Saturday, October 13, 2012

Top 1 Percent Income Gain Does Not Come From Middle Class Or Any Other Americans

The rise in income at the top did not result in a decline in income of the middle class.

From the Tax Foundation, "Putting a Face on America's Tax Returns: Chart 12:"

Source:  Tax Foundation

Top 1 Percent Share Of Total Income Did Increase Due To Capital Gains And More Education
However, the share of total income of the top households did increase, while the total income share of the bottom households did decline, due to two factors. A greater return on education and skills with a higher pay for a high-skilled workforce over a low-skilled workforce, and (2) more capital gains income to the top income group.

From The Federal Reserve Bank of Cleveland Economic Commentary, "Labor's Declining Share of Income and Rising Inequality" by Margaret Jacobson and Filippo Occhino:
The Decline in Labor’s Share of Income
Household income comes in two types: labor income, which includes wages, salaries, and other work-related compensation (such as pension and insurance benefits and incentive-based compensation), and capital income, which includes interest, dividends, and other realized investment returns (such as capital gains). During the last three decades, labor’s share of total income has declined in favor of capital income.

There are a number of ways to measure the share of income that accrues to labor. We look at three different data sources, and each provides broad evidence of the decline. According to data from the Bureau of Economic Analysis, labor’s share of gross national income fluctuated around 67 percent during the 1980s, 1990s, and early 2000s, but it has declined since then and now stands at 63.8 percent. (See figure 1.) According to the Bureau of Labor Statistics, the ratio of compensation to output for the nonfarm business sector fluctuated around 65 percent until the early 1980s and has declined steadily since, from 63 percent during the 1980s and 1990s to 58.2 percent most recently. Finally, a 2011 study of income tax returns and demographic data by the CBO (CBO 2011) finds that labor’s share of income decreased from 75 percent in 1979 to 67 percent in 2007.

Source: Federal Reserve Bank of Cleveland

Source: Federal Reserve Bank of Cleveland

Most of the rise in income inequality since 1980 has been attributed to an increase in the returns to education and in the wage differential between high-skilled and low-skilled labor. Over time, the marginal productivity of high-skilled workers has increased relative to low-skilled workers, which has driven the demand for their labor higher and raised their relative compensation. As a result of this change, labor income became less evenly distributed and more concentrated at the top.

However, part of the increase in income inequality was due to the decline in labor’s share of income, and the associated shift from the more evenly distributed type of income to the more concentrated one.

Limits Of Measuring Income Inequality
A caveat about income inequality from the Federal Reserve Bank of Cleveland from the above cited Economic Commentary:
There are limits to what income inequality measures. For starters, it indicates inequality of outcomes, not of opportunities. It focuses on income, not on welfare, which depends on other variables such as consumption, leisure, health, and public goods. On one hand, income inequality does not respond to changes in the level of income, remaining constant when all households earn proportionally more (or less). On the other hand, it changes all the same regardless of whether the richest households earn more or the poorest households earn less. And, since it provides a snapshot of the relative dispersion of income across households in a given year, part of it is simply explained by the fact that households earn a variable income during the different stages of their lives. That part does not reflect lifetime income inequality. Because inequality responds similarly to very different factors, it is as important to learn why it has risen.

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