Income Divergence in the US

The United States has a strong tradition of favoring hard-work and meritocracy - if someone works hard, or is meritorious, then that person can live the 'American Dream.' Recently, a number of analysis have questioned that the US is not as economically mobile as previously thought. Wage inequality has been rising the past 3 decades. Consequently, the rich is getting richer, and the poor is getting poorer.

Recently, a paper I authored was published in the journal Social Indicators Research, and it highlighted this phenomenon using a metric of measuring wage disparity called the generalized means.

The generalized means is a way of aggregating income of a population, shown by Foster and Székely (2008). The formula of calculating generalized means is as follows: 

where, the x's are the incomes of each individual/family, n is the total number of individuals/family in the region, and α is an integer. If α=1, then the equation is a simple arithmetic mean of income in the region. If α is greater than 1, then it places more weight on the incomes of richer individuals, and if α is less than 1, it places more weight on the poorer individuals in the region. 

For example, let a certain region have three individuals, and their incomes are 100, 200, 300. If α=1, then according to the generalized mean formula above, the generalized mean is 200. If α=2, then the generalized mean is 216.024. If α=3, the value is 228.94. The higher the level of α=2, the higher is the generalized means. Similarly, if α=-1, the generalized means is 163.62, while it is 148.46 when α=-2.

Thus, if we have the income levels of all the individuals in a region across time, we use different values of α to see how the incomes of different sub-groups of the population are evolving over time. The figure below shows how the generalized means has been evolving in the US for different values of α:

The data has been obtained from the March CPS dataset, that is collected by the Census Bureau. This graph is also in the paper I authored

The figure summarizes the findings of my paper. Over the period 1975-2010, the US economy has been growing, except for a few instances of short recessions. However, we see that most of the income growth happened to those who are the top income earners in the US. The ones who earned low incomes did not enjoy the fruits of economic growth to the maximum extent. Economic growth in recent years mainly benefited the rich in the US, and those earning low incomes in the US did not get much benefit out of the growth.

As a policy implication, more needs to be done to ensure that those who are earning the bottom of the income distribution are able to move upwards. This can be done by helping to improve the skills and technical knowledge of those who are in the bottom.