Income Inequality in the United States

Chairman Brady, Vice Chair Klobuchar, and other distinguished members of the Joint Economic Committee, thank you for inviting me to participate in today’s hearing, “Income Inequality in the United States.” This is an issue on which I have focused my academic research over the past decade and also an area of focus for The Hamilton Project, which I currently direct. Following my oral testimony, I would be happy to take questions.

INTRODUCTION

As you are aware, as this is the topic of today’s hearing, inequality has increased dramatically in the United States during recent decades. To frame this in a different way, in contrast to earlier periods in our nation’s history, the economic growth experienced since 1975 has not translated into shared prosperity. Consider the period of national economic prosperity between 1947 and 1975. This was a period of strong economic growth in which the growth in family income was roughly the same across the income distribution — families in the bottom 20 percent saw their income grow by 90 percent, as compared to 86 percent for families in the top five percent. In sharp contrast, between 1975 and 2010, income gains were vastly different across families at different points in the income distribution, with each higher income group witnessing a greater increase in family income. Families in the bottom 20 percent of the income distribution saw their income increase by a mere 3.7 percent while those in the top five percent saw an average income gain of 57 percent.

The phenomenon of growing inequality is indeed real, but what does that mean and how should we approach this challenge? There are three main points I want to make about the high level of inequality we are experiencing today:

1. First, the trends in inequality we have witnessed over recent decades are largely the result of structural changes in the labor market that have favored the very highly skilled. There are growing gaps in wages and employment opportunities for those with at least a college education as compared to those without, and there is no reason to think that these labor market forces will be reversed any time soon. The Great Recession has exacerbated these issues, but the dominant forces were present long before the recession and they will remain even when the economy recovers.
2. Second, the growing levels of income inequality have translated into sizable gaps in educational achievement between the children of the rich and the poor. As the rich amass greater shares of the nation’s wealth, the children of these families enjoy even greater advantages relative to their less economically advantaged peers. This has the potential to perpetuate societal divides and erode social mobility. We must meet these structural challenges with a concentrated effort to invest in future generations.
3. Third, income inequality has the potential to interact with poverty in ways that perpetuate disadvantage and exacerbate intergenerational transmission of poverty. If those at the bottom of the income distribution view middle class life as increasingly out of reach, they might forgo the mainstream climb to economic success, perpetuating the cycle of poverty and inequality.

I will now expand briefly on these three main points, all of which lead me to the conclusion that it is of the utmost urgency that we make the necessary investments so that all Americans have the skills and ability to compete in a global labor market. We must ensure that broad swaths of the population are not left behind but rather, can participate productively in the economy and be rewarded with genuine economic security.