The Hierarchy
Income Inequality in the United States

Multinational Monitor: What is the best way to measure and describe income inequality?
Jared Bernstein: Probably the most intuitive way is to look at the ratio of those at the very top of the income scale to those at the very bottom, and to see how that ratio has changed over time.

If you go back to 1979, prior to the period when the growth in inequality really took off in the United States, the top 5 percent on average had 11 times the average income of the bottom 20 percent. If you fast forward to the year 2000, the most recent economic peak, you find that that ratio increased to 19 times. So over the course of those two decades, the gap between the wealthiest and the lowest income families grew from 11 times to 19 times.
MM: What is the disparity just in benefits?
Bernstein: The previous figures were for income, so that includes most income sources, including both wages and non-wage income, such as interest payments and government transfers.

If you divide the work force into quintiles, or fifths, based on their wages, in the bottom fifth, 18 percent of the workforce has pension coverage and one-third has health coverage. If you then look at the top fifth, you’ll find that 73 percent has pension coverage, and 81 percent has healthcare coverage.

Practically any variable that has to do with how economic growth is distributed — compensation, benefits, pensions, health insurance, quality of education, quality of housing, exposure to crime — will yield this kind of highly skewed result. Wealth disparity is far more concentrated than income disparity.

MM: And what happens when you look at that set of data by race?
Bernstein: Minorities tend to be concentrated on the lower end of the spectrum whether we’re talking about income or wealth. And if you’re looking at the impact of some of these other inequalities, they are more acutely felt by minorities as well. For example, minorities experience more crime than whites on average, and majority populations have better access to higher quality public education than minority populations.

If you’re talking about wealth, the gap between white wealth and black wealth is very extreme because wealth is a more historical variable than income. African Americans by dint of their history in this country have had much less opportunity to accumulate wealth over time.

MM: To what extent do the income disparities correlate with educational disparities?
Bernstein: Well, folks with less education tend to have less income at any point in time. So there is definitely a correlation between inequality and education. However, over time the growth in inequality has been as much within education groups as between them.

While education differentials themselves have grown, they only explain about half of the growth in overall inequality. That is, the gap between the earnings of, say, college and high school workers explains part of the increase in equality, but only about half of it. The rest of the increase has occurred within pretty narrowly defined educational groups. Even within college-educated workers, there is more inequality than there used to be, and among high school-educated workers as well.

Educational disparities are one explanation for why income or wages are unequally distributed at any point in time. Such disparities, though, do little to explain the increase in inequality.

MM: How does the level of unemployment affect the income ladder?
Bernstein: That’s a very important point. It affects it profoundly. When the unemployment rate is too high, the fruits of economic growth tend to be distributed much less evenly throughout the workforce and tend to be distributed upward.

In an economy like ours, where lower- and mid-wage workers don’t have a lot of bargaining power, they depend on a low unemployment rate to ensure that the fruits of productivity growth are more equally distributed. In the absence of low unemployment, you are typically going to see the kinds of redistribution upward that we saw over the eighties and early nineties.

MM: Why does a lower unemployment rate mean that the productivity benefits are more evenly shared?
Bernstein: When unemployment is very low and when we’re near full employment, employers typically have to bid up wages to maintain the workforce they need in order to meet high levels of demand. That is what characterizes a tight labor market. There is enough demand out there such that there is competition for workers. In the presence of such competition, employers tend to pay workers a higher wage than they do if unemployment is higher and there is less competition and firms can keep more of their income as profits.

Think of the economy as a pie. As the pie is growing, the question is how do the slices get determined. A tight labor market plays the same role as other institutions that distribute growth — like unions and minimum wages — and ensures that the slices of the pie are distributed fairly to those who help bake it.

MM: How does trade policy and the trade balance impact inequality?
Bernstein: Trade policy is certainly implicated in the falling wages of the bottom half of the workforce, along with the loss of manufacturing employment, which are obviously related phenomena.

Manufacturing is a sector where non-college-educated workers have historically seen relatively high and rising wages, wages that rise in step with productivity, which has always grown pretty quickly in that sector.

We’ve now run large trade deficits in the manufacturing sector for many years on end, and have lost millions of manufacturing jobs in the process.

The kinds of trade agreements that we’ve pursued over the past decade or so have exposed our manufacturers to foreign competition with workforces that earn much less than we do, and that has hurt the sector. Add to that the fact that our economic policy at the federal level has explicitly pursued a strong dollar regime that makes our manufactured good less competitive in international markets. So between greater exposure to globalization and the strong dollar, we’ve constructed a set of policies that have made it very difficult for manufacturing to do anything but contract, and it has contracted big time.

MM: To what extent do you attribute the rise in inequality to the shift in the U.S. economy to the service sector?
Bernstein: I hesitate to attach numbers to any one factor, but it is widely agreed that the loss of manufacturing employment probably explains 15 to 25 percent of the increase in inequality over the past couple of decades, which is as large as any one factor alone, so it’s a very important factor.

The service sector is a very broad sector. It includes professional people earning lots of money and people earning very little, so it is a sector that inherently has more inequality built into it. If the economy grows and there’s more employment in that sector and less employment in a sector where blue collar workers were making relatively high wages, you’re definitely going to have more inequality.

MM: What about the considerable portion of the service sector that is low paying — are people shifting to those jobs driving the inequality?
Bernstein: The share of our economy working in low-wage jobs crept up consistently from the mid-seventies through the mid-nineties. This was despite the fact that we were ever more productive, that we were ever more highly educated, that average incomes were growing. Despite the fact that on a broad per capita level it was a richer country, we kept creating more and more low-wage jobs. That explains part of the increase in equality.

The average is less and less relevant for understanding what’s going on because you’ve got more disparity between the top and the bottom.

MM: Is there anything inherent in low-wage jobs that makes them low wage?
Bernstein: I think there is. Some of these jobs are pretty low productivity jobs. At some level, what you pay is a function of how productive that particular job is. One of the problems in our low-wage labor market is that we have lots of cheap labor and lots of low-wage work for that cheap labor to do.

But although the level of pay is somewhat constrained, there is a fairly broad range within which low-wage labor can be paid. Low-wage workers are paid much less now than they used to be. The idea is that a janitor in 1965 was paid a lot more than a janitor in 2000, despite the fact that that person was at least as productive and as well educated in 2000 as he or she was in 1965.

So there are constraints in paying low-wage sectors based on their low productivity, but there’s a range within those constraints that we’ve slid down.

MM: There’s clearly been a huge surge in salaries of top management at big corporations. Does that impact on the inequality measures or does it affect too few people to make much difference?
Bernstein: It’s more limited than you might believe. It is sensational and eye-grabbing. It is egregious in many cases, especially when you’ve got these guys, and they are mostly guys, pulling down huge salaries with falling stock prices and very little to show for it.

If you just think about the supernovas at the top of the income or wealth scale, you’ll miss the fact that real wages were falling for low-wage men and women for 20 years from the mid-seventies until the mid-nineties, and that there is just no obvious reason why that should have been the case. It is not just a very small group at the top pulling ahead, it is too little growth being fairly shared with workers at the middle and lower end of the income scale.

The real story tends to be more that the growth between the top and the middle, and the middle and the bottom, and how those different groups have grown over the years.

Why have real incomes stagnated at the middle and declined at the bottom over the long term? In a growing economy where people are more highly educated and they are working more hours, there is no obvious reason why their incomes should be falling. You might argue that you can see why their incomes wouldn’t grow in lock step with productivity because not everybody is equally productive, but, on average, an economy that is working appropriately should have incomes growing throughout the distribution.

To understand why a particular occupation pays less now than it did 20 years ago, you have to look at structural changes of the type we talked about before: higher unemployment, fewer union protections, lower minimum wages, large and unsustainable trade imbalances. Those are the kinds of factors that work against non-college-educated workers that find themselves with less bargaining power and thus are less able to claim their fair share of the growth.

MM: Technological change is often used as an explanation for rising inequality: technology jobs are the best paid, but only available to those who are highly educated and technology-fluent. How do you assess this explanation?
Bernstein: I think a lot of people notice that they’re looking at computers on their desk that they didn’t have 20 years ago and they look at these inequality trends and think that they must be correlated. But a closer look reveals that that correlation doesn’t really lead to a causation.

Technology is an ongoing trend. The production of goods and services in our economy has become consistently more technology complex, going back as far as you can record history. These days it’s the computer, but starting with the abacus and moving forward there has always been some new technological gain or application that has made a difference in the workforce. In earlier periods it was, for example, electricity, or railroads. Computerization and information technology is the latest flavor.

It is very important and has played a key role in absorbing the more skilled workers that our education system turns out over time. Think about the fact that we now have 25 percent of our workforce college educated. A generation ago, it was 12 percent. We do a very good job at employing skilled persons and finding useful productive things for them to do, and part of that is because ongoing technological change is highly complimentary to the skills of the workforce.

But there is no evidence that this factor has accelerated over time and would therefore explain the increase in inequality. At any given point in time, those who are more technologically adept will earn more than those who aren’t, but that relationship has not grown; the income or wage premium associated with technology has not increased much over time. So it does not explain the increase in inequality.

Like the education story before — in fact they are highly correlated — at any given point in time technology can explain part of the story, but it does not do much in terms of accounting for the increase in inequality.

Manufacturing is a sector where non-college-educated workers have historically seen relatively high and rising wages, wages that rise in step with productivity, which has always grown pretty quickly in that sector. We've now run large trade deficits in the manufacturing sector for many years on end, and have lost millions of manufacturing jobs in the process.