The Measures of Inequality

The Measure of Inequality

February 16, 2014

To take a position on inequality, most people need a solid understanding of how unequal we are. The only ones who don’t are those who have already decided inequality is not an issue–let the invisible hand rule, let capitalism flourish without restraint, and it will all be ok, they argue. Some feel the theories of Simon Kuznets will recurrently prevail–in each long term cycle there will be an increase in inequality followed by a later decrease in inequality. Others just think property rights are to be honored at all costs, and that includes not imposing higher taxes on the wealthy, or any other form of redistribution (such as the Affordable Care Act)–these feel that the wealthy invest those extra gains, and thus create jobs for the others. This is the basis of the “trickle down” theory. With this theory, the argument goes that we’d be far worse off if we tried even a moderate degree of redistribution.

Well, it turns out there hasn’t been much trickle down in recent decades. Let’s start here:

The two charts below tell the story. Chart 1: As measured by the Gini coefficient, inequality was high in the US before WWII, declined significantly across the period 1940-1960, and then began a steady climb to today’s very high level.

Chart 2 shows that those in the top 90-95%, those in the 95-99%, and especially those in the 99-100%, saw steady increase in their share of earnings. For example, those in the top 1% increased their share from about 6% in 1960, to about 13% in 2000.

Source of charts: UNCOVERING THE AMERICAN DREAM:INEQUALITY AND MOBILITY IN SOCIAL SECURITY EARNINGS DATA SINCE 1937

Wojciech Kopczuk, Emmanuel Saez, Jae Song,Working Paper 13345 http://www.nber.org/papers/w13345, NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue, Cambridge, MA 02138, August 2007 

These are the facts.This is what has happened in America. Scholars like those referenced above have looked at inequality in many dimensions, finding similar results in most developed countries and many developing countries in the world: Since around 1960-70, inequality has accelerated.

As mentioned above and in previous posts, there are those who find no reason for concern with this trend–either feeling it will reverse itself without intervention, or that this is simply how capitalism works, and that it would not work without unrestrained inequality–and definitely no need for any form of redistribution. To those on the right, the word “redistribution” is a gross pejorative. So offensive is this word that it never appears in the political dialogue–not even from those on the left. It’s just too contrary to the Horatio Alger stories of American opportunity of pulling yourself up by your bootstraps.  

There are numerous explanations for what has caused this acceleration in inequality. One of the many attempts to explain it comes form Timothy Noah in his The Great Divergence. In his book, he thoroughly analyzes the many contenders for cause of the rise in inequality. He ultimately settles on four major causes: a shortage of better educated labor, resulting in the increasing value of a college degree, along with no effective pressure on the rising costs of higher education; increased globalization in the form of trade with lower wage nations; changes in government policy and finance (with special focus on Reagan and the Washington Consensus); and the decline of the labor movement. 

One facet of the rapid increase in inequality in the US has been the dramatic rise in CEO pay. See this chart:


Source:  INCOME INEQUALITY IN THE UNITED STATES, 1913-2002*

THOMAS PIKETTY, EHESS, Paris EMMANUEL SAEZ, UC Berkeley and NBER 2004, Fig. 11.


Regrettably, the modest downturn in the 2001-2002 period in the above chart did not signal a reduction in inequality. It simply reflected the smaller recession experienced in the US at that time due to the “tech bubble.” Since that time, CEO pay has continued to rise. Average wage income for the middle class did not rise. For example, Forbes reports that in 2012, the CEO of McKesson earned $131 million, Ralph Lauren $67 million, Vornado Realty $64 million. Forbes reports (June 27, 2013): “From 1978 to 2012, CEO compensation measured with options realized increased about 875 percent, a rise more than double stock market growth and substantially greater than the painfully slow 5.4 percent growth in a typical worker’s compensation over the same period.”


Inequality varies from city to city in the US. One of the least equal cities is San Francisco, where the earnings of those in the 95th-100th percentile are more than 16X those of the people in the 20th percentile.  During the 2007 to 2012 period, the earnings of those in the 20th percentile declined $4,000 while those in the 95% percentile increased $28,000 (Source: Brookings Institution).a

And, while the above is mostly about US inequality, a similar story is true throughout much of the world since around 1980, thus causing many to question whether this period of economic policy imposed by the IMF and the World Bank, reliant on the neoliberal Washington Consensus, is a significant causal factor in this development.  I believe it is. Most of the wealthy OECD displays similar results, although the US is near the most unequal. And, some developing countries have even higher levels of inequality than the US–e.g., Brazil and S. Africa. A particularly troublesome example is China, one of the most egalitarian countries in 1950. Inequality there has risen rapidly since 1980 and 1990, reaching about the same level as that of the US today.  Today, China has the 2nd largest number of billionaires in the world, and concerns with inequality are now ranked among the most troublesome to Chinese, where a growing number of protests allegedly reaching more than 600,000 annually, focus on inequality, pollution, corruption, and inflation, among other lesser concerns.

This is a short sketch of the reality of today’s level of high inequality. It is something everyone should be concerned about–for both moral reasons and the economic peril it may portend for the future.











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