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Clarifying America’s Great Inequality Debate

Technical debates about the nature and scale of income inequality are important, but they should not obscure what matters most in the story of the US economy. The mitigating effects of taxes and transfers do not change the fact that the market economy has been malfunctioning for the past 40 years.

BOSTON – Debates about inequality trends in the United States have leapt from the pages of academic journals to leading media outlets. While conservatives have long questioned whether US inequality has really increased, The Economist recently weighed in, concluding that “the idea that inequality is rising is very far from a self-evident truth.” Unfortunately, this debate has muddled several issues in an unhelpful manner.

There are different notions of inequality, each of which is relevant to a different question and complicated by its own unique measurement challenges. The most straightforward metric is labor-income inequality, which refers to what high earners receive relative to low earners. When we talk about how workers with college degrees are faring compared to those with just a high-school diploma, we are also talking about labor-income inequality.

Of course, measuring labor income is not a simple matter, because some earnings go unreported, and some very highly paid individuals deploy strategies to make their labor income look like capital income (which is taxed at a lower rate). Moreover, when it comes to determining if real (inflation-adjusted) wages have increased, there is a vigorous debate about whether the consumer price index is overstating true inflation. But even after accounting for these issues, there is no doubt that labor-income inequality has surged at least since 1980, and that the trend has continued since the post-2008 Great Recession.