Income inequality has cost American workers $2.5 trillion: RAND study
Economic growth since the mid-1970s hasn’t benefited most American workers.
Just how big is the income gap? RAND Corporation attempted to gain a better understanding of changes in income inequality since the mid-1970s by creating a new metric that measures how much economic growth is shared across all income distributions.
The result? The bottom 90% of Americans would be $2.5 trillion richer if income growth had impacted everyone equally.
“Multiple studies have found that labor, capital, pre-tax and post-tax income has been increasingly concentrated at the top of the distribution since the middle of the 20th century,” the authors, Carter Price and Kathryn Edwards, wrote.
In the ‘50s and ‘60s, income for all income groups increased between 1.5% and 2.5%, on par with per capita GDP growth of 2%.
The stagnation of the early ‘70s slowed growth for everyone, but from 1975 on, only the wealthiest 20% (and particularly the wealthiest 5%) seem to have recovered much more significantly, with income often growing faster than GDP, according to the paper.
Income inequality hit the median earners the hardest, the authors found. Income for earners in the 25th percentile increased at 62% of per capita GDP.
Income for those earning the median of $26,000 a year in 1975 grew at just 30% of per capita GDP to $36,000 in 2018. If it had grown in line with GDP, it would have reached $57,000.
The top 1% of earners in 1975 saw their income increase by 305% of per capita GDP.
Price and Edwards note that the population in 2018 was more educated than in 1975. Although the population with less than a high school diploma saw the most significant growth (121% of GDP), “this was driven primarily by an increase in hours rather than growth in real wages,” according to the report.
“Additionally, because educational attainment has increased over time, this population was disproportionately older in 2018 compared to the population in 1975. While those with a college degree had incomes double those of other education levels in 2018, this gap was virtually identical in 1975,” the authors wrote.
The authors also examined income inequality across racial demographics and found that income disparities declined below the median earning level.
However, they explain, “this has primarily occurred because White men in the bottom half of the income distribution are earning the same or less than in 1975; other demographic groups did not see income gains close to the growth in the broader economy.”
Although earnings were lower for women across time periods and income distributions, they enjoyed higher growth rates than men. “The net effect of these trends was, in some sense, a reversion to the mean with the first quartile of incomes for different demographic groups closer to each other in 2018 than in 1975,” according to the report.
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