Soaring income inequality in the United States since 1979 reduced economic growth in the decades before the pandemic recession, according to a new EPI report. By redistributing income from lower-income households that spend money to higher-income households that have the luxury to save money, the rise in inequality was reducing growth in aggregate demand by about 1.5% of GDP annually in the years preceding the 2020 recession.
Since 1979, income share has risen for the top 10% but fallen for the rest. By 2018, the top 1% were securing 16.4% of pre-tax and benefits income, up from 8.9% in 1979. And they were saving 30.6% of their income, over 60 times as much as the bottom fifth of households. This, in turn, often constrained overall economic growth by reducing economywide spending.
The report authors—EPI director of research Josh Bivens and economic analyst Asha Banerjee—demonstrate that growing income inequality reflects a failure of policy on two fronts. First, policy choices were made to intentionally weaken the bargaining power of workers, and this erosion of workers’ power fueled inequality in market-based incomes. This is evident in the split between productivity growth and pay: Between 1979 and 2019, economywide productivity rose by nearly 60%, while hourly pay for nonsupervisory workers rose less than 14%.
Second, key fiscal and monetary policymaking institutions have failed to stabilize demand growth and counter the effects of rising inequality. Congress has not made the tax-and-benefits (aka “transfers”) system more progressive—taxing more at the top and spending more at the bottom—to counteract the rise in inequality. It has also tolerated long stretches of weak aggregate demand without raising public spending enough to boost that demand. And with interest rates until just recently sitting at or near zero since the Great Recession, the Federal Reserve has had little room to boost spending with interest rate cuts.
“Policy failures in the labor market have helped fuel the rise in inequality. These policy failures were not just detrimental to workers—they had a negative effect on macroeconomic growth,” said Bivens. “Without policy changes, inequality will continue to drag on household spending, further slowing overall economic growth.”
“Reduced worker bargaining power in the labor market is a key driver of the rise in income inequality before taxes and spending, which means that policies that build worker power can help offset these trends,” said Banerjee. “Policymakers can also enact tax policies that reduce the upward redistribution of income and spend more on tax credits and benefits that raise the overall share of income going to lower-income households.”