US income inequality hasn't risen for a decade

New research points to the power of tight labor markets
The lowest paid workers have started to catch up. 
The lowest paid workers have started to catch up. 
Photo: Brendan McDermid (Reuters)
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The story of the US economy in recent decades has been one of divergence between haves and have-not in multiple measures, from wealth to income.

A new research paper offers a wrinkle in the tale: Income inequality actually plateaued over the last decade, even as the key factors responsible for the gap have remained.

Instead, a decade of labor market tightness has seen the lowest-paid workers slowly catch up since 2012. Those gains, however, are hardly permanent, and could be wiped away in a recession.

Harvard graduate student Clem Aeppli and MIT professor Nathan Wilmers used multiple measures of earnings, from household and business surveys to government administrative data, to trace income inequality. After decades of increase since the 1980s, they found that income inequality peaked in 2012 and has held steady or perhaps even fallen since.

During that time period, the US unemployment rate fell from 8.3% to less than 4%, briefly interrupted by the pandemic recession. The authors have focused on the period up until 2020 because much of the data they rely on is still not complete past that year, but what information exists suggests the trend continued.

The mystery of income inequality

As with any good research paper, the authors have a bit of a mystery on their hands. The factors we often cite as driving inequality, like the decline in union representation or the push from manufacturing jobs into lower paying service jobs, haven’t disappeared. And tight labor markets don’t always reduce inequality; during the 1990s boom, wages at the top of the income spectrum rose faster than those at the bottom.

This time around, however, they didn’t. Occupations where wages had grown slowly for the first decade of the century saw pay grow disproportionately after 2012, faster than middle- or high-income earnings.

That doesn’t mean economic inequality has disappeared. The gap between median and top earners has continued to grow, and the divergence in accumulated wealth between poorest and richest Americans continues to widen. However, this finding does suggest that growing demand for workers helped drive up their earnings and could contribute to reducing inequality in the future.

At the same time, the current economic situation has the Federal Reserve working to fight inflation by raising interest rates and, ultimately, forcing job cuts. That’s likely to slow or reverse the trend identified in this paper, and one reason fixing the unemployment insurance system is a good idea.