very good for both the poor in America and for the immigrants that are able to escape low wage countries. If you just look at the data, it looks as if there is a group of people who have not advanced since 1973.
Finally, what are your policy conclusions from this graph? Policy implications are not obvious just from looking at datasets.



"Economic growth since the mid-1970's just hasn't delivered much for many families."

Correct data, incorrect conclusion.

The members of the quintile sets change over time. Families that were members of the lowest quintile in one year may be members of the highest quintile in later years and vice versa. The data as presented cannot be used to infer performance of an member of the set over time.

I could just as easily (mis)use the data to conclude:
families that find a way keep their household income growing work their way to the top of the income spectrum.

But that conclusion wouldn't be very good as class warfare propaganda, would it? ;)

Mark B.

@ Mark T.

Psychologically it is inequality within a country that matters, not the inequality between them. Do not read that statement advocating global inequality, but rather there are important reasons to consider regional inequality as well. Inequality, regionally and globally, are (in my opinion) important issues in a variety of arenas (e.g. psychology, sociology, economics, political science). Its important not to focus on one at the expense of another.

I personally think an appreciation and acceptance of diversity is important because it lessens the derogation of a variety of low-status and stigmatized groups. To me this is important both from a humanitarian perspective, but from a utilitarian perspective it also makes sense. Acceptance and appreciation of diversity leads to positive economic outcomes that enlarges the pie for everyone. It also helps minority groups feel included, which reduces crime and bolsters educational and economic attainment within these groups.

Economic diversity, however, works against all of the things I find beneficial in social diversity. Furthermore, I'd argue that in the United States, and other countries with high levels of inequality, there is not economic diversity, but rather just the opposite (i.e. there are a lot of underprivileged people). In a truly economically diverse society I would suspect that we would have equal proportions of people at all levels of income, or more likely, a normal curve. We have neither.



But the actual people who were in the lower fifths have often moved up to higher fifths, thereby growing their incomes faster than this chart implies.


Response to Vahid @2:

The American ideal is that everyone should have a reasonable opportunity at a modest, middle-class life.

Poverty is intrinsically self-reinforcing. (The demonstration of that is very long, but the quick summary is that it takes capital--both financial and educational--to improve one's lot in life, and being poor interferes in that bootstrapping process.)

Putting all the wealth in the hands of the few goes against the American ideal. The American Dream is not to be the richest son of a gun in your town. It's to be comfortable, where the American definition of "comfortable" is not worrying about how you'll keep a roof over your head, food on your table, and the lights turned on.

But aside from the emotional appeal of the American standard of living, there is this problem:

If all the money rests in the hands of a few, who buys the goods and services?

Ten thousand rich guys buying ten TVs each don't create as many jobs as a million middle-class guys buying one TV each. Ditto cars, clothing, computers, etc.

Ten thousand rich guys on massive, over-the-top vacations don't distribute as many tourist dollars as a million middle-class guys staying in modest hotels and eating modest meals.

Ten thousand rich guys buying six mansions each don't create as many construction jobs as a million guys buying one modest three-bedroom home each.

If you want to drive an economy, you need lots of people spending modest amounts of money. The greater the divide between rich and poor, the fewer dollars are fed back into the cycle of the economy.



Mark T. - Do not confuse inequality with diversity. As a society we have made a subjective judgment that economic mobility is better than destitution. Objectively, the wealthy are better served and better treated.

It should be fairly obvious why this is a problem. As the lower half finds it more difficult to support themselves, we end up with problems like increasing incidence of bankruptcy, for example. What happens then, is that when some of these have-nots then end up having their economic cost be spread out over the entire society. While it isn't that big of a deal for the haves, it adds more burden on the have nots who were already struggling, and leading to further economic problems. See the 'vicious cycle' here?

Additionally, as taxes shift away from businesses, investements and the super rich, they shift toward the bottom half, as they have been for a while now. This further exasperates the problem.

Why should the rich care if the poor are starving? Why does it make a difference because this is America and not the world? Last I checked, we are all citizens of the USA, with that comes the kinship and protection of being under the same government. Additionally important is that everyone in the US pays roughly the same price for things. There is no point extolling this to the world in general, because that's not what it was about. Not only because a cup of rice is much cheaper in Cambodia than in the US, but because, as Newt Gingrich put it in trying to deride Obama, "I am not a citizen of the world."

Additionally, in a society that thrives on the myth of the American dream of social and economic mobility, this is stark evidence that that dream does not exist, and we are moving toward a society of serfdom where the peasants are increasingly at the mercy of the social and economic elite.

But in the end, I just want to point out how ridiculous it is to call income inequality "diversity."


Thomas B.

I have similar concerns to the above commenters. Not even John Rawls pushed equality for equality's sake. But since those concerns have already been raised, I'll play devil's advocate:

One throwaway argument pro-equality might be to cite the decreasing marginal utility of goods. Money, just like butter, isn't as valuable if we put it all in one person's mouth.


Mark T-

I agree that inequality isn't bad per se (a relatively free economy will always have some inequality in it), but it is a problem when the inequality increases without bound because only the top 5% of the population is benefiting from economic growth.

The whole point of growth for the participants of an economy is to raise all ships. If all the societal gains go to a small fraction of the population, then you just have a small group getting fabulously wealthy while the rest of society stalls (which I'm guessing will eventually result in civil unrest). And sure, even with sluggish growth over the last 35 years, the US middle class is still richer than in most other countries, but shouldn't we striving for higher levels, rather than being satisfied with what we have already attained?

Finally, having the poorer fractions of society share in the economic growth does not appear to harm the richer fractions (as can be seen in the 1947-1973 data), so there seems to be little argument for continuing as we are going.



Recently there was a US president who pushed a program called "No Child Left Behind." Do you suppose that was an attempt to correct this? What ever happened to that program?

Robert L.

There is also the issue that every quintile's growth rate is dramatically lower from 1973 on vs. pre-1973. If this were just a matter of money being shifted to the rich we'd see growth rates for the rich over the old mean and for the poor under the old mean: instead we see every quintile doing worse.

The obvious, though not necessarily correct answer is that 1945-1973 is a highly unusual period. In 1945 every economy in the world was in ruins except that of the US and the major industrial countries were literally in ruins, again except for the US.

This gave the US an enormous, and one time only, advantage for growth completely independent of any earned competitive advantages. This meant, for instance, that union workers in Detroit could be paid very high salaries to do mediocre work on poorly designed cars and that Detroit management would be fine with the deal.

My hypothesis is that one of the things we are seeing in the data is the wringing out of overpaid, under-performing parts of the US economy and one of the manifestations of that is this chart.



Unfortunately, this post is bad economics.

To see why, readers should check out Russ Roberts's explanation here:

It's really unfortunate when prominent economists present shoddy analysis. I'd very much like to hear Justin's response and a retraction.


See Russ Roberts's comment on this graph:

Ray Gardner

The demographics of the average has changed dramatically because of the huge spike in divorce and single parent homes.

Phil H

Income inequality is important because people, being social primates, tend to judge their social status relative to the people around them. If they believe that their wealth, for example, is well below that of others, they become less happy.

Rational? No. Real? Yes. It has been studied extensively. It was also recognised intuitively by socialist writers decades ago. They also observed that a large underclass of disgruntled poor folk can lead to political problems.