Educational gaps may account for half of US income inequality growth

December 25, 2020

Graffiti addressing income inequality. (Lea Kobal, Unsplash)

Wide disparities in education may account for nearly half of the growth in U.S. income inequality since the 1970s, with a surge in highly educated workers serving as a predominant force in widening the gap, according to new research.

Between 1975 and 2018, 56% of income inequality growth for both men and women was connected to education; the fraction grows to nearly 70% when only focusing on changes that occur after the late 1980s, economists found in their analysis.

“If it had not been for factors directly connected to education and increasing gains to education, income inequality would have increased by less than half as much as it did over the last four decades,” researchers wrote in The Journal of Economic Perspectives. 

Capital income, defined as interest, dividends and rental income, has also magnified the growth in U.S. earnings inequality over the last four decades as the ratio of capital to labor income disproportionately increased among high-earning individuals, the researchers wrote.

The paper, published in the fall 2020 edition of the journal, was authored by Florian Hoffmann and Thomas Lemieux, assistant professor and professor, respectively, at the University of British Columbia, and David S. Lee, professor at Princeton University.

The researchers used the Annual Social and Economic Supplement of the Census Bureau’s Current Population Survey, which has been collecting information about labor and capital income since 1976, to study income inequality for all but the top 1% wealthiest people in the U.S. 

After growing modestly in the late 1970s, the researchers found, earnings inequality among men grew rapidly in the 1980s and 1990s before growing at a much slower pace after 2000. Trends for women were generally similar, the researchers wrote, except that income inequality for women was completely flat in the 1970s and it continued growing steadily after 2000.

One explanation for this, the researchers said, is that as the fraction of full-time employed women has grown over time, the number of college-educated women has also grown, causing incomes to be more unequally distributed.

The 1990s were also a particularly strange time in the U.S. in ways that economists are just starting to appreciate, Hoffmann said.

“It was really the ’90s where the middle class seems to have lost quite a bit relative to the rest of the economy,” he said. “And it’s also the decade where the returns to education have really increased by quite a bit.”

To some extent, Hoffmann said, income inequality is a policy choice. For example, income inequality in France has remained stable since the 1990s, in contrast with some other advanced economies, because of regulations and institutions in place, such as an early retirement age, strong labor unions, a high minimum wage and other labor regulations.

“So these are policies that will definitely compress the wage structure,” he said. “But there are tradeoffs to that,” such as a higher unemployment rate — France averaged 8.4% unemployment in 2019 — and lower productivity.

Germany, on the other hand, is an example of what happens when those policies are reversed, Hoffmann said. Until the early 2000s, Germany had similar labor policies to France, as well as their accompanying tradeoffs. Shortly after the turn of the century, though, Germany “liberalized their labor market policies quite a lot,” Hoffmann said, and unemployment rates dropped.

At the same time, though, inequality has risen faster in Germany than the other European countries studied; researchers said Germany “is becoming more and more the European country that resembles the U.S. experience the most.”

An important priority for future research, Hoffmann and his colleagues wrote, is to better understand the nature of the differences in inequality growth in the U.S. and Europe.

“Overall, although the same global forces toward increased inequality appear to be at play in both the United States and Europe, the role of capital income and education in rising inequality remains quite different across countries,” the researchers wrote.

The study “Growing Income Inequality in the United States and Other Advanced Economies,” published in the Fall 2020 edition of The Journal of Economic Perspectives, was authored by Florian Hoffmann, University of British Columbia; David S. Lee, Princeton University; and Thomas Lemieux, University of British Columbia.

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