The document discusses the rise of income inequality in the United States from 1979 to 2010, highlighting significant disparities in income growth across different income quintiles. It presents various figures showing stagnation of income for lower and middle classes while the top 1% experiences substantial growth, contributing to reduced intergenerational mobility and economic consequences. Additionally, it emphasizes the less progressive nature of the U.S. tax code compared to other OECD countries.

1. The Rise and Consequences of
Inequality
Alan B. Krueger
Chairman
Council of Economic Advisers
January 12, 2012

2. Figure 1: Growing Together, Growing Apart
Income Growth by Quintile, Various Periods
Annual Growth Rate of Real Income Across the Family Income Distribution Annual Growth Rate of Real Income Across the Family Income Distribution
Percent 1947 to 1979 Percent 1979 to 2010
3.5% 3.5%
3.0% 3.0%
2.5%
2.5% 2.4% 2.4% 2.5%
2.2% 2.2%
2.0% 2.0%
1.5% 1.5%
1.2%
1.0% 1.0%
0.6%
0.5% 0.5% 0.3%
0.1%
0.0% 0.0%
Lowest fifth 2nd fifth Mid fifth 4th fifth Top fifth
-0.5% -0.4%
Lowest fifth 2nd fifth Mid fifth 4th fifth Top fifth
Source: Census Bureau
January 12, 2012 1

3. Figure 2: Growing Together Again
1992-2000
Annual Growth Rate of Real Income Across the Family Income Distribution
Percent 1992-2000
4.0%
3.5%
3.5%
3.0%
2.6%
2.5%
2.0%
2.0% 1.9% 1.8%
1.5%
1.0%
0.5%
0.0%
Lowest fifth 2nd fifth Mid fifth 4th fifth Top fifth
Source: Census Bureau
January 12, 2012 2

4. Figure 3: If Real Incomes Had Grown During the 2000s as They Did
During the 1990s, the Median Household Would Have an Extra $8,900 in
Annual Income in 2010
Median Household Income
2010 Dollars
60,000
If median
household income had
58,000 grown during the 2000s
at the same rate as it
did during the 1990s
56,000
54,000 $8,900
52,000
50,000
2010
48,000
Actual
46,000
44,000
42,000
79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09
Note: Shading denotes recession.
Source: Census Bureau; CEA calculations
January 12, 2012 3

5. Figure 4: CBO Estimates Show Much Faster Income Growth for the
Top 1%
Growth in Real After-Tax Income, 1979-2007
Percent Change
300%
278%
250%
200%
150%
100%
65%
50% 43%
35%
28%
18%
0%
Lowest Quintile Second Quintile Middle Quintile Fourth Quintile 81st-99th Top 1 Percent
Percentiles
Source: CBO
January 12, 2012 4

6. Figure 5: Income Inequality Near Record High
Share of Income Earned,1916-2009
Percent of All U.S. Income
25
20
15
Top 1%
10
5 Top 0.1%
0
1916 1926 1936 1946 1956 1966 1976 1986 1996 2006
Source: 2010 update to Piketty and Saez (2006)
January 12, 2012 5

7. Figure 6: The Size of the Middle-Class has Fallen
Percent of Households With Annual Income Within 50% of the Median
Percent
52
50.3
50
48
47.3
46 45.6
44.2
44
42.2
42
40
0
38
1970 1980 1990 2000 2010
Source: CEA Calculations from Current Population Survey
January 12, 2012 6

8. Figure 7: “The Great Gatsby Curve”
Higher income inequality associated with lower intergenerational mobility
.
The Great Gatsby Curve
Intergenerational earnings elasticity
0.6 0.6
0.5 United Kingdom 0.5
United States
0.4 France 0.4
Japan
Germany
0.3 0.3
New Zealand
Sweden
y = 2.2x - 0.27
R² = 0.76
0.2 Finland 0.2
y = 2.2x - 0.27
Norway R² = 0.76
Denmark
0.1 0.1
0.15 0.20 0.25 0.30 0.35 0.40
Inequality
(1985 Gini Coefficient)
Source: Corak (2011), OECD, CEA estimates
January 12, 2012 7

9. Figure 8: “The Great Gatsby Curve”: Projection
.
The Great Gatsby Curve
Intergenerational earnings elasticity
0.6 0.6
United States
(2010)
0.5 United Kingdom 0.5
United States
0.4 France 0.4
Japan
Germany
0.3 0.3
New Zealand
Sweden
y = 2.2x - 0.27
R² = 0.76
0.2 Finland 0.2
Norway
Denmark y = 2.2x - 0.27
R² = 0.76
0.1 0.1
0.15 0.20 0.25 0.30 0.35 0.40
Inequality
(1985 Gini Coefficient)
Source: Corak (2011), OECD, CEA estimates
January 12, 2012 8

10. Figure 9: Causes of Higher Inequality
Box-5-3.─The Expert's Consensus on Earnings Inequality
Average percent distribution
50
40
30
20
10
0
Technological Other and International Decline in real Decline in Rising
change unknown trade minimum wage unionization Immigration
Source: Economic Report of the President, 1997
January 12, 2012 9

11. Figure 10: U.S. Tax Code is Less Progressive than
Most Other OECD Countries
Gini Coefficient Before and After Taxes and Transfers, 2010
0.6
Before tax After tax
0.5
0.4
0.3
0.2
0.1
0
Source: OECD
January 12, 2012 10

12. Figure 11: Despite large tax cuts, less dynamism
Startup Employment as a Share of Total Employment
Percent
3.5
OBRA Deficit Balanced JGTRRA
Reduction Act Budget Act
EGTRRA
3.3
3.0
Average:
1993-2000
2.8
Average:
2001-2007
2.5
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
Source: Business Dynamics Statistics
January 12, 2012 11

13. Consequences
• Intergenerational Mobility
• Consumption
• Aggregate demand and excess leverage.
• Economic Growth
• Morale and Productivity
January 12, 2012 12

14. The Rise and Consequences of
Inequality
Alan B. Krueger
Chairman
Council of Economic Advisers
January 12, 2012