Inequality in the United States: A brief tour of some facts

1. Inequality in the United States: A brief tour of some facts James K. Galbraith Lyndon B. Johnson School of Public Affairs The University of Texas at Austin McCormick Tribune Foundation Conference Series Chicago Federal Reserve Bank April 2, 2008

2. The University of Texas Inequality Project http://utip.gov.utexas.edu

3. The Official Story Second, however, there has been, as we know and discussed over the years, a significant opening up of income spreads, largely as a function of technology and of education with the increased premium of college education over high school, and high school over high school dropouts becoming stronger. The whole spread goes right through the basic system. It is a development which I feel uncomfortable with. There is nothing monetary policy can do to address that, and it is outside the scope, so far as I am concerned, of the issues with which we deal. Alan Greenspan Testimony to Congress March 5, 1997

4. The Official Story Second, however, there has been, as we know and discussed over the years, a significant opening up of income spreads, largely as a function of technology and of education with the increased premium of college education over high school, and high school over high school dropouts becoming stronger. The whole spread goes right through the basic system. It is a development which I feel uncomfortable with. There is nothing monetary policy can do to address that, and it is outside the scope, so far as I am concerned, of the issues with which we deal. Alan Greenspan Testimony to Congress March 5, 1997

5. If technology and trade affect anything, they would affect manufacturing pay The idea that inequality in the structure of manufacturing pay has increased systematically is a myth. It has risen and fallen. Inequality in manufacturing pay can be measured directly, easily and accurately. It closely tracks the unemployment rate. This measure peaked in the early 1990s and declined sharply as the economy moved toward full employment

6. Inequality in Manufacturing Pay and Unemployment in the U.S. 1953-2005, Monthly Data Inequality Unemployment Shaded areas show recessions.

7. The best explanation for inequality in manufacturing pay is, it is almost exactly the same thing as unemployment. Looking beyond manufacturing, inequality in pay more generally, including in services, depends mainly on the participation rate. As the proportion of workers in the population has risen, so has inequality. Overall pay inequality is a combination of two factors: the effect of participation rates and the effect of unemployment rates.

8. Inequality and the participation rate

9. Participation rates also determine the famous “stagnating median wage”

10. Classic argument: **stagnating** median wage Source: CEPR report, April 2007, p.10

11. But, not for women …

12. Between 1965 and 2000, labor force participation increased by nine percent, creating about nine million jobs, or fifteen percent of total job creation. The share of women in the labor force rose eleven percentage points. That of Hispanics rose ten percentage points. That of African-Americans rose three percentage points. That of white non-Hispanic males fell eighteen percentage points. To be clear, much of this was the consequence of disruptive economic events – including especially vast macroeconomic disruptions in the 1970s and 1980s, and institutional change, including the attack on unions. Many older, white, non-Hispanic male workers were forced from work. Nevertheless, the transition in the structure of the workforce is an essential component of the rise of measured inequality in the structure of pay.

13. Thus, when you break out the workforce by race, the stagnation goes away

14. Conclusion: real median incomes rose for all groups in the late 1990s. Full employment is good for median wages. They were stagnant for a period starting around 1971 and ending in 1983 for whites, 1992 for blacks and around 1995 for Hispanics. The stagnation of aggregate median incomes through 1997 is a composition effect. The hourglass phenomenon has much to do with the rising labor force role of women and minorities. And especially with the rising role of new immigrants in the Hispanic workforce. The problem is not whether people start at the bottom. It is whether they end there. This depends very much on how we treat those groups, as they move into jobs previously held by unionized male, Anglo workers.

15. Inequality in INCOME, on the other hand, has risen substantially. This too can be measured quite precisely, from income tax and other data sources. It is obvious that the explanation for rising income inequality must come from some other source, than rising inequalities in the structure of pay.

16. How about the stock market? That works fine.

17. U.S. Income Inequality Between Counties 1969 – 2005 Plotted Against the NASDAQ Composite, with Three Counterfactual Scenarios of Inequality Growth from 1994 – 2000 It’s the stock market, s&%#*d Inequality Piketty-Saez data would give essentially the same answer.

18. If you remove a handful of counties, related to information technology and finance, most of the rise in income inequality in the late 1990s would not have occurred.

19. U.S. Income Inequality Between Counties 1969 – 2005 Plotted Against the NASDAQ Composite, with Three Counterfactual Scenarios of Inequality Growth from 1994 – 2000 Without Manhattan Without Silicon Valley Without Top 15

21. Contribution of New York Counties to U.S. Income Inequality, 1969-2004 Manhattan Bar-height is the contribution of the county to the Theil T-Statistic

22. No good jobs for the unskilled? “The spiraling crisis in the credit and housing markets has kept [Phil] Gramm in focus, fairly or not. His employer, UBS, revealed yesterday that investment losses tied to the U.S. housing market reached $37 billion over the last six months. For the last three months, UBS posted a $12 billion loss. “Gramm, UBS's vice chairman, said yesterday he was "totally unaware" of his bank's massive holdings of securities tied to subprime mortgages, but, he added, "I'm confident we'll recover." Washington Post, April 2. 2008

23. Per Capita Income Inequality Across US Counties Over Time1969 – 2004

24. Contribution to Inequality between Counties(Components of the Theil T Statistic) Relatively Impoverished Neutral Prosperous (income above national mean)

25. 1969

26. 1970

27. 1971

28. 1972

29. 1973 Nixon’s Soviet Wheat Deal

30. 1974

31. 1975

32. 1976

33. 1977

34. 1978

35. 1979 Watch The West

36. 1980

37. 1981 The Big Recession

38. 1982

39. 1983

40. 1984

41. 1985

42. 1986

43. 1987 The Oil Bust

44. 1988

45. 1989

46. 1990

47. 1991

48. 1992

49. 1993

50. 1994