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Income Inequality, A Growing and Continuing Dilemma

January 20, 2021 | Posted in: Insights

Several years ago, I wrote a white paper (Considerations on Income Inequality) that included income and wealth data through 2017, in both cases portraying an ever-widening spread between the top 5% and the rest of the population. The income spread is powerfully captured in the following chart that updates the data through 2019:

Note that the spread between the top 5% and remaining quintiles began to widen around 1975 and accelerated dramatically after 2010.
The Rand Corporation published a paper in September of 2020 that posed the question: what would be the income of the average adult in 2019 if inequality had remained the same as it was in 1975? The analysis is fairly complex but the conclusion is that the average income of the bottom 90% of the population would be $13,700 higher, and to place that number in perspective, the median income of an adult in the U.S. is approximately $36,000.
The causes of growing inequality are many and complex but they include intense global competition, substitution of technology for labor, the decline in manufacturing in the U.S., the decline in trade union representation, increasingly concentrated corporate power, and stagnation of wages in less skilled positions.
All of this data preceded Covid-19 which raises the question of whether the pandemic has further widened the income and wealth gap. Income distribution data is taken primarily from tax returns so a definitive answer to this question won’t be available for some time. But, we can look at several economic variables that suggest that the already-substantial gap will have widened dramatically.
The following chart depicts recent trends in employment and you will note that the number of higher income workers employed slightly exceeds pre-Covid levels while employment of lower wage workers is 21% below pre-pandemic levels.

This suggests that the income of higher wage workers is largely intact while many lower wage workers are in dire financial straits despite unemployment and stimulus benefits. What about wealth? The stock and bond markets provided returns in 2020 of 18.4% and 7.5%, respectively, but the Federal Reserve reports that 87% of equities are owned by the top 10% of the population according to net worth. Additionally, home prices rose about 8% which obviously benefits owners as opposed to renters.
The bottom line is that the forty-five-year trend towards greater financial inequality likely accelerated as a result of the pandemic, and many economists and sociologists are expressing concern that this trend will lead to economic stagnation, higher crime rates, and the potential for social unrest. So, I am hopeful that we can rise above the current level of divisiveness in our country and have a reasonable national discourse on this important topic.