Causes of income inequality in the United States describes the reasons for the unequal distribution of income in the US and the factors that cause it to change over time. This topic is subject to extensive ongoing research, media attention, and political interest.
Income inequality in the United States grew significantly beginning in the early 1970s, after several decades of stability. The US consistently exhibits higher rates of income inequality than most developed nations, arguably due to the nation's relatively less regulated markets.
According to the Congressional Budget Office, "the precise reasons for the [recent] rapid growth in income at the top are not well understood", but "in all likelihood," an "interaction of multiple factors" was involved. Researchers have offered several potential rationales. Various rationales conflict or overlap. They include: Globalization – Lesser-skilled American workers have been losing ground in the face of competition from workers in Asia and other emerging economies. Changes in labor demand – The rapid pace of progress in information technology has increased the relative demand for higher-skilled workers. Superstar hypothesis – Compensation in many sectors turned into a tournament in which the winner is richly rewarded, while the runners-up get far less. This affects both workers and investors (in dominant firms). Tax policy – Pre-tax income inequality in the U.S. is similar to other developed countries, but markedly rises after taxes and transfers. Immigration – Relatively high levels of immigration of less-skilled workers since 1965 may have reduced wages for American-born high school dropouts. Decline of unions – Unions helped increase wages, benefits and working conditions. Unionized workers declined from over 30% to around 12%. Social norms – Social norms constrained executive pay. CEO pay rose from around 40 times the average workers pay in the 1970s to over 350 times in the early 2000s.
Divergence of productivity and compensation
Overall
One view of economic equity is that employee compensation should rise with productivity (defined as real output per hour of labor worked). In other words, if the employee produces more, they should be paid accordingly. If pay lags behind productivity, income inequality grows, as labor's share of the output is falling, while capital's share (generally higher-income owners) is rising. According to a June 2017 report from the non-partisan Bureau of Labor Statistics (BLS), productivity rose in tandem with employee compensation (a measure which includes wages as well as benefits such as health insurance) from the 1940s through the 1970s. However, since then productivity has grown faster than compensation. BLS refers to this as the "productivity-compensation gap", an issue which has garnered much attention from academics and policymakers. BLS reported this gap occurs across most industries: "When examined at a detailed industry level, the average annual percent change in productivity outpaced compensation in 83 percent of 183 industries studied" measured from 1987 to 2015. For example, in the information industry, productivity increased at an annual average rate of 5.0% over the 1987-2015 period, while compensation increased at about a 1.5% rate, resulting in a 3.5% productivity gap. In Manufacturing, the gap was 2.7%; in Retail Trade 2.6%; and in Transportation and Warehousing 1.3%. This analysis adjusted for inflation using the Consumer Price Index or CPI, a measure of inflation based on what is consumed, rather than what is produced.
Analyzing the gap
BLS explained the gap between productivity and compensation can be divided into two components, the effect of which varies by industry: 1) Recalculating the gap using an industry-specific inflation adjustment ("industry deflator") rather than consumption (CPI); and 2) The change in labor's share of income, defined as how much of a business' revenue goes to workers as opposed to intermediate purchases (i.e., cost of goods) and capital (owners) in that industry. The difference in deflators was the stronger effect among high productivity growth industries, while the change in labor's share of income was the stronger effect among most other industries. For example, the 3.5% productivity gap in the information industry was composed of a 2.1% difference in deflators and about a 1.4% due to change in labor share. The 2.7% gap in Manufacturing included 1.0% due to deflator and 1.7% due to change in labor share.