Income Inequality in the United States

Abstract

In this paper we investigate the evolution of income inequality in the United States between 1980 and 2016. We find the drivers to be threefold: changes in the labor force composition, changes in household composition, and changes in market return to skills, with the latter two influences dominating this trend. We show that individual real wages grew from 1980 to 2016 throughout the entire wage distribution, indicating that the increase in wage income inequality does not stem from lower real wages at the bottom of the distribution but rather from relatively faster growth in compensation rates of high earners compared to the average earner. We apply a Mata-Machado decomposition to separately identify the contributions of changes in characteristics of workers in the US labor force and changes in returns to these characteristics. The results demonstrate that increasing education levels among the US population as well as increasing returns to education have played a significant role in the growth of wage income inequality, with the role of increasing returns to education dominating. Finally, the paper highlights several common omissions from previous inequality analyses that bias results upward, in particular nonwage compensation and dynamic behavioral responses to taxation incentives.

Keywords: income inequality, labor market, inequality measurement, inequality overview, inequality survey, taxation, wage growth, nonwage compensation

JEL Classification: D3, D63, H2