Inequality–When and Where?

David Leonhardt’s recent Economix blog post, inviting readers to vote for (or rank) fourteen potential causes for slumping incomes, is a provocative–if at the same time a little silly–exercise in crowd-sourced economic analysis.   The problem is narrowly defined: the decline of median household income over the last 12 years.  And the potential causes range widely–from union decline to the “innovation plateau.”

The exercise of distributing or ranking those causes would be more productive, to my mind, if the problem they were explaining was conceived more broadly; if it included low, median, and high earners; and cast its attention over a longer time period.  Since income stagnation or inequality is largely rooted in the stagnation of wages or earnings, let’s put aside the demographic and family structure variables that shape the way individual wages and earnings are combined as household income.

As we look at the trajectory of wages, it is fruitful to consider not just the stagnation of the median, but the distinct gaps between low-wage and median-wage workers, and between median-wage and high-wage workers.   And its important to consider the timing of these gaps.  Union decline is undoubtedly important, for example, but it is most important to the gap between low-wage and median-wage workers–and most important, as a causal force, before 2000.  By the same token, declining returns on education are probably most important to median-wage workers in recent years.  And skyrocketing CEO salaries or financialization explain the gap between the median and the wealthy (or between the wealthy and the very wealthy) in recent years, but have little effect on low or median-wage workers.

This graph traces the ratio between wages at the 10th, 5oth (median), 90th, and 95th percentiles–for men and women, from 1973-2011.  Think of the ratio between poor and rich (the 10th and 90th percentiles) as a rough index of inequality.  Through the 1990s, most of that gap was driven by poorer workers falling away from the median–as unions declined (especially for men) and the minimum wage stagnated (especially for women).  Over the last 20 years, that gap has been driven largely by high-wage workers (the 90th percentile and up) pulling away from the median.

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