Between World War II and the 1970s income disparities in America were relatively narrow. Some people were rich and many were poor, but overall inequality among Americans in terms of wealth, income and status was low enough that the country had a sense of shared prosperity. Things are very different today, as American society is beset by extreme inequality, economic fragmentation and class warfare.

What happened? The economic data show a huge widening of disparities in income and wealth starting around 1980, eventually undermining the relatively equal distribution of income we had from the 40s to the 70s. Moreover, growing disparities in income have led to growing disparities in political influence and the reemergence of what feels more and more like an oppressive class system.

So today’s post is the first of two posts exploring the rise of American inequality and its consequences. This will be a double-header because I feel I need a whole post to discuss what I believe to be the most important factor in rising inequality, the shift in political and bargaining power against workers.

Beyond the paywall I’ll address four issues:

1. Four facts about inequality that any story should explain

2. The role of globalization

3. Did technology do it?

4. The role of power

Four facts about Inequality

Families at the 95th percentile — richer than 95 percent of their compatriots — probably consider themselves well off but not rich. In 1950 they earned 2.43 times as much as the median family — the family right in the middle of the income distribution. By 1980 that ratio was 2.62 — not much change over 30 years. But by 2023 families at the 95th percentile were earning 3.54 times as much as the median family. In other words, by 2023 well-off Americans had pulled away from those below them in the income distribution.

There are a number of ways to measure inequality. I tend to prefer simple ratios like the ones above, but other economists prefer more complex measures like the “Gini coefficient.” I won’t try to explain how that coefficient works, but here’s what it looks like over time:

What this graph tells you is that within the top 1 percent of the American income distribution, the top one-tenth of 1 percent were pulling away from the rest of the top 1 percent, and the top one-hundredth of 1 percent were pulling away from the rest of the top one-tenth of 1 percent. That is, even within the top 1 percent, inequality has exploded.

This leads us to our second fact:

Inequality fact #2: Income gains have been bigger the further you go up the income scale, with huge gains at the very top.

Now, I’ve said that the U.S. distribution of income was relatively stable from the 1940s until around 1980. But it hadn’t always been stable. People often call the period we’re living in a “New Gilded Age,” in recognition of an earlier era of extreme income and wealthy inequality. For the purpose of comparison, can we document that earlier era statistically?

Much of what we know about modern inequality comes from surveys that didn’t begin until the 1940s. We do, however, have other sources of data, especially for high-income individuals who began paying income taxes in the United States after 1913 and in the UK much earlier. These data can be used to produce estimates of the share of income going to top income groups over the past century or more, such as this chart from the World Inequality Database estimating the share of total income going to the richest one percent from 1909 to 2023:

What they showed was that the 90-10 ratio (and other measures of wage inequality) suddenly declined in the 1940s, then stayed low for several decades before widening again. This is consistent with what we see in data on the share of income going to the top 1 percent. The relatively equal income distribution of postwar America didn’t evolve gradually. Instead it emerged quite suddenly, roughly during World War II, and didn’t disappear until decades after World War II ended. So here’s our fourth and final fact:

Inequality fact #4: The era of relatively low inequality began suddenly, but persisted for decades.

So whatever theory you use to explain rising inequality must be consistent with these four facts.

Was it globalization?

International trade both grew rapidly and changed its character beginning in the 1970s. Until then, to the extent that America imported manufactured goods, it did so mainly from other high-wage nations. What we bought from poorer countries — what we now call emerging markets — were mainly minerals like oil and agricultural products like coffee and bananas. In the 70s, however, a widening range of emerging markets began exporting labor-intensive manufactures like apparel. Also, falling costs of transportation caused in large part by containerization made it possible to break up production of goods like automobiles and computers into stages, and carry out the labor-intensive parts of the process in low-wage nations like China or Vietnam.

Standard international trade theory says that importing goods made by blue-collar workers while exporting goods whose production requires many workers with college degrees reduces the demand for less-educated workers while increasing the demand for more-educated workers, increasing wage inequality. And there’s no question that this happened. The question instead is how much it contributed to the story of rising inequality.

There are three main reasons to believe that globalization’s role was limited. One, which I partially documented a couple of weeks ago, is that the numbers just aren’t big enough. I could go into that at much greater length, and (along with many other researchers) did in multiple papers during the 1990s. But probably more than you want to know. Basically the math says that globalization wasn’t the main driver of inequality.

A second reason for doubting the claim that globalization drove inequality is that globalization widens inequality by widening the pay differential between highly educated and less educated workers. But while a widening pay gap based on education explains part of rising inequality in the 1980s and 1990s, the education pay gap stopped rising after 2000, yet inequality continued to increase, a pattern inconsistent with the idea that globalization is the main driver of inequality. Here’s a helpful chart from the Economic Policy Institute:

Source: Congressional Research Service

The correlation with both the Great Compression and the post-1980 rise in inequality is obvious.

However, laying out the ways in which power can explain the fall and rise of inequality will take a lot of time and space. So will laying out the problems with that argument — for it, too, has some weak points.

So, to be continued, probably next week.