Wednesday, August 9, 2017

A Comparison Of Income Growth By Percentile In US For Two 34 Year Periods

There has been a lot of discussion about the topic on income inequality in the US.  Conservative economists have criticized some of the data that fail to account for government transfers to the poor and other factors.  Those criticisms are described in this article.  A graph towards the end of the article shows that income distribution in the US in the 34 year period from 1946 and 1980 was much more equal than it was in the 34 year period between 1980 and 2014.  We lived in two different worlds during those 34 year periods.

The distribution of income across income percentiles in the early period tended to favor individuals with lower incomes.  For example, the average income growth for those in the 5th percentile was over 3% in the early period.  There was zero income growth for low income Americans in the 5th percentile in the later period beginning in 1980.  The trend line across income income percentiles was downward sloping in the early period.  That is, annual income growth tended to fall as one's income income increased.  Moreover, annual income growth for Americans in the 50th percentile in the early period was 2%.  That was double the 1% growth rate for those in the middle percentile in the later period.

The trend line during the later period showed that annual income growth sloped upwards as one moved to high income percentiles in contrast to the earlier period.  The most dramatic change, however, did not occur until we reached the 95th percentile.  Even more revealing was the huge disparity in income growth as one move upwards within the 99th percentile. Americans who made it to the top 1% did much better than those in lower income brackets, but the level of inequality within the top 1% is huge.  The annual growth in income skyrocketed as we move upwards within the top 1%.  Fortunate Americans who made it to the top 1% are paupers compared to those at the top of the 99th percentile.

Its important to recognize that we had a market economy during both of these periods.  This implies that we can't attribute the difference to market forces.  Its pretty clear that markets worked differently beginning in 1980.  Some of that difference may be the result of government tax policies.  The top marginal tax rate was very high in the early period.  It was reduced substantially in the 1980's.  That may have encouraged top executives to campaign for larger salaries.  Executive salaries grew rapidly during the later period.  It would be hard to attribute their salary increases to growth in executive productivity.  Economist's like to relate income to worker productivity but executive productivity, which is difficult to measure, could not have improved as fast as the increases in executive compensation.  Factors, other than executive productivity, must account for most of the changes within the top income brackets and for the lack of income growth below the top 95th percentile.

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