Income Inequality in the US

Following up on AB’s post about how well the wealthiest have done in recent years, here’s a graph showing the share of aggregate income earned by high-income households in the US. Unfortunately we don’t have 2003 data yet (other than Forbes’ data on billionaires), but I think it’s a safe bet that the upward climb has continued in both lines since 2002.

(Source: Census data, available here.)

Of course, the interesting question is what’s the cause of this remarkable upward trend. After a very heated (by economists’ standards) debate throughout most of the 1990s, the consensus seems to have emerged that most of this increase in inequality can be attributed to technological change. Specifically, over the past 20 years we’ve seen technological advances (read computers) that give well-educated workers an increasing advantage over poorly educated workers. Put another way, technology has been more and more able to substitute for low-skill workers. There are other factors as well, but the lion’s share of the blame seems to belong to technology.

What do we do about it? I’m not sure. However, I have a feeling that cutting taxes for people at the top of the income scale is exactly NOT the way to fix the problem.