Equity, Diversity and Inclusion

What’s caused the rise in income inequality in the US?

Olga Baranoff
Intern, Washington Center for Equitable Growth
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May Day celebrations kicked off around the world late last week, with unionists in many countries decrying the rise of income inequality in their countries. The United States, of course, celebrates Labor Day in September. But in the spirit of adding an American voice to the larger international commentary, here’s a post-May Day analysis of what economists think about income inequality in this country.

Income inequality has increased in the United States over the past 30 years, as income has flowed unequally to those at the very top of the income spectrum. Current economic literature largely points to three explanatory causes of falling wages and rising income inequality: technology, trade, and institutions. The existence of different explanations points to the difficulty of pinning down causes of inequality.

Part of this difficulty is rooted in the complexity inherent in larger labor market inequalities. Falling labor force participation, stagnating median wages, and declining share of labor income, for example, are all part of current U.S. labor market trends. These trends are certainly connected, but they also have been studied through various research frameworks, which can inexorably lead to different policy implications. Acknowledging the complex and intertwined nature of these explanations is crucial to developing policy solutions that address the joint causes of inequality.

Of the three explanations for rising inequality, the so-called technology-and -education argument is the most prominent. This hypothesis focuses on the large wage premiums for workers with high levels of education and skills. According to Massachusetts Institute of Technology professor David Autor, demand for skills has consistently increased across developed countries. The skill premium, then, is a result of skills not being supplied at a rate to keep up with demand. The proposed solution to inequality driven by these trends is increasing education and job training opportunities for workers so they can get better paying jobs.

A second explanation is trade and globalization. Scholars, including Autor, point to increases in trade and offshoring as a cause of income inequality. According to this hypothesis, growing trade between the United States and the rest of the world, especially China, has increased the number of imports in the U.S. economy, which has led to job loss in industries that originally produced these goods in the United States. Offshoring has also affected jobs and wages. Both these trade phenomena lead to declining employment, falling labor force participation, and weak inflation-adjusted wage growth. Possible policy solutions for this trend include those that would make U.S. exports more competitive, among them the depreciation of the U.S. dollar.

The last explanation suggests that U.S. government policies created an institutional framework that led to increasing inequality. Since the late 1970s, deregulation, de-unionization, tax changes, federal monetary policies, “the shareholder revolution,” and other policies reduced wages and employment. This explanation would seem to call for policy changes such as increasing unionization, better supervision of Wall Street, raising the minimum wage, and maintaining a full-employment focus in monetary policy, to address inequality and declining wages.

These three main explanations for income inequality show the difficulty in pointing to one cause of inequality over others. Researchers’ emphasis on disentangling causes of income inequality is relevant to understanding the issue, but it also highlights the complexity of factors that contribute to labor market inequality. Income inequality has no one cause. As such, any policy solutions that address inequality must match this nuance and acknowledge the various factors that contribute to inequality.

This article is published in collaboration with the Washington Center for Equitable Growth. Publication does not imply endorsement of views by the World Economic Forum.

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Author: Olga Baranoff is an intern with the Washington Center for Equitable Growth and an economics major at Johns Hopkins University.

Image: A customer withdraws 500 Estonian kroon ($40) from an ATM in Tallinn July 13, 2010. REUTERS/Ints Kalnins.

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Equity, Diversity and InclusionEconomic Growth
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