The Rise and Consequences of Inequality

Alan B. KruegerChairman

Council of Economic Advisers

January 12, 2012

Figure 1: Growing Together, Growing ApartIncome Growth by Quintile, Various Periods

January 12, 2012 2

2.5%

2.2%2.4% 2.4%

2.2%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

Lowest fifth 2nd fifth Mid fifth 4th fifth Top fifth

Percent

Annual Growth Rate of Real Income Across the Family Income Distribution1947 to 1979

-0.4%

0.1%

0.3%

0.6%

1.2%

Lowest fifth 2nd fifth Mid fifth 4th fifth Top fifth-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%Percent

Annual Growth Rate of Real Income Across the Family Income Distribution1979 to 2010

Source: Census Bureau

Figure 2: Growing Together Again1992-2000

January 12, 2012 3

2.6%

1.9% 1.8%2.0%

3.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

Lowest fifth 2nd fifth Mid fifth 4th fifth Top fifth

Percent

Annual Growth Rate of Real Income Across the Family Income Distribution1992-2000

Source: Census Bureau

Figure 3: If Real Incomes Had Grown During the 2000s as They Did During the 1990s, the Median Household Would Have an Extra $8,900 in

Annual Income in 2010

January 12, 2012 4

Note: Shading denotes recession.Source: Census Bureau; CEA calculations

$8,900

42,000

44,000

46,000

48,000

50,000

52,000

54,000

56,000

58,000

60,000

79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09

2010 DollarsMedian Household Income

If median household income had grown during the 2000s

at the same rate as it did during the 1990s

Actual

2010

Figure 4: CBO Estimates Show Much Faster Income Growth for the Top 1%

5January 12, 2012

18%28%

35%43%

65%

278%

0%

50%

100%

150%

200%

250%

300%

Lowest Quintile Second Quintile Middle Quintile Fourth Quintile 81st-99thPercentiles

Top 1 Percent

Percent Change

Growth in Real After-Tax Income, 1979-2007

Source: CBO

Figure 5: Income Inequality Near Record High

6January 12, 2012

0

5

10

15

20

25

1916 1926 1936 1946 1956 1966 1976 1986 1996 2006

Top 1%

Top 0.1%

Percent of All U.S. Income

Share of Income Earned,1916-2009

Source: 2010 update to Piketty and Saez (2006)

Figure 6: The Size of the Middle-Class has Fallen

7January 12, 2012

50.3

47.3

45.6

44.2

42.2

38

40

42

44

46

48

50

52

1970 1980 1990 2000 2010

Source: CEA Calculations from Current Population Survey

0

Percent

Percent of Households With Annual Income Within 50% of the Median

Figure 7: “The Great Gatsby Curve” Higher income inequality associated with lower intergenerational mobility

January 12, 2012 8

Denmark

Finland

France

GermanyJapan

New Zealand

Norway

Sweden

United Kingdom

United States

y = 2.2x - 0.27R² = 0.76

0.1

0.2

0.3

0.4

0.5

0.6

0.1

0.2

0.3

0.4

0.5

0.6

0.15 0.20 0.25 0.30 0.35 0.40Inequality

(1985 Gini Coefficient)

Intergenerational earnings elasticity

The Great Gatsby Curve

y = 2.2x - 0.27R² = 0.76

.

Source: Corak (2011), OECD, CEA estimates

Figure 8: “The Great Gatsby Curve”: Projection

January 12, 2012 9

Denmark

Finland

France

GermanyJapan

New Zealand

Norway

Sweden

United Kingdom

United States

y = 2.2x - 0.27R² = 0.76

0.1

0.2

0.3

0.4

0.5

0.6

0.1

0.2

0.3

0.4

0.5

0.6

0.15 0.20 0.25 0.30 0.35 0.40Inequality

(1985 Gini Coefficient)

Intergenerational earnings elasticity

The Great Gatsby Curve

United States(2010)

y = 2.2x - 0.27R² = 0.76

United States (2010 Gini)

.

Source: Corak (2011), OECD, CEA estimates

Figure 9: Causes of Higher Inequality

10January 12, 2012

0

10

20

30

40

50

Technologicalchange

Other andunknown

Internationaltrade

Decline in realminimum wage

Decline inunionization

RisingImmigration

Average percent distribution

Box-5-3.─The Expert's Consensus on Earnings Inequality

Source: Economic Report of the President, 1997

Figure 10: U.S. Tax Code is Less Progressive than Most Other OECD Countries

11January 12, 2012

0

0.1

0.2

0.3

0.4

0.5

0.6Gini Coefficient Before and After Taxes and Transfers

Before tax After tax

, 2010

Source: OECD

Figure 11: Despite large tax cuts, less dynamism

12January 12, 2012

2.5

2.8

3.0

3.3

3.5

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

Source: Business Dynamics Statistics

Percent

Startup Employment as a Share of Total Employment

EGTRRA

JGTRRAOBRA Deficit Reduction Act

Average: 1993-2000

Average: 2001-2007

BalancedBudget Act

Consequences

13January 12, 2012

• Intergenerational Mobility

• Consumption• Aggregate demand and excess leverage.

• Economic Growth

• Morale and Productivity

The Rise and Consequences of Inequality

Alan B. KruegerChairman

Council of Economic Advisers

January 12, 2012