Income inequality has been rising in the US for almost four decades. President Obama plans to increase taxes on those with high incomes while Governor Romney is against such “class warfare”.
John Van Reenen argues that a better focus would be on restoring America’s place as a world leader in public education and thereby tackling the human capital deficit that is at the heart of the inequality challenge.
Inequality doesn’t usually feature in US presidential election debates. Compared with Europeans, Americans are more relaxed about disparities of income, seeing high pay as the reward for effort and ability. What matters, they typically say, is equality of opportunity, not equality of outcomes.
This time is different. The Occupy movement reflected the general anger towards Wall Street bankers who raked in millions during the boom years and then got bailed out in the bust that they helped to create. One of the main differences between the two candidates in this election is over whether or not to raise taxes on the rich.
Rising inequality between people
Since the late 1970s, the shares of total income (labour and investment) held by the top 1% and top 0.1% of Americans have dramatically risen (Figure 1). In 1975, the top 1% had nearly 8% of the ‘income pie’, but by 2007 this had risen to nearly 24%. The last time inequality was so high was in 1928 on the eve of another great crash.
Figure 1 Share of income by individuals in the top 1% and top 0.1% 1918-2010
Source: Atkinson, Picketty and Saez (2012) World Top Incomes Database
These differences are caused by what happened in the labour market
In 1970, the richest tenth of men earned about 3.2 times as much as the poorest tenth.
By 2010, this ratio had risen to 5.2.
Figure 2 Difference in weekly earnings ratio between the top 10% and bottom 10% (Full-time full-year, FTFY, 90-10)
Source: Machin, Murani and Van Reenen (2012), calculations from March Current Population Survey, full-time full-year workers aged 18-60…
Adapted excerpts by JMM from