Recent Trends in Income Inequality

Abstract

The impact of the “Great Recession” on inequality is unclear. Because the crises in the housing and stock markets and mass job loss affect incomes across the entire distribution, the overall impact on inequality is difficult to determine. Early speculation using a variety of narrow measures of earnings, income, and consumption yield contradictory results. In this chapter, we develop new estimates of income inequality based on “more complete income” (MCI), which augments standard income measures with those that are accrued from the ownership of wealth. We use the 1989–2007 Surveys of Consumer Finances, and also construct MCI measures for 2009 based on projections of assets, income, and earnings.

We investigate the level and trend in MCI inequality and compare it to other estimates of overall and “high incomes” in the literature. Compared to standard measures of income, MCI suggests higher levels of inequality and slightly larger increases in inequality over time. Several MCI-based inequality measures peaked in 2007 at their highest levels in 20 years. The combined impact of the Great Recession on the housing, stock, and labor markets after 2007 has reduced some measures of income inequality at the top of the MCI distribution. Despite declining from the 2007 peak, however, inequality remains as high as levels experienced earlier in the decade, and much higher than most points over the last 20 years. In the middle of the income distribution, the declines in income from wealth after 2007 were the result of diminished value of residential real estate; at the top of the distribution, declines in the value of business assets had the greatest impact.

We also assess the level and trend in the functional distribution of income between capital and labor, and find a rising share of income accruing to real capital or wealth from 1989 to 2007. The recent economic crisis has diminished the capital share back to levels from 2004. Contrary to the findings of other researchers, we find that the labor share of income among high-income groups declined between 1992 and 2007.

Citation

Smeeding, T.M. and Thompson, J.P. (2011), "Recent Trends in Income Inequality", Immervoll, H., Peichl, A. and Tatsiramos, K. (Ed.) Who Loses in the Downturn? Economic Crisis, Employment and Income Distribution (Research in Labor Economics, Vol. 32), Emerald Group Publishing Limited, Leeds, pp. 1-50. https://doi.org/10.1108/S0147-9121(2011)0000032004