The Pattern of Growth in Income Inequality

Greg Mankiw notes:

Greg Mankiw's Blog: Lazear vs Krugman: NY Times columnist Paul Krugman yesterday:

There's a persistent myth, perpetuated by economists who should know better -- like Edward Lazear, the chairman of the president's Council of Economic Advisers -- that rising inequality in the United States is mainly a matter of a rising gap between those with a lot of education and those without...

And he questions why economist Paul Krugman, a high-ranking candidate for this year's Nobel Prize, writes this.

The reason, I think, is contained in this graph:

from Thomas Piketty and Emmanuel Saez (2006), The Evolution of Top Incomes: A Historical and International Perspective (Cambridge: NBER Working Paper No. 11955, January 2006).

The big rise in inequality in the U.S. since 1980 has been overwhelmingly concentrated among the top 1% of income earners: their share has risen from 8% in 1980 to 16% in 2004. By contrast, the share of the next 4% of income earners has only risen from 13% to 15%, and the share of the next 5% of income earners has stuck at 12%. The top 1% have gone from 8 to 16 times average income, the next 4% have gone from 3.2 to 3.7 times average income, and the next 5% have been stuck at 3 times average income.

It's hard to attribute this pattern to a rise in the premium salary earned by the well-educated by virtue of the skills their formal education taught them. Such a rise in the education premium would produce a much smoother rise in relative incomes among the whole top tenth of the income distribution. The cross-percentile pattern doesn't fit.

It is especially hard because most theories of the rising education premium attribute it to skill-biased technological change generated by the high-tech computer industrial revolution. But the high-tech boom's effects on overall productivity became large only in the second half of the 1990s, well after the biggest increases in inequality. The timing doesn't fit either.

Something else is going on.

If the New York Times were smarter, it would give Paul Krugman 2000 words every two weeks, rather than confining him to the straightjacket of 700 words twice a week, so that he could explain background issues like this more adequately...