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.

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  1. the Gooch says:

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

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  2. Vahid says:

    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.

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    • RussellSender says:

      Some income inequality is necessary for a healthy growing economy. However, vast income inequality hinders growth for the reason that less money is ending up in the pockets of the members of society who are most likely to spend it, namely the middle and working classes. Econometric studies suggest that as wealth is concentrated in fewer and fewer hands, less is spent on the goods and services that spur further growth in an economy.

      This is why historically successful economies tend to use government intervention when necessary to ensure that there is a healthy and growing middle class. It is the people in the middle and the lower end who tend to buy the goods and services that create jobs and thus growth for the economy as a whole.

      After all, if you earn, say, $100M a year, there are still only so many goods you are going to buy. The balance of your money you would invest. Some of that money would be productive but a decent percentage of it is going to end up in tax shelters, gold, offshore and other non-productive uses.

      On the other hand, lets say you earn $80M a year. You still have all the cars, houses and extravagant holidays you want. You still have enough left over to invest.

      Assume that the other $20M of the money is earned by lower income and middle class earners because the economy distributes money more equitably. That money is going to be spread more widely resulting in more cars, houses, vacations, electronic goods being bought than if you retained the money.

      This money that is spent employs people who in turn spend the money they earn. Thus, the economy grows. More people are employed. This leads to more opportunity. More stable lives. Security. Economic health. And the wealthiest in society could still have all the cars, vacations, other consumer goods and investments they could ever need.

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  3. Nosybear says:

    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.

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  4. Mark T says:

    “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.

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  5. Kirilius says:

    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?

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  6. Kevin H says:

    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.

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  7. azmyth says:

    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.

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  8. TonyW says:

    “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? ;)

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