Cleveland Fed Report: More Income Inequality
CLEVELAND -- Since the early 1980s, labor’s share of total income in the United States has dropped significantly. At the same time, labor income has become more concentrated among those at the top of the income scale. These two factors have contributed to an increase in income inequality. In the coming years, the labor share will partially recover, but income inequality is likely to continue to increase, report Federal Reserve Bank of Cleveland researchers Filippo Occhino and Margaret Jacobson.
The decline in labor’s share of income can be attributed to technology and increased globalization, among other factors, the researchers say. And labor income has become more concentrated at the top as the productivity of high-skilled workers has increased relative to low-skilled workers, driving the demand for high-skilled workers higher and raising their relative compensation.
Historically, labor income has been more evenly distributed across U.S. households than capital income (i.e., interest and investment returns), a disproportionately large share of which accrues to the top-earning households, according to the research. As the share that is more evenly distributed declined and the share that is more concentrated at the top rose, total income became less evenly distributed and more concentrated at the top. As a result, total income inequality rose.
Part of the decline in labor's share of income in the past five years was temporary, and will be reversed as the recovery progresses, the report finds. The future path of labor concentration, though, is hard to predict, say the researchers. It depends on the evolution of the returns to education and of the wage-skill premium.
The concentration of capital income, however, is strongly procyclical and rises during recoveries. This, Occhino and Jacobson note, suggests that capital income will become more concentrated at the top in the coming years of the recovery, helping to raise income inequality even further.
FULL REPORT: Labor’s Declining Share of Income and Rising Inequality
SOURCE: Federal Reserve Bank of Cleveland.
Published by The Business Journal, Youngstown, Ohio.