If you want to know how much income inequality has really risen in recent years, Scott Winship has written a terrific short essay summarizing much of what we now know. And what we know is that almost the entire increase in inequality since the 1980s is attributable to a stupendous rise in incomes at the top of the top of the top of the income distribution. Here’s Scott, near the end of his analysis:
Discussion of income inequality trends generally proceeds as if some sizable fraction of the population were getting richer (the top 10 percent, or the top 1 percent) while everyone else is getting poorer. In reality, the “poorest” 90 percent of the top 10 percent—and even the “poorest” half of the top 1 percent—have not seen outsized income gains over the past 30 years. It is only the top one-half-of-one-percent that has received a rapidly increasing share of income. Furthermore, the increase in concentration at the very top has been smaller than the most-cited figures have implied. For example, using a comprehensive measure of income, the top one percent probably received about 8 percent of income in 1980 and about 12 percent in 2008.
Nor have the poor fallen behind the typical household. Indeed, they may not even have fallen behind the 90th percentile. If this finding holds up, then it would seem that resentment toward the top one-half-of-one-percent should have grown equally among households with contemporary incomes as high as half a million dollars and households below the poverty line. Put another way, if rising inequality is unfair, then it may be that it has been as unfair for the 90th or 95th percentile as it has for the 10th percentile.
It is not immediately clear what to think about income concentration being confined to the very top. Would it be worse if income were becoming increasingly concentrated in the top half of the distribution at the expense of the bottom half or if it were becoming increasingly concentrated in Bill and Melinda Gates’s household at the expense of everyone else? Does the answer change depending on whether the “losers” are experiencing strong income growth or not? On some level, as long as incomes are rising for everyone, it matters little how much more the Gates’s income is rising. They cannot price others out of markets for goods and services by themselves. On the other hand, if the top fifth of the income distribution is pulling away from the bottom 80 percent, then the consequences for those falling behind could be profound. The top fifth might be able to sort themselves into the best neighborhoods with the best schools, and they might bid up the cost of higher education to the point where the best schools become unaffordable to most families.
The evidence indicates that patterns of inequality more closely resemble the Gates scenario than the bifurcation scenario. It is unlikely that the rise in inequality, then, has had much practical impact on the quality of life of middle-income or poor Americans. The exception would be if rising inequality had spawned competitive spending patterns to maintain relative standing in such a way that families end up worse off as a consequence of trying to keep up with the Joneses. For now, however, this possibility remains largely untested.
Please do read the whole thing.