Bill Knight – March 14
1:16 pm
Wed March 13, 2013

Feds Take Note of Income Inequality

Labor income “has been declining as a share of total income earned in the United States for the past three decades,” according to a new analysis on income inequality from an unlikely supporter of economic justice: the Federal Reserve, which adds, “The capital share, by stark contrast, has been increasing.

This analysis from the Federal Reserve Bank of Cleveland examines both “labor” and “capital” income in America since 1980. Labor income includes all compensation from jobs: wages and salaries, pensions and benefits. Capital income comes from the ownership of assets. So it includes interest, dividends and the capital gains from buying and selling stocks, bonds and other forms of property.

Bill Knight
Bill Knight

The end result, according to Margaret Jacobson and Filippo Occhino: Americans have been making less from work and, if they have “capital,” more from wealth. But only a relative few Americans, the Cleveland Fed shows, have significant quantities of such wealth. The unsurprising consequence is that U.S. society has undergone a significant “spike in inequality” over the past generation.

Both authors are with the Research Department at the Federal Reserve Bank of Cleveland. Jacobson is a research analyst and Occhino a senior research economist.

They write that one outcome of labor’s declining share has raised concerns: Since labor income is more evenly distributed across U.S. households than capital income, the decline made total income less evenly distributed and more concentrated at the top of the distribution, and this contributed to increased income inequality.

They explain, “We look at three different data sources and each provides broad evidence of the decline. According to data from the Bureau of Economic Analysis, labor’s share of gross national income fluctuated around 67% during the 1980s, 1990s and early 2000s, but it has declined since then and now stands at 63.8%.  According to the Bureau of Labor Statistics, the ratio of compensation to output for the nonfarm business sector fluctuated around 65% until the early 1980s and has declined steadily since, from 63% during the 1980s and 1990s to 58.2% most recently. Finally, a 2011 study of income tax returns and demographic data by the Congressional Budget Office finds that labor’s share of income decreased from 75% in 1979 to 67% in 2007.

“These three data sources … agree in indicating a significant drop of 3 to 8 percentage points in labor’s share of income since the early 1980s, with the trend accelerating during the 2000s,” they continued. “As a result, total income inequality rose.”

Inequality declined “up to the late 1970s,” they continued, “but it has since reversed course. It rose sharply during the 1980s and early 1990s and currently is at near record-high levels.”

Inequality affects a variety of other important economic variables, such as the composition of consumption and investment, tax revenue and government spending, government policies, economic mobility, human capital accumulation, and growth, the researchers say. Some economists have suggested that rising income inequality contributed to the debt accumulation and financial imbalances that led to the recent financial crisis.

“And, of course,” the two Federal Reserve analysts add, “income inequality is the focus of much attention as an indicator, albeit imperfect, of the inequality of lifetime income and welfare across households.”

Bill Knight’s newspaper columns are archived at billknightcolumn.blogspot.com

The opinions expressed in this commentary are not necessarily those of Tri States Public Radio or Western Illinois University.