Economic growth and income equality since the 1982 recession

This paper tests the “rising tide” and “trickle down” hypotheses of income growth by examining several measures of income inequality between 1983 and 1987. A close look at household incomes between those years shows that post-tax income growth has been concentrated among the 20 percent of American households with the highest incomes. The middle income classes have experienced only modest income growth over this period, and the 20 percent of American households with the lowest incomes have experienced a decline in income. These results hold whether the analysis is based on a summary measure of income equality such as the Gini coefficient, or on a less technical measure such as average income. Furthermore, income growth seems to be decreasing most rapidly for groups of households that historically have had the lowest incomes: female-headed households, blacks, and Hispanics. Finally, two standard explanations of the inequality trend—that the distributional changes are the result of either cohort effects or the movement of jobs to the lower wage areas of South—are tested by disaggregating the data. Neither hypothesis is confirmed by our research.