The Three Big Causes of Rising Inequality

Our new report, “Pulling Apart,” finds that inequality has grown in every state since the late 1970s, as incomes have risen dramatically at the top of the scale while rising only modestly or even stagnating in the middle and bottom.  There are three broad reasons why.

• Wages have become more unequal. This is by far the largest factor, since wages compose about three-quarters of total family income.  Over the past three decades, wages have grown substantially at the top but only slowly if at all at the bottom and middle.

  Longer periods of high unemployment have left workers with less leverage when asking for higher pay.  More intense competition from foreign firms and a decline in higher-paying manufacturing jobs have also slowed wage growth at the bottom and middle of the wage scale.  Falling union membership has weakened the position of working households, as well.

• Investment income has become a bigger slice of the economic pie. Income from investments, such as capital gains, dividends, interest, and rent, goes primarily to high-income households, so the growth in investment income as a share of overall income has widened the gap between the wealthy and everyone else.  (Our measure of household income doesn’t include capital gains because of data limitations, so our report almost certainly underestimates the rise in inequality in recent decades.)

• Government actions — and in some cases inaction — have also played a role. The federal minimum wage provides an important backstop to declining wages, but policymakers have failed to maintain its real (inflation-adjusted) value over time; it has shrunk by 13 percent since the 1970s due to inflation.  Also, the safety net has weakened — most notably, Temporary Assistance for Needy Families (TANF) helps many fewer needy families than it used to — and the federal and state governments have provided insufficient support for workers’ collective bargaining rights.  Changes in federal, state, and local tax policy have, in many cases, only made things worse.

Though growing inequality results in large part from economic forces that are largely outside states’ control, states can mitigate the effects of these forces, as we’ll explain in an upcoming post.