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9.3G: Income Distribution

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    The United States has a high level of income inequality, with a wide gap between the top and bottom brackets of earners.

    Learning Objectives

    • Explain the development of income distribution in the US since the 1970’s and what is meant by the “Great Divergence”

    Key Points

    • Since the 1970s, inequality has increased dramatically in the United States.
    • Different groups get different compensation for the same work. The discrepancy in wages between males and females is called the ” gender wage gap,” and the discrepancy between whites and minorities is called the “racial wage gap”.
    • While earnings from capital and investment are still a significant cause of inequality, income is increasingly segregated by occupation as well. Of earners, 60% in the top 0.1% are executives, managers, supervisors, and financial professionals.

    Key Terms

    • Race Wage Gap: The difference in earnings between racial or ethnic groups.
    • Gender Wage Gap: The difference between male and female earnings expressed as a percentage of male earnings.
    • great divergence: Refers to the growth of economic inequality in America since the 1970s.
    image
    Income Distribution by Education: This graph illustrates the unequal distribution of income between groups with different levels of educational attainment. Education is an indicator of class position, meaning that unequal distribution of income by education points to inequality between the classes.

    Unequal distribution of income between genders, races, and the population, in general, in the United States has been the frequent subject of study by scholars and institutions. Inequality between male and female workers, called the “gender wage gap,” has decreased considerably over the last several decades. During the same time, inequality between black and white Americans, sometimes called the “race wage gap,” has stagnated, not improving but not getting worse. Nevertheless, data from a number of sources indicate that overall income inequality in the United States has grown significantly since the late 1970s, widening the gap between the country’s rich and poor.

    A number of studies by the U.S. Department of Commerce, Congressional Budget Office (CBO), and Internal Revenue Service (IRS) have found that the distribution of income in the United States has become increasingly unequal since the 1970s. Economist Paul Krugman and journalist Timothy Noah have referred to this trend as the “Great Divergence.” Since the 1970s, income inequality has grown almost continuously, with the exceptions being during the economic recessions in 1990-91, 2001, and 2007. The Great Divergence differs in some ways from the pre-Depression era inequality observed in the early 1900s (the last period of great inequality). Before 1937, a larger share of top earners’ income came from capital (interest, dividends, income from rent, capital gains). Post-1970, a higher proportion of the income of high-income taxpayers comes predominantly from employment compensation–60% of earners in the top 0.1% are executives, managers, supervisors, and financial professionals, and the five most common professions among the top 1% of earners are managers, physicians, administrators, lawyers, and financial specialists. Still, much of the richest Americans’ accumulated wealth is in the form of stocks and real estate.

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