Speech to the Center for the Study of
2006-2007 Economics of Governance Lecture
University of California, Irvine
By Janet L. Yellen, President and CEO, Federal Reserve
Bank of San Francisco
November 6, 2006, 4:00 PM Pacific Standard Time
Economic Inequality in the United States
Good afternoon, and thank you very much for inviting me
to deliver this year's Economics of Governance Lecture. My
topic today will be the performance of the U.S. economy,
with a focus on how trends for the economy as a whole—in
other words, at the macro level—have been playing out
for our nation's individuals and families. One area I'd like
to focus on in particular is how the income that has been
generated by our economy over the past three decades or so
has been distributed among the various income groups, from
the top to the bottom.
Questions of income inequality, of course, are not part
of the Federal Reserve's dual mandate from Congress, which
is to foster price stability and to promote maximum sustainable
employment. Nonetheless, this has been an interest of mine
for a long time, and not only as an academic. In addition
to my years as an economics professor at U.C. Berkeley, I've
also had several stints as a macro policymaker, first on
the Federal Reserve Board in Washington D.C., then on President
Clinton's Council of Economic Advisers, and now at the Federal
Reserve Bank of San Francisco. Much of my interest in macro
policy has been founded on the belief that it can and should
improve the lives of the broad range of our nation's people.
I think of this as happening through two channels. First,
policies that reduce the frequency and size of the fluctuations
in business cycles can spare people the painful disruptions
that occur during recessions, or, in the worst cases, tragic
events like the Great Depression of the 1930s. Second, policies
that succeed in enhancing the long-run growth of productivity
should help lift the average standard of living over time.
By many measures, these two channels have been operating
extremely well in our economy for some time. In terms of
the business cycle, for almost two decades we have been enjoying
an era that many economists call the "Great Moderation";
in other words, recessions have been less frequent, and the
swings have been less severe, while, at the same time, inflation
has come down to quite moderate levels and itself has been
Productivity trends also have been very favorable, probably
in no small part because of the impact of technological advancements.
Growth in labor productivity has been quite rapid for over
ten years now, following more than a quarter century of stagnation
that began in the early 1970s.
Given these two developments—more macro stability
and more rapid labor productivity growth—it is tempting
to conclude that most Americans are feeling "better off." But
a glance at the newspapers suggests that this is not necessarily
the case. Indeed, poll after poll shows that many Americans
feel dissatisfied with the long-term direction of the economy
and are worried about the future. Recent polls by the Pew
Charitable Trust, the New York Times and CBS News, and various
labor organizations indicate that growing shares of respondents
feel that they and their children will experience a diminished
quality of life in coming years, and that, even today, working
conditions are marked by more insecurity and stress than
they were a generation ago.
Looking beyond the headline numbers on the macro economy
provides some clues to the source of this discomfort. In
particular, over the past three decades, much of the gain
from excellent macroeconomic performance has gone to just
a small segment of the population—those already in
the upper part of the distribution. As a result, inequality
has grown. This inequality, coupled with increased turbulence
in family incomes associated with job displacement and restructuring,
sheds substantial light on the sources of the disappointment
and concern that show up in the opinion polls.
Today I'd like to examine these trends in a bit more detail.
I will start with a more thorough review of the facts relating
to economic inequality and an assessment of some of the leading
explanations that have been advanced. Then I will broaden
my perspective to consider other sources of unease, namely,
job displacement and income volatility. Finally, I will turn
to some policy considerations.
Productivity and real wages
A natural place to begin is by looking at average real compensation,
that is, average wages plus benefits for an hour of work
adjusted for inflation. In the U.S., the growth in average
real compensation has roughly tracked growth in labor productivity,
which measures the value of output per hour of work adjusted
for inflation. When U.S. labor productivity growth slowed
sharply and unexpectedly in the early 1970s, and then stayed
sluggish for the next 25 years, growth in average real
compensation also was sluggish. Then,
in the mid-1990s, labor productivity growth surprised us
again, only this time, thankfully, on the upside: it suddenly
took a big jump up—to over 3 percent at an annual
rate—and it has stayed in that vicinity ever since. As
I mentioned, this development probably stemmed mainly from
technological innovations and the huge investments businesses
made to harness them for production. How has this affected
average real compensation growth? It has jumped, too, also
hitting a 3 percent rate.
From this perspective, then, it would seem that things
are looking pretty good. However, the public mood does not
seem consistent with this view. To see why, we need to dig
a little deeper. When we look at data on the distribution
of real wages, which constitute the bulk of compensation,
we find striking evidence of increasing inequality. For example,
economists Robert Gordon and Ian Dew-Becker report that,
from 1997 to 2001, nearly 50 percent of productivity gains
went to the top 10 percent of the distribution. Importantly,
they find roughly the same pattern going back more than thirty
As Figure 1 shows, from 1973 to 2005, real hourly wages
of those in the 90th percentile—where most people have
college or advanced degrees—rose by 30 percent or more.
As I will discuss later, among this top 10 percent, the growth
was heavily concentrated at the very tip of the top, that
is, the top 1 percent. This
includes the people who earn the very highest salaries in
the U.S. economy, like sports and entertainment stars, investment
bankers and venture capitalists, corporate attorneys, and
CEOs. In contrast, at the 50th percentile and below—where
many people have at most a high school diploma—real
wages rose by only 5 to 10 percent.
What I've described so far is the big picture for wage inequality—the
major change over three decades. However, an interesting
twist on the story has occurred during the last decade, when
rapid productivity growth raised the real wages of workers
throughout the distribution for the first time since the
1960s. During this period, as Figure 1 illustrates, real
wages of the lowest earners—the 10th percentile—actually
rose somewhat faster than those in the middle of the distribution.
The consequence was that wage inequality among those in the
bottom half of the distribution, which had been widening
throughout the 1980s, diminished during the 1990s. At the
same time, real wages at the upper end continued to soar.
What explains the rising economic inequality?
Although there are a variety of ways to explain trends in
wage inequality, perhaps no cut at the data has been more
revealing than the differences in real wages by education.
As Figure 2 shows, since the early 1980s, the wage gap between
college graduates and those with a high school education
or less has widened dramatically; the gap between high school
graduates and non-graduates also has widened, but less so.
Thus it appears that the demand for college educated workers
has outstripped the supply. While
rising returns to education at the upper end of the distribution
led to a pickup in college enrollment, the increase in supply
has not been sufficient to reduce the wage gap between college
and high school educated workers.
It's important to recognize, however, that shifts in the
return to education and the educational attainment of the
workforce cannot fully explain the evolution of inequality
over the last thirty years because, even within groups with
the same level of education, the gap between high and low
earners has widened too. Indeed, the more advanced the degree,
the wider the gap becomes. A satisfactory theory must therefore
explain not only why the demand for college educated workers
has risen but also why "residual" inequality has
increased, that is, the part that is unexplained by education
and other observable factors.
Skill-biased technological change
A primary explanation has focused on the impact of technology.
Over the past three decades, many sectors of the economy
have undergone fundamental change as a result of technological
advancement, most notably the enormous investments in computers
and related technologies. These technologies have changed
what workers need to know to do their work, and, indeed,
they have changed the nature of the work itself. As a result,
there is a greater demand for, and a greater payoff to,
workers who have the conceptual and organizational skills
to use these technologies most effectively. The necessary
skills are more prevalent among college educated workers,
so they are in greater demand. However, even among workers
with equal educational attainment, skills differ.
For example, consider two college graduates with liberal
arts degrees: the one who has the skills to use computer
power to collect, analyze, and synthesize data may have a
distinct edge in the labor market over the other who lacks
those skills. Similarly, a machinist with a high school diploma
who can use computers effectively will tend to earn more
than a coworker who is a technophobe.
This explanation is summed up in the literature by the term "skill-biased
technological change." It explains the increased demand
for and rising wages of highly educated workers and also
rising "residual" inequality because skill differences exist
not only across but also within educational groupings. These
skill differences are observed by employers and rewarded
in the marketplace, but unobservable to researchers.
A related factor accounting for rising inequality is the
increasing globalization of labor markets. The most basic
way in which globalization might affect inequality is through
trade, which has raised substantially both imports and
exports as a share of GDP. Since the U.S. tends to export
goods that use skilled labor intensively and to import
goods that use less-skilled labor intensively, increased
trade has, on balance, raised the demand for skilled labor
and reduced the demand for less-skilled workers in this
country. In the 1980s, the impact of globalization was
especially pronounced for previously well-paid manufacturing
jobs available to U.S. workers possessing a high school
degree or less. The result has been job losses and excess
supply of low-skilled workers, a situation that has been
intensified by an influx of immigrants with less than a
high school education.
Certainly, globalization has been a factor in the downsizing
of several industries that employ less-skilled workers—apparel
is a good example. And it may account for part of the increase
in inequality over the last thirty years. But it surely can't
be the whole story because, for much of the past thirty years,
the shift in employment toward an increasingly skilled workforce
has occurred across a wide range of industries, whether they
were affected by global trade or not. The logical conclusion
is that skill-biased technological change has been a dominant
force operative across the industrial spectrum.
In recent years, globalization and skill-biased technological
change may have been working in combination to particularly
depress the wage gains of those in the middle of the U.S.
wage distribution, accounting for the twist in the trend
that I mentioned earlier. The explanation goes like this.
The surge in the use of new technologies that began in the
mid-1990s led to major changes in the way business was conducted
and organized within the U.S. and globally. Technological
change and globalization, especially outsourcing, complemented
the skills of highly able workers performing non-routine
work requiring problem-solving skills. This explains the
continued rapid increase in real wages at the top of the
distribution. In the middle of the distribution, however,
technology and globalization had the opposite effect—substituting
for workers performing routine or repetitive tasks and depressing
their wages. At the bottom of the distribution, these developments
have had little impact during the last decade. By that time,
many low-wage jobs that could be eliminated by technology
had already vanished. Most of the remaining low-wage jobs
involve manual and service work that cannot easily be automated.
This may explain why, as I said, wages in the middle not
only rose far more slowly than those at the top, they also
rose more slowly than those at the bottom of the distribution
during the 1990s.
Let me elaborate with an example from the technology side.
Take the accounting profession. Computers and telecommunications
technologies have increased wages for accountants, who tend
to be at the top end of the distribution. In contrast, in
the middle of the distribution are workers like bookkeepers,
who are being replaced by technology. At the lower end, the
labor market has already largely adjusted to the impact of
skill-biased technological change. Therefore, the wages of
those workers, who perform manual tasks in sectors like business
services—janitorial work is an example—are now
largely untouched by computers.
Globalization in combination with advances in technology,
especially communications technology, leads to similar patterns.
At the upper end, it has boosted demand for those who have
the skills to manage large, complex, global operations. In
contrast, an increasing share of domestic jobs in the middle
of the wage spectrum has experienced lower demand because
companies can now look all over the world for workers able
to perform computer programming tasks, communications tasks,
and similar jobs—even medical services. At the same
time, such outsourcing is far less feasible for manual jobs
and for service jobs that require face-to-face interactions
and lie at the low end of the wage distribution.
The top one percent
These changes in technology and growing globalization go
a long way towards explaining the inequality trends I have
described. And there certainly are other factors that have
also likely played a role. For example, the fall in the
real value of the minimum wage appears to have especially
depressed the wages of low-skilled women, while declines
in unionization particularly impacted the wages of less-skilled
men. However, none of these factors provides a complete
and compelling explanation for the rapid growth of real
wages at the very top of the distribution, the top 1 percent,
which, according to IRS data, doubled between 1972 and
The market forces of changing technology and rising globalization,
broadly understood, may matter to some degree for this group.
For example, these forces have substantially increased the
size of the markets that American companies serve. This has,
in turn, increased the impact of individuals who are at the
very top end of the talent and skill distributions—and
who tend to be in very short supply. These individuals include
so-called superstars, such as top entertainers and athletes,
highly successful investment bankers and venture capitalists,
and perhaps CEOs, although the latter point is hotly debated.
For example, people had a high demand to see Michael Jordan
perform—far higher than the demand for even a large
number of average NBA players—and technology enabled
his performances to be broadcast to a very large worldwide
audience at relatively low cost. It's not surprising that
he, and other superstars, could earn very large incomes.
The superstar argument is less clear-cut with CEO salaries,
in part because a CEO's contribution to the bottom line of
a corporation is difficult to measure. Some argue that CEO
compensation has been driven up by market forces, like the
large increase in the size of many American companies, which
increases the potential benefit of hiring the right CEO from
the limited pool of candidates.
Another possible explanation is the so-called "tournament" model,
in which the CEO's direct contribution to the bottom line
is not so much of an issue. This model suggests that large
pay differentials for those at the top of an organization
function as incentives for lower-ranked executives to compete
for those positions, in other words, to work harder in order
to win the top spots themselves one day. The resulting increase
in effort generates benefits for the company that go well
beyond the direct contribution made by the CEO.
While such competitive factors may matter, I cannot ignore
the concerns that have been raised of late regarding corporate
standards for executive pay-setting. Some observers have
argued that corporate boards are increasingly beholden to
the CEOs whose salaries they determine; as a result, CEO
salaries may be inadequately monitored and sometimes set
higher than market conditions or company performance merits.
Critics of rising executive compensation also have pointed
to inappropriate reliance on compensation schemes that hide
payments from shareholders and the market—for example,
the backdating of stock options for top executives, which
increases executive payouts without properly reflecting the
resulting costs in corporate balance sheets. The hidden nature
of these payouts may reflect an imbalance in the setting
of executive pay relative to shareholder returns
and worker pay more generally. Issues like these quite naturally
raise concerns for the public and contribute to feelings
Job displacement and income
contributor to feelings of discontent is the perception that
job stability has declined. Globalization and technology
appear to have played roles in these trends as well, since
they represent changing market conditions that are causing
dislocations in previous patterns of labor demand.
It's important to note first that our economy is always
subject to large amounts of job turnover. Indeed, this is
one hallmark of a dynamic, flexible economy, and it is not
necessarily a bad thing on net. Data on worker flows—movements
into and out of jobs—indicate that about 1 out of 3
job matches are dissolved each year, with a comparable rate
of worker matching to new jobs. Over
half of this job churning is voluntary in nature, reflecting
worker desires to find a job with higher wages, better working
conditions, or a different location. Moreover, the degree
of job creation and destruction has declined somewhat over
the past 15 years, creating a picture of a more stable labor
However, involuntary displacement from permanent jobs, due
to layoffs or downsizing, is important and has been on the
rise over the past two decades. In particular, rates of worker
displacement are up relative to measures of overall labor
market conditions, such as the unemployment rate. For example,
in the 2001 recession, which was relatively short and shallow,
there was about as much worker displacement as in the early
1980s, when the economy went through the biggest recession
in post-war history.
In addition, the distribution of displacement has shifted
towards the highly educated: workers holding a college degree
saw nearly a 50 percent increase in their displacement rates
between the early 1980s recession and the most recent one
in 2001, while workers with a high school degree or less
actually saw a slight decline in displacement rates. So,
more educated workers are seeing erosion of their job security
relative to their less-educated counterparts. Of course,
job displacement still remains a more significant issue for
low-paid workers, but the instability that they have always
faced has increasingly spread to higher-income groups.
Involuntary job loss frequently inflicts dire consequences,
which have grown more severe over time. Involuntary job losers
typically are unemployed for at least four months, about
70 percent longer than individuals who enter unemployment
voluntarily. As such, the rising share of permanent job losers
among the overall unemployed has helped keep the typical
length of an unemployment spell stubbornly high over the
past few decades. The
picture looks even gloomier when you recognize that some
job losers withdraw from the labor force and are no longer
counted as unemployed, so their observed unemployment spells
understate the severity of the jobless experience. Put these
factors together and it's clear that periods without earnings
can be quite lengthy and costly for job losers. Moreover,
when displaced workers do find new jobs, they're taking a
pay cut of about 17 percent on average. The size of this
wage loss in the early 2000s was the highest in at least
Job displacement also has adverse consequences for health
insurance coverage. Research shows that job loss substantially
reduces access to health insurance over extended time periods,
and this effect is only partially offset by federal COBRA
guidelines, which require employers to make continued coverage
available—at its full cost—to separated employees. The
connection between displacement and the loss of insurance
coverage reinforces a more general trend towards declining
coverage through employment-based health insurance programs.
For example, between 2000 and 2005, health coverage through
employer-based programs fell about 4 percent nationwide,
representing a loss of health insurance for several million
Americans that was only partially offset by increased coverage
through government-provided insurance.
Given the increase in job displacement and earnings losses
that I described above, it is not surprising that yearly
fluctuations in individual earnings and family incomes have
increased sharply since the 1970s. Indeed,
between the 1970s and the early 2000s, the gaps between the
highs and lows in a typical family's yearly income have risen
substantially. That is, in the 1970s, a typical family might
have seen its income vary from a high of $60,000 to a low
of $30,000 over the decade, while in the more recent decade
a family seeing that same high would tend to see a low of
about $15,000. Among families seeing declines in annual income,
the size of the typical loss has increased: for example,
the chances that an American family will see at least a 50
percent drop in its yearly income has more than doubled since
the early 1970s, rising to about one in six families in recent
The increased risk associated with these income fluctuations
is likely to reduce perceived well-being quite substantially,
even if family incomes on average are growing over time.
As with the risk of job loss, these income risks are most
severe for less-educated Americans. However, during the 1990s,
income instability rose relatively more for families with
high educational achievement, consistent with the spread
of involuntary job loss to highly educated individuals.
My focus thus far has been on the problems facing Americans
in the labor market and not on potential solutions. It
is natural to ask, then, whether anything can be done to
alter these disquieting trends. Since technology and globalization
have been identified with growing inequality, it might
seem natural to look at these areas for possible solutions.
While I sometimes feel like smashing my own computer, I
wouldn't recommend this as a national policy! However,
it's not uncommon to hear proposals to put up barriers
to trade as a way to mitigate economic disruption and inequality.
I don't think that is the way to go. By providing for specialization
in production across countries, trade enhances the size
of the economic "pie" here and abroad, and in doing so,
enhances overall economic welfare. I think we should look
to other policy tools to address inequality, and I will
attempt to provide a useful overview of some key considerations.
I will begin with education. There can be little doubt that
programs that support investment in education, broadly conceived,
are worthwhile. Increasing skill has been a significant source
of productivity growth. Moreover, since the gap between the
earnings of workers with more and less skill in part represents
the return to education, a widening of that gap clearly signals
the need for such investment to increase the supply of higher-skilled
But investment in education takes resources, which complicates
the debate: the resources are limited and to a large degree
should be directed to where they will pay the highest return.
At the college level, one possibility is just to "let
the market work." If college pays off, more young people
will enroll. Indeed, the rising returns to education at the
upper end of the earnings distribution did precede an increase
in college attendance through the mid-1990s, suggesting that
market forces may have worked as expected. Since then, however,
despite further growth in the returns to college and advanced
degrees, college attendance has flattened out. For example,
enrollment rates among recent high school graduates hovered
around 65 percent between 1996 and 2004, after increasing
noticeably in the preceding decade.
Does this imply that the highest priority for public funding
for education should be the college level? Not necessarily.
There certainly is a lot of public discussion by educators
and politicians about problems with the quality of K-through-12
education in the U.S., and international comparisons show
that American students rank relatively low on standardized
tests in science and math, the very kinds of skills that
earn higher rewards.
But there is yet another contender for the scarce public
funding for education. Recently, researchers led by James
Heckman from the University of Chicago have argued that these
funds should be targeted at even younger children. Family
background factors are critically important in student achievement,
and recent evidence suggests that the cognitive and social
skills associated with college attendance are developed very
early in life. Moreover, skill acquisition is a cumulative
process that works most effectively when a solid foundation
has been provided in early childhood. As such, programs to
support early childhood development, such as preschool programs
for disadvantaged children, not only appear to have substantial
payoffs early but also are likely to continue paying off
throughout the life cycle.
But what about struggling adults, especially those who find
that their skills have become outmoded due to technological
change or globalization? Should the highest priority for
public funding of education be the expansion of federally
subsidized retraining programs, such as those associated
with the Job Training Partnership Act, the Comprehensive
Employment and Training Act, and the Job Corps program for
disadvantaged youth? Some researchers, such as Alan Krueger
of Princeton University, view the outcomes of these programs
as evidence that training investments often have high returns,
especially for the economically disadvantaged, who cannot
finance educational and training investments on their own.
Proponents of this view argue that these programs, which
have been sharply curtailed over the past few decades, should
be revived. In contrast, Heckman and others, looking at the
same evidence, note the high cost of these programs relative
to early childhood interventions and K-through-12 education,
implying that retraining is financially unsound on a large
scale. At this point, then, the evidence is unclear regarding
the exact conditions under which adult education and retraining
programs are cost-effective. However, it seems reasonable
to consider providing workers buffeted by powerful economic
forces a fair shot at retooling and finding new careers.
Beyond education and training, the United States has long
deployed an array of policy tools to combat inequality and
diminish economic insecurity. One example is the earned income
tax credit, which supplements the earnings of low income
workers. Unemployment and disability insurance cushion family
income in the face of job loss and illness, while Social
Security shelters many elderly households from poverty. Indeed,
inequality in consumption among U.S. families is notably
lower than inequality in pre-tax income due to these programs
and others that involve the direct provision of services
such as healthcare, housing, childcare, and food stamps to
families in need. The real question is whether government
should and can do more.
To assess the value of and potential need for additional
government intervention, it is instructive to draw some comparisons
between the U.S. and other countries. In regard to inequality,
over the past few decades it has risen more in the U.S. than
in most other advanced industrial countries in the Organization
for Economic Cooperation and Development, or OECD. Indeed,
by most measures, the U.S. ranks near the top (some might
say the bottom) in terms of household income inequality.
The inequality gap in the United States is associated with
higher levels of overall and child poverty relative to a
majority of OECD countries.
This high and growing level of relative inequality in the
U.S. reflects, in part, differences in the "social safety
net." Among the 30 OECD countries, the U.S. ranks above only
Mexico, Korea, and Ireland in gross public social expenditures
as a share of GDP spending, and it does the least to target
government taxes and transfers towards moving families out
of poverty. Not surprisingly, outcomes such as infant mortality
and life expectancy are worse in the U.S. than in most advanced
industrial countries. As for workplace protections, unemployment
insurance in the United States replaces a smaller share of
income and offers benefits of shorter duration, while the
minimum wage is quite low relative to average wages in the
U.S. Moreover, U.S. firms face far fewer restrictions in
their ability to fire or lay off workers than do firms in
most other OECD countries.
Other countries' efforts to mitigate inequality and provide
a safety net may come at a price, however, since these efforts
may hinder job growth and intensify unemployment, especially
for young and less-skilled workers. Indeed, over the past
two decades, unemployment rates generally have been higher
in other advanced countries than in the U.S. Heeding this
lesson, some European countries have recently taken steps
to reduce the distortions associated with generous social
insurance programs and employment protections. For example,
some are following the U.S. lead, placing less emphasis on
policies that discourage hiring and more on programs like
the earned income tax credit. By contrast, the U.S. has done
little to move closer to the European model of social protections
and the reduction of inequality and poverty.
This comparison of the U.S. and
other advanced industrialized countries, though just a sketch,
is suggestive. The possible
responses to rising inequality do not boil down to "either/or" kinds
of solutions. Rather, these responses range along a fairly
wide continuum, reflecting the tradeoffs that policymakers
face between efficiency and equity. Certainly some market-determined
income differences are needed to create incentives to work,
invest, and take risks. However, there are signs that rising
inequality is intensifying resistance to globalization, impairing
social cohesion, and could, ultimately, undermine American
democracy. Improvements in education are an imperative for
reducing inequality and an easily justifiable investment,
given its high social return. In contrast, improvements in
the social safety net entail costs, even when policy interventions
are well-designed from an efficiency standpoint. Even so,
in my opinion, they deserve high policy priority. Inequality
has risen to the point that it seems to me worthwhile for
the U.S. to seriously consider taking the risk of making
our economy more rewarding for more of the people.
1. These remarks reflect my own views and
are not necessarily shared by my colleagues in the Federal
2. Poll results described in: Leonhardt,
David, "Anxiety Rises as Paychecks Trail Inflation," New
York Times, August 2, 2006; Greenhouse, Steven, "Three
Polls Find Workers Sensing Deep Pessimism," New York
Times, August 31, 2006; Yeager, Holly, "Americans suffer
big fall in optimism ratings," Financial Times, September
3. From 1972 to 1997, nonfarm labor productivity
rose at only a 1.7 percent rate, while real labor compensation
rose at an annual rate of 1.3 percent.
4. Despite the widespread view that labor's
share of total income has fallen as capital's share
has gone up, there actually was no net change in these shares
over 1997-2005, although there were fluctuations during the
5. Dew-Becker, Ian, and Robert J. Gordon, "Where
Did the Productivity Growth Go? Inflation Dynamics and the
Distribution of Income," Brookings Papers on Economic
Activity 2 (2005) pp. 67-127.
6. Piketty, Thomas, and Emmanuel Saez, "The
Evolution of Top Incomes: A Historical and International
Perspective," American Economic Review 96 (2, May 2006),
7. The broad trends in inequality described
in this paragraph are also observed for men and women analyzed
8. The basic story about inequality in
real wages does not change if one broadens the analysis to
include benefits or if one examines earnings or family income.
9. The demand for skilled workers was
growing during the 1970s as well. But back then, a surge
of "baby-boom" college graduates, together with
a rise in labor force participation among educated women,
largely met that demand and helped to keep their relative
wages from rising rapidly. In contrast, during the 1980s,
the "baby bust" slowed the flow of new college
graduates onto the market at a time when some believe that
the demand for skilled labor was actually accelerating.
10. Autor, David H., Lawrence F. Katz,
and Melissa S. Kearney, "The Polarization of the U.S.
Labor Market," American Economic Review 96 (2, May
2006), pp. 189-194. Autor, David H., Frank Levy, and Richard
J. Murnane, "The Skill Content of Recent Technological
Change: An Empirical Exploration," Quarterly Journal
of Economics 118(4, 2003), pp. 1279–1333.
11. Dew-Becker and Gordon (2005). Piketty
and Saez (2006) show that in 2001 the top 1 percent of the
income distribution held 15.4 percent of total income.
12. Rosen, Sherwin, "The Economics
of Superstars," American Economic Review 71(5, 1981),
13. Gabaix, Xavier, and Augustin Landier, "Why
Has CEO Pay Increased So Much?" NBER Working Paper
12365, July 2006.
14. Lazear, Edward P., and Sherwin Rosen, "Rank-Order
Tournaments as Optimum Labor Contracts," Journal of
Political Economy 89 (5, Oct. 1981), pp. 841-864.
15. Davis, Steven J., R. Jason Faberman,
and John Haltiwanger, "The Flow Approach to Labor Markets:
New Data Sources and Micro-Macro Links," NBER Working
Paper 12167, April 2006.
16. Displacement rates: 12.8% in 1981-1983,
11.8% in 2001-2003. Unemployment rates: 9.0% in 1981-1983,
5.2% in 2001-2003.
17. The job displacement figures in this
paragraph and wage loss figures in the next paragraph are
from Henry S. Farber, "What Do We Know about Job Loss
in the United States? Evidence from the Displaced Workers
Survey, 1984-2004," Working Paper #498, Industrial
Relations Section, Princeton University, January 2005.
18. Valletta, Robert G., "Rising
Unemployment Duration in the United States: Causes and Consequences," manuscript,
Federal Reserve Bank of San Francisco, May 2005.
19. Gruber, Jonathan, and Brigitte
Madrian, "Employment Separation and Health Insurance
Coverage," Journal of Public Economics 66, 1997,
20. Buchmueller, Thomas, and Robert G.
Insurance Costs and Declining Coverage," FRBSF
Economic Letter 2006-25, Sept. 29, 2006. Between 2000 and
2005, coverage through employment-based plans fell from 63.6%
to 59.5%, while coverage through government programs rose
from 24.7% to 27.3%. The decline in the actual number of
individuals covered through employer-provided insurance was
about 3 million; absent employment and population growth,
the decline would have been about 11.5 million. For exact
numbers, see Carmen DeNavas-Walt, Bernadette D. Proctor,
and Cheryl Hill Lee, "Income, Poverty, and Health Insurance
Coverage in the United States: 2005," U.S. Census Bureau,
Current Population Reports P60-231, Appendix Table C-1.
21. Hacker, Jacob S., The Great Risk
Shift, New York, NY: Oxford University Press, 2006.
22. National Center for Education Statistics
23. Carneiro, Pedro, and James Heckman, "Human
Capital Policy," in Inequality in America: What Role
for Human Capital Policies? edited by Benjamin M. Friedman
(Cambridge, MA: MIT Press, 2003).
24. Krueger, Alan B., "Inequality,
Too Much of a Good Thing," in Inequality in America:
What Role for Human Capital Policies? edited by Benjamin
M. Friedman (Cambridge, MA: MIT Press, 2003).
25. The OECD defines poverty as the share
of households that receive 50 percent or less of the median
income in each country and takes account of household size,
cash transfers, taxes, and tax credits.
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