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Tuesday, February 1, 2011

Income Inequality in the United States: Trends and International Comparisons

Linda Levine
Specialist in Labor Economics

The recent recession, which has been followed by an unemployment rate persistently near 10% since the recovery’s start in June 2009, has meant reduced wages and salaries for many of the workers who lost jobs. This, among other things, has drawn attention to the long-term trend of growing inequality in the distribution of income across U.S. households—a trend that has been present when unemployment was less pervasive and the economy was expanding strongly. That is to say, even when the economy was growing, economic benefits accrued unevenly.

Existing measures of income fall short of accurately indicating the economic well-being of one household compared to another. The Census Bureau omits some sources from its official measure of income, for example. Taking the existing measure of money income at face value, however, several observations can be made concerning income inequality based on the bureau’s annual calculation of the distribution of total income by household quintile (fifth). If income were equally divided across households with income, each quintile would account for 20% of total income. The bottom fifth of households has accounted for much less than the one-fifth of total income it would get if the distribution were perfectly even. Its share of income stagnated during the 1970s, slowly fell through 2003, and has again stagnated at a lower income share (3.4% in 2009 compared with 4.2% in 1968). In contrast, the income shares of the top fifth and the top 5% of households in the distribution generally have risen throughout the 40-year period. The top fifth’s share grew from 42.6% in 1968 to 50.3% in 2009; the top 5%’s share grew from 16.3% to 21.7%. The middle class, as represented by the three middle quintiles, experienced a decrease in its income share from 53.2% in 1968 to 46.4% in 2009.

Various explanations have been offered for the increasingly uneven distribution of income across U.S. households in recent decades. Skill-biased technological change and globalization are the two leading hypotheses. Economists generally have found the former to be more persuasive.

The limited income data that are comparable internationally suggest that the U.S. income distribution is among the most uneven of all major industrialized countries. Various cross-country studies have found the most equal distributions of income exist in Scandinavia, followed by Central Europe and Southern Europe. English-speaking countries, with the exception of Canada, appear to have the highest levels of income inequality. In terms of the trend in income inequality since the 1970s, the United States, United Kingdom, and Italy were estimated to have experienced the greatest increase. Sweden, Finland, and Norway were found to have experienced the smallest increase in recent decades. In between were Germany, Australia, and the Netherlands.

There are three leading explanations for these international differences. First, other advanced economies devote a larger share of national output to transfers that equalize income across households. Second, the progressivity of tax rates varies by country and thus has different effects on equality of the distribution of after-tax income. Third, equality in the distribution of earnings, which account for most household income, varies substantially across countries.

Date of Report: January 10, 2011
Number of Pages: 17
Order Number: RL32639
Price: $29.95

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