Income inequality is gutting the middle class

I care about economic inequality. I teach a class on it. I wrote a book about it. Yet, recently, two different arguments have popped up with a seemingly similar conclusion: economic inequality hasn’t risen as much as conventional wisdom would suggest.

While these two arguments have the same implication, they look at vastly different ends of the income distribution. 

The first focuses on the bottom 20 percent of households by income and suggests an actual reduction in inequality. The point is that through increased government transfers, the bottom has actually caught up to the middle over the last 40 years. The second argument focuses on the top 1 percent of the income distribution. It argues that estimates of the top 1 percent’s share of income make assumptions that may overstate that share’s growth and thus the growth of inequality.

I don’t necessarily disagree with either of these arguments. Over the last 50 years, the social safety net has expanded in ways that reduce poverty and benefit the bottom 20 percent relative to the middle. And, because most surveys of household finances miss out on the top 1 percent, calculating their share of income is hard. It requires assumptions, and those assumptions will yield different estimates of growth. While I don’t profess to know which group is right — the one saying lots of growth or the one saying less — I know enough to admit that I don’t know.

So, if I don’t disagree with these arguments, then why am I writing this? Because I think a focus on the poles of income distribution distracts from the real story: the stagnation of the middle over the last 50 years. Sure, the bottom has caught up to the middle partially because of government programs. But the other part of the story is that the bottom has also caught up because the middle hasn’t seen much income growth at all.

The figure below illustrates this point. It shows how GDP per capita, the median earnings of female versus male full-time workers and the median income of Black versus white households have grown since 1975. While per capita income in the U.S. nearly doubled over this period, the same can’t be said for anyone in the middle. 

The median working man saw his real income decline. And, while the median working women saw increases, this is largely because their education and work experience expanded rapidly. In any case, despite these gains, they still couldn’t keep up with the economy’s growth nor catch up completely to men — the gender wage gap today sits around 83 percent.

At the household level, things aren’t great either. Median income for white households grew about 25 percent. Black households saw even less growth. That’s right, since 1975, the Black-white household income gap has grown. And while those making the first argument above could fairly point out that my numbers do not account for non-cash safety net programs like food stamps or Medicaid, the median household isn’t getting these programs anyway.

These data contain questions about the economy that demand answers. Why aren’t labor markets providing any economic growth for middle-earning men? Why haven’t middle-earning women — despite massive increases in human capital — been able to outpace the economy? Why are households not seeing much growth despite large increases in women’s earnings and labor force participation? And why did Black households actually lose ground?

Economists know the answers to some of these questions. Technology, trade and the increased power of large businesses all likely play some role in holding down median wages. Women have to trade pay for flexibility due to caregiving responsibilities. The decline of marriage in the middle — at least partially fueled by the economic performance of men — means fewer two-income households than would have occurred otherwise. And Black households still face discrimination, a damaging human capital gap and economic conditions that can make marriage tougher than it is for white households.

These issues demand some consideration. Should we plan for the impact of AI to prevent another four decades lost for middle earners? Would universal pre-K help kids do better and help moms work and earn more if they want? Do we want to change housing policy to improve opportunities for Black households to unstick the racial income gap? 

These conversations are worth having, but they won’t be had if people think incorrectly that the issue is settled.

Geoffrey Sanzenbacher is an associate professor of the practice at Boston College, where he teaches a class called The Economics of Inequality. He is also a research fellow at The Center for Retirement Research at Boston College.