What is truly remarkable is that this change has occurred at a time when overall economic growth has been unprecedented. In real dollars, the GDP has nearly doubled since 1970 but wages based on an index that applies to most workers have actually dropped.    Since 2007, the downward trend in wages has particularly affected Americans with lower levels of education. .   But the income level of the upper 1% of families has more than doubled and only the income levels of the top 20% of families have significantly increased in the past two decades.    The most publicized and extreme example of income inequality has been the rise in compensation levels for CEO's of major corporations.

Economic inequality can also be measured in terms of overall wealth. The imbalance in wealth is far more dramatic than the imbalance of incomes. Since 1984, the share of wealth of the top 1% of the population has increased from 25.4% to 39.6%. The top .01% has 21.6% of all the country's wealth and the top 5% own about 75%.   The already small share owned by the bottom 90% has been diminishing.   The share of wealth of the top 1% has returned to the levels which existed prior to World War 2.

Many believe that economic inequality is a disturbing trend because of the increasing polarization of what had been an admirably pluralistic society. Income disparities have produced conspicuous consumption among the wealthy and an impoverished "underclass" which includes most recent immigrants and a disproportionate number of African-Americans. There has been a growing "residential segregation" based on income status. America's cities and suburbs are increasingly identifiable by the income group which lives there.    The consequences of this economic segregation are significantly reduced educational and vocational opportunities for those in lower income groups. For example, even those low income children who show considerable academic promise tend not to complete college.

A major disturbing byproduct of economic inequality involves public attitudes. Many policy issues draw less consensus opinion because they affect income groups differently. The "underclass", saddled with a negative net worth and minimal income prospects, become resentful of the wealthy particularly when consumption is conspicuous. These attitudes naturally assume a racial and ethnic tone as well. The affect of this trend on the middle class has been more subtle. This group, which is diminishing in number, is far more "status conscious" than in previous decades. The result has been unnecessary consumption, a high rate of debt and bankruptcy.    Today, over 40% of the public regards the U.S. as a nation of "haves" and "have nots". In 1988, only about a quarter of Americans had this opinion.  

Have changes in government policy caused increased economic inequality?

Not entirely. But the role of federal policy has been significant. Some of the changes which have contributed to this trend are:

• Tax policy changes

Changes in tax policy, particularly reductions in the higher marginal tax rates, have coincided with the changes in income inequality.    For the wealthiest tax payers, the average tax actually paid is far lower than it was in the 1960's and 1970's.   Perhaps the clearest recent example of the relationship between changes in tax policy and changes in income inequality is the effect of the Bush Administration's tax proposals enacted by Congress in 2001 and 2003. These changes sigificantly raised the after-tax income of the highest income earners while having a negligible effect on other groups.

• Declining influence of labor unions

In 1960, unions represented almost one third of American workers. Today, they represent just over 10%.   In the private sector, the decline has even been steeper.    Union membership varies significantly from state to state.

As membership has decreased, so has the effectiveness of union activities. Major strikes have become increasingly rare because employers regularly and successfully replace strikers.   In many countries, labor legislation prohibits the hiring of replacement workers. The Reagan Administration's successful repulsion of a 1981 strike by air traffic controllers by firing the controllers and hiring replacements has been regarded by some as a turning point in modern U.S. labor history.

Over the years, employers have become increasingly successful in using existing labor legislation to impair the effectiveness of unions. Unions are virtually nonexistent in some 22 "right to work" states where compulsory union membership in organized industries is prohibited by law.   Today unions are rarely capable of mounting successful new organizing campaigns because even if a majority of workers at a site favor a union, workers are forced to go through a slow National Labor Relations Board election process. Employers have become very effective in using these delays to turn around pro-union sentiment.

Unions have long advocated legislative reforms which would simplify the certification process and which would prevent employers from hiring replacement workers. But there has been no substantial progress in achieving these goals.

• Failure to substantially adjust the minimum wage

The federal minimum wage of $5.15, when adjusted for inflation, has steadily decreased during the past two decades and is at its lowest historical level.   Moreover, the ratio of the minimum wage to the average worker's wage continues to decrease.   Prior to 1980, the annual minimum wage was near or above the Federal Poverty level for a household of three persons. Since 1980, it has been substantially below that level.  Over 6% of the national workforce is employed at the minimum wage level. Significantly more low level workers are paid an hourly wage that is scaled to the minimum wage. A majority of states have enacted minimum wage laws which exceed the federal standard.   In 2007 Congress passed the Fair Minimum Wage Act of 2007 which called for a gradual increase in the minimum wage to $7.25 per hour by March 2009.    .

• Globalization

Many argue that the growing world economy has significantly disadvantaged workers, particularly in manufacturing jobs, because wages are unrealistically low in many countries. They maintain that this has had a negative affect on U.S. wages. But the connection between world trade and wage inequality is not direct. It is the service sector of the economy where job growth has occurred.   Many low level service jobs have a pay scale which is close to the minimum wage. It is the failure of the economy to provide these workers the protections which previously had been provided to manufacturing jobs that has created much of the wage imbalance.

• Lax governmental regulation of economic institutions

At times segments of the economy which are dominated by wealthy interests have manipulated the political system to achieve major economic gains at the expense of the public in general.

A clear example of such manipulation are the banking scandals of the 1980's. Under this scheme, the government implemented a deregulation plan which permitted banking institutions to offer unreasonably high interest rates to investors. These investors were overwhelmingly wealthy interests who purchased "brokered accounts" under the $100,000 federal insurance limit. The agency responsible for monitoring the investments of these institutions, the Federal Deposit Regulatory Commission, was understaffed and there was political interference with their activities. When numerous institutions failed, the government "bailed out" the many wealthy depositors. The total cost of the bailout according to a recent Federal Reserve report was $153 billion. The net result is a shift of this money from ordinary taxpayers to wealthy investors.

How does economic inequality in the United States compare to other countries?

Among countries with modern economies, the United States is the clear leader in income inequality under the gini measure.   But recently the overall trend in almost all OECD countries is toward greater income inequality.   Income inequality in the U.S. is more comparable to the third world.  (Click to see map)   The percentage of wealth held by the top 10% is significantly higher in the U.S. than in most other developed countries.   Interestingly, income inequality does not completely correspond with the density of union membership. The percentage of union workers in other countries varies significantly from country to country yet in countries like France, where there is low union membership, there is a relatively low level of income inequality. Like the U.S., most other industrialized countries have reduced their previously high marginal tax rates in the past three decades. Still, a common characteristic of countries where there is a low level of income inequality is a comparatively high marginal personal income tax rate for wealthy households.