The 1% and the 99%

J. F. O’Connor

Distribution of family income in the U.S.

• Current distribution• How has it changed over the years?• Why has it changed?• Why does it matter?

Some Preliminaries• Income versus wealth

– Wealth is the value of what you own minus what you owe.

– Income consists of earned and unearned income• Labor or earned income consists of wage, salaries, and

proprietor’s income (75%)• Capital income consists of dividends, interest, rent, and

(capital gains) • Transfer payments – social security, pensions, TANF

Median Family Income

• Income of the typical family – 50% of families above the median and 50% below

• US 2010 ?• Kentucky 2010 ?• Madison County 2010 ?

How to Assess Inequality

• Economists compare economies on basis of both efficiency and equity (fairness).

• Distribution of income is a major indicator of the fairness of the outcome of an economic system. (Equality of Opportunity is another)

• Common method is to look at the quintiles of the distribution. How much of total income goes to bottom 20%, next 20%, et cetera

Quintiles and Top 5%Lowest Second Third Fourth Highest Top 5%

1947 5.0 11.9 17.0 23.1 43.0 17.5

1966 5.6 12.4 17.8 23.8 40.5 15.6

1979 5.4 11.6 17.5 24.1 41.4 15.3

1989 4.6 10.6 16.5 23.7 44.6 17.9

2000 4.3 9.8 15.4 22.7 47.7 21.1

2007 4.1 9.7 15.6 23.3 47.3 20.1

2010 3.8 9.5 15.4 23.5 47.8 20.0

Mean Income for Quintiles and Top 5%

Lowest Second Third Fourth Highest Top 5%Top 5%

1966 14 31 44 59 100 154

1979 17 36 55 75 129 191

1989 16 37 58 84 157 252

2000 18 41 64 95 199 352

2007 17 40 65 97 196 333

2010 15 37 60 92 187 313

Quintile Limits in 2010 (000$)

• Class Limits Class mean • Lowest fifth 0 – 27 15 • Second Fifth 27 – 48 37• Third fifth 48 -- 74 60• Fourth fifth 74 – 137 92• Highest fifth 137 - 200 187• Top 5% 200 - 313

Conclusions so far?• Distribution of family income in the U.S. has

become more unequal from 1980 onward, after being fairly stable in the years 1947-79.

• Percentage of total family income going to top 20% families increased from 41.4% to 47.3%. Most of that gain went to the top 5% (4.8 out of 5.9).

• The average incomes of the families in the three lowest quintiles have been stagnant since 1979. From 1979 to 2007, average income for the top fifth increased by 50% and by 75% for the top 5%.

Where is the 1%?

• We need to switch to a different data set to get there. IRS data and it gives market income.

Explaining Increased Inequality of Income in 1979-2010

• Key is this development is an outcome of the workings of a market economy and the changes are occurring in the labor market.

• Proportion of output going to labor and capital has remained relatively constant at 2/3 and 1/3.

• Two kinds of persons in the labor market – wage and salary employees and proprietors

Causes?

• Skill-biased technological advance,• Globalization, immigration • Minimum wage, and decline of unions • Failure of educational system• Politics • Gender, race, family structure• Changing norms regarding rewards – winner

take all markets, CEO pay,

The Layers of Richness!

• Category Annual Income• Somewhat Rich – top10% $100,000 +• Rich - Top 1% $370,000 +• Super Rich – Top .1% $1,000,000 +

Implications?

• Transfer of income to the 1%, a trillion dollars a year!

• Creating a new Gilded Age• Hollowing out of middle class• Inter-generational mobility – equality of

opportunity• Macroeconomic effects?

Rights of Workers

• A just wage. The right to rest.• Safe working environment ( physical health or

moral integrity).• Unemployment insurance• A pension and insurance for old age, sickness, and

in case of work-related accidents.• Social security connected with maternity. • Assemble and form associations