Searching for the Supposed Benefits of Higher Inequality: Impacts of Rising Top Shares on the Standard of Living of Low and Middle-Income Families
Jeffrey Thompson | Elias Leight | 6/21/2011 | Political Economy Research Institute
In 1980, the richest 10 percent of Americans received 33 percent of the nation’s income. Today, that same 10 percent takes home 46 percent of all income. If we look at wealth, not just income, today the top 5 percent hold 65 percent of all assets in the United States.
The underlying thesis behind the Republicans and most of the Democrats in this debate is that if the rich are free to invest and if government is smaller, and particularly if the debt is smaller, people will have more confidence to invest. And if they invest and the rich spend more, everyone will do better, and as we know, we’re told a rising tide raises all boats. Well, a new study by Jeffrey Thompson and Elias Leight shows something otherwise. In other words, the better the higher end did, the top 10 percentile, and even more so the top 1 percentile, actually, the worse was everyone else’s standard of living.
Thompson and Leight found that in fact the relationship is negative. The higher the top share goes –when the top 10 percent increase their share of income from 30 percent to 46 percent, they found that the impact on middle-income household incomes falls, and the impact on household incomes of families toward the bottom of the distribution also falls.
The report shows that rising inequality leads to falling incomes for low and middle-income families. For low income families the effect is immediate, large and statistically significant. The impacts at the middle of the income distribution are smaller, but remain significant when lagged impacts of inequality are included.
Even without introducing a time-lag, their findings clearly show that when we control for cyclical and external variables, inequality has a negative impact on the incomes of the non-affluent. With the time lag this relationship becomes even stronger. A 15 year lag, for example, suggests that a 10 percent increase in inequality from 15 years ago leads to a 1.6 percent decline in current income level for middle-income families.
For example, one of the things that the report found is that when you look at the incomes of middle-income families, you find that a 10% rise in income by the richest, led to a 2 percent decline in the actual incomes of those in the middle of the distribution. And that’s looking at the period between 1979 and 2005.
The same basic findings hold when we look at earning instead of income, low-income groups instead of middle-income, and when we look at changes in the top 10% share of income instead of top 1%. The findings also remain strong when we vary our definition of low and middle-income.
To download the full study, Searching for the Supposed Benefits of Higher Inequality, please go to the PERI website at http://www.peri.umass.edu