Why a Recent Study Presents a Misleading Perspective on Inequality in America

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In recent years, there has been an ongoing debate among researchers about the extent to which inequality has increased in the United States over the past half-century. Many arguments in this discourse revolve around technical issues such as whether the income of owners of ‘pass-through businesses’ should be reported as wages or business profits, or the nature of income not reported on tax returns and whether it is predominantly earned by rich or middle-class households.

However, we have identified available data that bypasses most of these complexities and unequivocally illustrates a significant increase in inequality: individual Americans’ earnings in the labor market.

Taking into account one measure of labor market earnings – the compensation (including benefits) of the 80% of workers who are not managers or supervisors – reveals a substantial rise in inequality. Historically, before 1980, the hourly pay of these workers closely tracked economy-wide productivity growth. However, when productivity growth slowed, hourly pay growth plummeted even faster, resulting in an expanding gap between the pay of typical workers and overall economic growth. This missing pay for typical workers either went to those at the top or to business owners.

The primary factor driving this wedge between typical workers’ pay and economy-wide productivity is the increasing concentration of labor income at the very top of the wage distribution. Most publicly available data inconveniently obscures information about the wages of the highest earners due to confidentiality concerns. However, the Social Security Administration (SSA) data on annual wage earnings, a valuable source that does not suppress such information, clearly demonstrates a growing inequality in individual earnings over time.

The latest SSA data reveals a starkly unequal earnings growth between 1979 and 2022. Inflation-adjusted annual earnings for the top 1% and top 0.1% surged by 171.7% and 344.4%, respectively, while earnings for the bottom 90% grew by only 32.9%. This unequal growth has resulted in a rising share of total earnings accumulating at the top of the wage ladder.

During the same period, the share of earnings for the bottom 90% declined by 9.7 percentage points, while the share of earnings for the top 5% increased by 8.8 percentage points. The top 0.1% nearly tripled its share of total earnings from 1.6% in 1979 to 4.6% in 2022.

These gains at the very top are mirrored by data on CEO pay in the United States. According to Compustat, a financial database, inflation-adjusted pay for CEOs of the 350 largest publicly owned US firms skyrocketed by 1,209% between 1978 and 2022. Furthermore, the gap between CEOs and typical workers has dramatically increased, with CEOs being paid 344 times as much as the typical worker in 2022, compared to 21 times in 1965.

All this straightforward data on earnings unmistakably indicates a substantial rise in pay inequality in the US economy. Moreover, labor income is more evenly distributed among US households than income derived from wealth. Therefore, if labor income is becoming significantly more unequal, it raises questions about whether ownership of corporate equities or other financial assets has become equally imbalanced to compensate for this. However, no data suggests that this is the case.

Rather than debating whether inequality has significantly increased, the focus should be on understanding why and determining appropriate measures. The undeniable reality that much of the inequality stems from the labor market implies that policy changes deliberately disempowered typical workers in negotiating wages with employers. Reversing this trend will necessitate efforts to re-empower workers, including expanded unionization, maintaining consistently low unemployment rates, strengthening key labor standards, preventing employer efforts at wage suppression, and restraining wage growth at the very top.

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