The history of inequality in the United’ States is shown in Figure 19-4 on p. 94. This shows the ratio of the incomes received by the top fifth of families to those received by the bottom fifth. we can see  three distinct periods: falling inequality until World War attainable shares until 1970, then rising inequality over the ‘last two decades. Since 1975, die ratio of upper- to lower-group incomes has increased by almost 50 percent.

Diminishing Period: 192’~191.5. By any measure, in this period the poor enjoyed the fruits .of economic growth along with more affluent groups. According to historical studies, the real income of the bottom fifth of the population rose steadily from the 19205 to-the mid~1970s, growing slightly faster than the U.S. economy. As a result. the share of total income going to’ the poorest fifth of families rose ‘ from’ t8 ‘percent to about 5 percent between 1929 and 1975. Over the same stretch,’ the poverty rate dropped so far that some people hoped that poverty . .could be eliminated completely.

Why did inequality narrow over this period? Inequality declined in pan because of the narrowing of wage inequality. With increasing education of poorer groups ‘and unionization of the workforce, the gap declined. Government businesslike social security made a big difference for the elderly p0pulations, while programs like cash assistance and food stamps for the indigent and employment insurance boosted the incomes of other groups. Mo~r, our progressive income-tax system, which taxed high incomes .more heavily than low incomes, tended to reduce the degree of inequality.

Widening, Gaps: 1975-‘999.In the last quarter century,several of these trends have reversed them selves, The share of total income going to the bottom quin-tile declined sharply in the 19805, sinking from 5.4-percent in 1975 to 3.6 percent in 1998. Average real incomes for families in the bottom fifth . are well below their peak. However, the poverty rate did begin to decline during the long economic expansion of the 1990s, reaching its lowest recorded level of 12.7 percent in 1998.

Although the incomes of the poor ‘Stagnated during the last quarter-century, the share of income going to the richest Americans soared. From 1975 to 1998, the share of total income going to the top 5 percent of households rose from 14.9 to 21.4 percent, Indeed, a recent study of high-income households indicates that most of the gains at the top were ‘actuality at the tip of the income pyramid, going to the top O.~ percent of taxpayer.

A useful measure of inequality is the ratio of the incomes of the’ top fifth of the population to those of the bottom fifth: The share of top incomes declined after 1929 with the’ stock market collapse of the 19~, the low unemployment and reduced barriers to women and minorities during World War II, and the migration from the farm to the city.Since about 1970, income inequality has grown sharply with higher immigration and decline of wages of the unskilled.( Source: U.S. Bureau of the Census, with historical series spliced together by authors.)

Why did inequality rise in recent decades? After intensely debating this question for years, economists have identified several causes of rising inequality. For . one, government policies changed in the early 19805:transfer programs to poor families were cut, while the richest groups were helped by the supply-side tax cuts of the 19805.But government actions are only part of the story. The last two decades saw sharp increases in the compensation of top executives and professionals, while the rising share of births going to single mothers sharply increased the number of female-headed households, which tend to have much higher rates of poverty.

Perhaps the. most important cause of rising inequality is the tact that well-educated workers fared far .better after 1980 than their less-educated counterparts. Econ~is~loosely studied the ~- high school Wagnerian~hitch is the pay differential between-a worker with a college degree and a similar similar worker with only a high school diploma. Over the last decade the college-high school wage premium has grown sharply. According to .the 1994 Economic Report of 1M President, in 1981 college graduates earned ab.out 45 percent.more than high school gradates. But by 1997, full-time college graduates earned 10! percent more than: high school graduates. This increasing wage premium widened the gap between the top and bottom of the income distribution.I ‘

Why did the 1980s see increasing returns to’ education?One reason was a surge of immigration and competition from foreign imports. Both of these trends tend to hit hardest at less-educated workers, who in earlier decades had been able to earn a good living-working in factories making automobiles, steel, and other goods. In the 19805 these high-paying manufacturing jobs for workers without college educations began to dry up. In addition, increasing deregulation and foreign competition tended to  erode the market power of labor unions, lowering the relative wages .of highly paid union workers. At the Same time, many of the new jobs that were being created called for relatively high levels of skills . and education. The increasing prevalence of computers in the workplace places a high premium on literacy and analytically skills.All together, these trends have raised the degree of income inequality in the’ United States and most high-income countries.

We can point to at least one factor that did not lead to greater inequality: There was no decline in labor’s share of national income. The fraction of total incomes coming from Wages, salaries,and supplements in 1999 was virtually identical to what it had been a quarter-century earlier. This dog, at least, did not bite.

this concludes our description of the measurement and sources of inequality. In the next section, we turn to an analysis of government programs to combat poverty and reduce inequality. High-income democracies everywhere are rethinking these programs as they redefine the role of the state.

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