Accounting for United States Inequality Trends (1979-2010)

Richard V. Burkhauser (Cornell University) and Jeff Larrimore (Joint Committee on Taxation)

This report will document levels of United States household income and income inequality over the past 40 years and identify and explain their trends. The researchers will use data from the March Current Population Surveys (1979-2010), a joint effort between the Bureau of Labor Statistics and the U.S. Census Bureau that provides specific information on household income.

While much of the inequality literature focuses on the labor earnings inequality of individuals, this research will show that labor earnings inequality is only one of several trends that influence the size-adjusted household income inequality of individuals, because an individual’s labor earnings is only one component of his or her household income.

Hence the study will not only explore how much shifts in employment rates and labor earnings inequality affect household income inequality, but also the extent to which increases in income inequality are accounted for by changes in household formation, such as declining marriage rates and shifts in the correlation of spouses’ earnings.

Preliminary findings suggest that the trends in the median size-adjusted household income of individuals by decile for 1979-2010 reflect the change in workplace population. Male employment has shown little change, while female employment rose rapidly in the 1980s and 1990s, stagnating in the 2000s. Both have declined during the recent recession.

Additional preliminary findings also suggest that demographic trends are important for understanding median income trends and inequality growth. Blacks and Hispanics have lower incomes than whites and that the black and Hispanic share of the population has increased in recent years. This increase in the relative size of the Hispanic and black populations has led to a small but consistent increase in overall inequality over time and a small but consistent reduction in median income growth over time.

While focusing on level and trends in the size-adjusted household income inequality of individuals over this period, the researchers will illustrate how their results compare to the long-term trends in income inequality found by Piketty and Saez (2003), who use IRS tax records.

“If you want to know what’s happening in average people’s lives, it is important to recognize two things: that people share income within their households even when they report their taxes separately, and that tax records don’t capture the non-taxable portion of this shared income, such as social security and other government transfer benefits,” Burkhauser said.

“If you look only at taxable market income by tax units as Piketty and Saez do, and thus miss the growth in tax units per household as well as the growth in non-taxable income, you will overstate the share of total income held by the top part of the income distribution as well as its growth over time,” he said.

Finally, the researchers will estimate the consequences of two demographic trends on future household income inequality trends: the increased share of non-white and ethnic minorities and the aging/retirement of the baby-boom generation. They expect that these trends will further increase income inequality and reduce median income growth in the future.