Income Inequality: History, Causes, and Solutions

Median Wage Stagnation

Between 1979 and 2018, real GDP per capita increased by 89.1% LES1252881600Q while median wages increased just 6.3% LES1252881600Q. We'll call this discrepancy The Gap. What explains it?

A Didactic Math Note

Suppose X = A * B * C. Suppose ∆X means "% increase in X".

Then, 1+∆X = (1+∆A) * (1+∆B) * (1+∆C)

So, ln(1+∆X) = ln(1+∆A) + ln(1+∆B) + ln(1+∆C)

I implicitly use this observation to determine what "%" of the gap various hypotheses explain.

Hypothesis 1: Capitalists

Maybe the owners of capital are making off with all the money rather than the laborers. During the same time period, labor compensation as a percent of GDP decreased from 56.2% to 53.1% Table 1.1.5. Table 2.1.. This explains just 10% of The Gap.

Hypothesis 2: Benefits

Maybe laborers are being paid more, but it's via benefits rather than wages. This is also partly true: salaries and wages as a percent of compensation have decreased from 84.8% to 81.3%. This explains 7% of The Gap.

Hypothesis 3: Workers

The hawk-eyed reader will note a definitional foible: the employment-population ratio. At the moment, we are comparing the median full-time wage to wages per capita. If more people are working now (as a percentage) relative to 1979, then that could explain part of The Gap.

The employment-population ratio has increased slightly from 59.9% to 60.4% EMRATIO. I think the worst case scenario is that a X% increase in the employment-population ratio can explain X% of The Gap. In this case the change in the employment-population ratio explains just 1% of The Gap.

Hypothesis 4: Distribution

As far as I can tell, this leaves 82% of The Gap between real GDP per capita and median wages to be explained by how compensation for labor is distributed.

U.S. Bureau of Economic Analysis, Real gross domestic product per capita [A939RX0Q048SBEA], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/A939RX0Q048SBEA, January 12, 2020. U.S. Bureau of Labor Statistics, Employed full time: Median usual weekly real earnings: Wage and salary workers: 16 years and over [LES1252881600Q], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/LES1252881600Q, January 12, 2020. Table 1.1.5. Gross Domestic Product. The Bureau of Economic Analysis. https://apps.bea.gov/iTable/index_nipa.cfm. Table 2.1. Gross Domestic Product. The Bureau of Economic Analysis. https://apps.bea.gov/iTable/index_nipa.cfm. U.S. Bureau of Labor Statistics, Employment-Population Ratio [EMRATIO], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/EMRATIO, January 12, 2020. U.S. Bureau of Labor Statistics, Civilian Labor Force Participation Rate: Women [LNS11300002], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/LNS11300002, January 12, 2020.