Timothy T. Taylor Home Page
Journal of Economic Perspectives
Articles and Writing
Economics Textbook
Classroom Teaching
The Teaching Company
High School Pedagogy

Articles and Writing

February 26, 1992
"Income Inequality - Wages and Skills, Not Taxes, Separate Wealthy From Poor"
San Jose Mercury News

By Timothy Taylor
<< Back to 1992 menu

SURE, a number of academics and popular writers have argued that inequality of incomes increased during the 1980s, but now it's official: the Bush administration's own Council of Economic Advisors agrees.

The 1992 "Economic Report of the President" was released by the Council last week, and right there on page 126 it says, "Since the mid-1960s and in particular since the early 1980s, income growth has occurred in all quintiles and the distribution of money income has become more dispersed in the United States."

The "quintile" terminology refers to dividing U.S. households into fifths, as is shown in the table. During the 1980s, the proportion of total income received by the top fifth of all households rose from 44.1 percent in 1980 to 46.6 percent. Most of that increase was accounted for by the top 5 percent of households, whose share of total income climbed from 16.5 percent to 18.6 percent.

To be sure, the average level of income for each fifth did increase during the 1980s, but while the average household in the lowest fifth saw its income rise by 4.3 percent during the decade (adjusted for inflation), an average household in the highest fifth saw its income rise by 18.1 percent.

A few notes of caution: these statistics do overstate the amount of inequality.

For example, since the figures measure money income, they don't subtract the amount taken in taxes, nor add the amount paid in non-cash welfare benefits like food stamps or Medicaid. The combination of taxes and transfer payments raises the average income of a household in the lowest fifth by $8,800, while reducing the income of the average household in the top fifth by $22,000, according to estimates by the Census Bureau.

The table also exaggerates inequality in the economy by not accounting for the fact that in a typical year, perhaps one- third of all people will change income groups. Perhaps a quarter of the households in the top fifth of the income distribution arrived there just last year, elbowing out another group. The economy will always display a certain amount of inequality between groups like young people just out of school, middle-aged career professionals, and retirees.

But while the factors of taxes, non-cash welfare payments, and movement between income groups would affect how inequality might be measured, they do not affect the fact the however it is measured, it increased during the 1980s.

One temptation is to blame the greater inequality on -- say this fast, now -- that shameless insensitive free-market elitist country-club Republican Reaganite 1980s greed run amok, or something like that. But the rise in inequality probably doesn't have a lot to do with who has been in the White House.

The main source for the growing inequality appears to be a growing inequality in wages, not in government policies like taxes or welfare. Moreover, the trend toward greater inequality has been proceeding since the 1960s (although it quickened in the 1980s), and appears in other countries like Canada, West Germany, Sweden and even Australia.

A 1990 survey of the available evidence, by Gary Burtless of the Brookings Institution, described the main cause of growing wage inequality this way: "Companies and industries have tried to change their production techniques in a way that requires more able and highly skilled workers. Because skilled workers remain scarce, their wages have been bid up, raising the gap between them and workers with lower educational attainment and more limited abilities."

Interestingly, this argument does not rely on the often- heard complaint that the U.S. economy is seeing a surge of low-wage jobs in service industries, flipping burgers and taking tickets and the like. Instead, it appears that the U.S. economy, along with those of other countries, is moving toward higher rewards for those with more skills.

The average male college graduate was paid about 45 percent more than a high school graduate in 1980, but about 70 percent more in 1990. College graduates are twice as likely to use computers on the job as high school graduates, the "Economic Report of the President" points out, while the percentage of businesses reporting that they used computers climbed from 8 percent in 1984 to 36 percent in 1989.

From manufacturing to health care, from government workers to finance, all across the spectrum of industries, the demand for employees with better skills and a higher level of education has been rising. Meanwhile, the income prognosis for employees with lower skills is grim, since their jobs can be farmed out to the unskilled workers in less developed countries around the world.

Government does reduce inequality by taxing the middle-class and wealthy to offer a safety net of welfare programs -- especially for those who are between jobs or can't reasonably support themselves, like the disabled, children, or the elderly. But that sort of redistribution is a short-term fix, at best.

The real message from the rise in incomes for the highest skilled workers is that the country badly needs more such workers, and the way to get them is through childhood education, continuing education and job training. For me, the main problem of inequality occurs when many people don't have a real chance at experiencing the upper income brackets, at some point in their lives.

The chart shows the percentage of total money income
received by each fifth of U.S. households (and the top
5 percent), grouped by annual income. Underneath the
percentage is the actual average dollar amount of money
income for that income group, adjusted for inflation and
expressed in 1990 dollars.

  1970 1980 1990
Lowest fifth 4.1%
Second fifth 10.8%
Third fifth 17.4%
Fourth fifth 24.5%
Top fifth 43.3%
Top 5 percent 16.6%

Source: U.S. Department of Commerce, Bureau of the Census, Money Income of Households, Families, and Persons in the United States: 1990. Table B-5. Issued August 1991.

<< Back to 1992 menu