By John Pavlus, Kellogg School of Management
Rising income inequality in the U.S. may seem like a 21st-century preoccupation, as workers agitate to “occupy Wall Street” from the left and to “make America great again” from the right. But the wage gap separating high-income Americans from everyone else has actually been growing since the late 1970s, even as nationwide productivity and overall wages have risen.
Traditionally, economic explanations of this trend have fallen into two categories. Some assign responsibility to policies—for example, claiming that changes in tax policy in the 1980s and early 2000s increased earnings inequality. Others assign responsibility to changes in the supply and demand for labor—for example, arguing that the long shift in the U.S. economy from manufacturing to services may have boosted the demand for skilled workers relative to unskilled workers.