Trends in income inequality: What do we actually know looking at the US?

The economic crisis has triggered a wide-ranging discussion of income equality, not the least in advanced economies:

• Will owners of capital receive ever-larger shares of income generated at the cost of workers?
• Is there a risk that economic growth will ben-efit mainly the “rich”, i.e. high-net worth individuals and persons at the upper end of the income scale and with high educational attainment?
• Are there some secular, almost natural, laws of the market economy that leave persons with low skills and savings behind with a diminishing “slice” of the pie?
• Will skill-biased technological progress and globalisation create yet more inequality in the absence of substantial changes in economic policies?

In his book ‘Capital’, Thomas Piketty claims just that: This is the trend witnessed in the US and this pattern will spread to other countries in the coming decades. The IMF, ILO and OECD have also raised the issue of increasing inequality as a concern for society. This note addresses this discussion, focusing on the US.

First, it raises a number of simple, yet crucial, measurement issues that turn out to be critical to understanding income distribution trends over the last five decades.

Second, it questions some conventional wisdom about the role that technology plays for the demand for different labour skills (“skill bias”).

The ambition of this note is NOT to provide an exhaustive overview of the literature or definitive answers as to the drivers of income distribution in the US or elsewhere.

The purpose is more modest, namely to invite to a discussion of an important subject, based upon a more careful understanding of the underlying drivers of income distribution in the US as well as other countries…

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