The U.S. Income Distribution and Mobility: Trends and International Comparisons *

By Levine, Linda | Current Politics and Economics of the United States, Canada and Mexico, October 1, 2015 | Go to article overview

The U.S. Income Distribution and Mobility: Trends and International Comparisons *


Levine, Linda, Current Politics and Economics of the United States, Canada and Mexico


Introduction

The historically slow pace of recovery in the labor market from the 20072009 recession appears to be partly responsible for the renewed interest among some members of the public policy community in the long-term trend of growing inequality in the distribution of income.1 In other words, the benefits of economic growth (e.g., higher national income) began accruing unequally across U.S. households long before the late 2000s. Inequality is the label commonly applied to income distributions in which a group's share of total income is larger (smaller) than its share of the population (e.g., the top 20% of U.S. households accounted for slightly more than 50% of aggregate household income in 2011, as shown in Table 1.)

Economic theory provides little basis for preferring any particular degree of equality in the distribution of income. In theory, what matters with respect to labor income is that the distribution results from markets that operate efficiently; that is, markets in which the final demand for goods and services and the relative productivity of the firms producing those goods and services determine the demand for labor and the earnings of jobs in each sector of the economy. Theoretical arguments for a more equal distribution of income than that which results from market forces are based on a number of propositions, including the diminishing marginal utility of income. This refers to the idea that each additional dollar of income yields less and less satisfaction (utility) than the first. For example, one additional dollar of income adds less to the utility of someone earning $100,000 than to the satisfaction of someone earning $20,000. If this proposition is correct, it should be possible to increase the overall economic well-being of society by transferring money from those with high incomes to those with low incomes because the loss in utility will be less for high-income individuals than the gain for low-income individuals. However, the costs commonly associated with income redistribution (e.g., slower economic growth) may offset some and possibly all of any net gain in well-being.2

With varying perceptions about a trade-off between economic growth and income equality, members of the U.S. public policy community have long debated how best to improve the economic well-being of the population. This disagreement appears to underlie longstanding congressional deliberations about several policy issues, such as the progressivity of income tax rates, tax treatment of capital gains and inheritance, provision of social insurance (e.g., Social Security) as well as social welfare benefits (e.g., food stamps), and raising the federal minimum wage. It also has extended to consideration of initiatives (e.g., grants for early childhood education and college tuition tax expenditures) that arguably promote equality in the opportunity to move up the income ladder, which an increasingly unequal distribution of income may suggest a lack of and which may itself curb the potential productive capacity of the economy.3

This report presents recent analysis of the distribution of income and the extent of income mobility in the United States over time and in comparison with other advanced economies. It begins with a discussion of data issues related to measuring income and its distribution. The empirical literature on the development of and explanations for income inequality in the United States are next addressed. The report then compares the U.S. income distribution with the distributions of other industrialized countries and presents explanations for cross-country differences in measures of income dispersion. To the degree that a more equal distribution of income arises from policy decisions rather than market forces, the willingness of a country to incur any economic costs related to attaining greater equality may reflect varying national beliefs about the opportunity to ascend the income ladder. For that reason, the report closes with an examination of income mobility in the United States and other developed nations. …

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