It is scarcely a secret that the rich have got richer in the rich world, particularly since the second half of the 1980s. As the chart above shows, in the U.S. the share of total income accounted for by the top 1% has more than doubled over the past 30 years, almost approaching the levels of the Roaring Twenties. New technologies, globalization, and liberalization of financial markets are partly responsible for this. Yet they don’t explain one key piece of the puzzle: namely, why is income inequality growing faster in the U.S. than in other high-income economies? Germany, Japan and the U.K., for example, have all benefited and been buffeted by the same forces.
The summer issue of the American Economic Association’s Journal of Economic Perspectives offers six papers by economists on why that should be so, and some of the longer-term implications of this odd fact. Miles Corak, professor of economics at the University of Ottawa, raises the question of whether it will limit economic mobility for the next generation of young adults; Stanford’s Adam Bonica and colleagues question why democratic forms of government don’t constrain rising inequality; Harvard’s Greg Mankiw defends it. The Journal’s managing editor, Timothy Taylor, offers an overview of all six papers.
In answer to the core question, Oxford’s Facundo Alvaredo offers four factors:
The first is tax policy: top tax rates have moved in the opposite direction from top pre-tax income shares.
The second factor is a richer view of the labor market, where we have contrasted the standard supply-side model with the alternative possibility that there may have been changes to bargaining power and greater individualization of pay. Tax cuts may have led managerial energies to be diverted to increasing their remuneration at the expense of enterprise growth and employment.
The third factor is capital income. In Europe—but less so in the United States—private wealth (relative to national income) has followed a spectacular U-shaped path over time, and inherited wealth may be making a return, implying that inheritance and capital income taxation will become again central policy tools for curbing inequality.
The final, little-investigated, element is the correlation between earned income and capital income, which have become more closely associated in the United States.
This last point raises the intriguing possibility that the U.S. might be creating a new class system, one in which wealth and family connections provide the necessary access to high-paying employment, out of which further wealth is accumulated. It is still not quite socially acceptable in the U.S. to live purely off unearned income — but it’s absolutely fine (and even smiled upon) to live as one of the not-idle rich.