American Inequality is (Finally) Lessening

If 2022 was the year the U.S. economy came roaring back like a lion, 2023 is more of a lamb. Modest job growth, consistent inflation, falling home prices, slowing GDP growth—meh.

February was another month of meh, the government reported Friday, with personal incomes increasing 0.3% in February after growing 0.6% in January. In addition, consumer spending grew 0.2% in February.

But there’s some pretty good news that doesn’t readily appear in the steady stream of government data released each week. After decades in which the gap between the richest and poorest Americans grew by leaps and bounds, the strange rebound from the pandemic has led to something different: a slow reduction in inequality across the economy.

Incomes of people in the bottom half of income distribution grew by 4.5% in the last calendar year, much faster than the 1.2% average income growth of all Americans, according to Realtime Inequality, a tool launched by economists at the University of California, Berkeley to show a more holistic picture of how the U.S. economy is faring, as compared to GDP. While lower-income households struggled following the Great Recession, taking more than eight years to reach pre-crisis income levels, they have done much better in the pandemic’s aftermath. Between February 2020 and September 2022, average income for the lowest-earning 50% of Americansincreased by more than 10%, faster than all groups of population except for the top 1%, according to a paper by the Realtime Inequality economists, Thomas Blanchet, Emmanuel Saez, and Gabriel Zucman.

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This reduction in inequality breaks from a long-running trend in which the rich were getting richer and the poor were stagnating. Since 1980, the top 10% of earners have seen income grow 144%, while the bottom half of earners saw just 20% growth in income.

“What we’re witnessing since the late 2010s—significant growth rates for low-wage workers—is a notable break from the trend that has prevailed since the 1980s,” Zucman says, in an email.

The biggest factor driving this reduction in inequality is a tight labor market that has pushed up wages for workers whose pay had previously been stagnating. The monthly unemployment rate hovered around 4% in both 2018 and 2019 as well as in 2022 (the massive layoffs at the beginning of the pandemic spiked unemployment in 2020 leading into 2021); this year it hit a decades-long low at 3.4% in January. Economists expect the government to report an unemployment rate of 3.6% when it releases March data on April 7.

As finance and tech companies have cut back on hiring in recent years, employers in the lower-paying service industry, by contrast, have reported not being able to find enough workers. As a result, they’re raising starting pay and offering bonuses and benefits. Average hourly earnings of workers in the leisure and hospitality sector jumped 22% from February 2021 to February of 2023, for instance, while average hourly earnings in the information sector rose just 6% over the same time period.

The good news about falling inequality hasn’t stopped many CEOs from being pessimistic about the economy, with 93% preparing for a recession in the next 12-18 months, according to the Conference Board. Indeed, things have recently looked a little bleaker for those at the top of the income distribution. Bonuses for Wall Street workers fell 26% in 2022. Corporate profits fell 2% in the fourth quarter of last year, the government said on March 30.

This discrepancy is one reason a growing chorus of economists, including those behind the Realtime Inequality project, say that the U.S. should be paying less attention to numbers like the GDP (gross domestic product), which measure total output in the economy, and more to things like how different income groups are faring.

“Where we’ve gone wrong in national accounting is that we put so much emphasis on one number—GDP,” says Austin Clemens, the director of economic measurement policy at the Washington Center for Equitable Growth, which launched a project called GDP 2.0 to explore how the U.S. could use other metrics for well-being when measuring the success of the economy. Clemens proposes that the government produce statistics that show income growth for Americans in different income brackets. (The Bureau of Economic Analysis began doing this in 2020, but does not publish the data regularly and says the measure is just a prototype.)

“GDP has not been so good at telling you how typical households are doing,” Clemens says. In fact, he says, the tone of economic news is most closely related to how the fortunes of the top 10% of earners are doing.

It wasn’t always this way; when the U.S. economy was booming and growth was more evenly distributed across income groups in the 1950s and 1960s, GDP probably made sense as an economic measure, he says. But starting in the 1970s and accelerating in the 1980s and 1990s, strong GDP growth translated to little-to-no income improvement for lower-wage earners. And that, says Clemens, may have led to government policy choices that exacerbated the situation, eventually depressing overall growth.

“When there is unequal growth and you see lower and middle classes falling behind, we know that has all kinds of downstream effects,” he says. If lower-income families can’t afford childcare, for instance, the fertility rate declines, which is bad for economic growth.

The declining inequality that has characterized the past few years may not last long, Clemens says. Generous government stimulus programs during the pandemic helped boost the earnings of low earners, and many of those programs have since ended. The Congressional Budget Office predicts slower GDP growth in the decades to come. Whether or not that will once again grow inequality may come down to policy decisions that are to come. The government could continue to tinker with the minimum wage, give workers more bargaining power by bolstering unions, or plan more taxes on the rich. Or it could do nothing at all and see whether the American economy is going to become more equally distributed—or less.