The Real Driver of Rising Inequality

Lance Taylor over at INET:

Income distribution and employment are crucial macroeconomic indicators. Profits are key to distribution. Ther share in the value of output has risen steadily since around 1980. Households near the top of the size distribution of income receive business profits through various channels including interest, dividends, capital gains, proprietors’ incomes, and even labor compensation—which in US statistics includes profit-related items such as bonuses and stock options. Rising household inequality can be traced directly to higher profits fed by slower growth of real wages than of productivity (Taylor and Ömer, 2018).

The employment rate or the ratio of employment to the working age population, fluctuates around 60%. It hit a post-WWII high of 64% in 1990 at the peak of a business cycle, dropped to 55% in the wake of the Great Recession, and now is nearing 62%.

How do these developments hang together? Rising income inequality and oscillating employment are not the happiest macroeconomic combination. Causes include changing structural relationships including more “duality” between low wage/high employment industries and the rest.

In our paper, my co-author and I first trace these linkages in the data and then examine possible explanations. A key contrast is between business firms’ “monopoly” power to push up prices in markets for goods and services against consumers’ wages on the one hand, and their ability by various means to drive down wages against prices on the other. The latter strategy may well be more significant.

More here.