Slow wage growth is the key to understanding U.S. inequality in the 21st century

Introduction

The Washington Center for Equitable Growth today launched the U.S. Inequality Tracker, which tracks income and wealth inequality in the United States and highlights how particular components of income and wealth shape those trends. The tracker updates automatically—quarterly for wealth and annually for income—and follows income inequality from 2000 through the end of 2023 and wealth inequality from 2000 through the fourth quarter of 2024.

Although there are other dashboards on the internet that track inequality, including WID.world and realtimeinequality.org, none of them breaks down income by type. In contrast, Equitable Growth’s Inequality Tracker displays how income is divided between wage income, income in the form of income-support and in-kind transfers from the government, income from running a business, interest and dividend income from holding equities, and income from renting out property. These income data come from the U.S. Bureau of Economic Analysis’ Distribution of Personal Income dataset, which takes Personal Income data and divides it into 10 household deciles, or slices of the population that each hold 10 percent of households.

Equitable Growth’s Inequality Tracker also breaks out developments in wealth concentration, based on the Federal Reserve’s Distributional Financial Accounts. It shows how seven streams of wealth—including real estate wealth, equity wealth, and pension or retirement account wealth—have grown in the 21st century, contributing to the widening wealth gap in the United States.

This issue brief is primarily focused on the income data, where inequality has been stable over the past two decades, as opposed to wealth inequality, which has increased over the same period. Specifically, this brief looks at the past 23 years of income growth in the United States through the lens of the five streams of income mentioned above. Understanding how these streams of income add up to total income can yield new insight about the U.S. economy. In particular, analyzing the data shows the following:

• Income inequality, as measured by the Gini coefficient, has changed little and is currently almost exactly at its average level for the 2000–2023 period.
• This single-number summary, however, obscures important dynamics. Income growth has been highest for households in the bottom 50 percent of the distribution and households in the top 10 percent of the distribution. Those in the 50th percentile to the 90th percentile, representing the middle and upper-middle class in the United States, have seen weaker income growth.
• In the 21st century, wages have grown slower than any other income source, making these two decades an outlier in recent U.S. economic history. This slowdown in wage growth largely explains why households in the 50th percentile to the 90th percentile have lagged other groups in income growth because this group is the most dependent on wage gains.
• Although the bottom 50 percent of households have kept pace, more and more of their income comes in the form of in-kind transfers, such as from Medicaid and Medicare, which means their economic welfare is advancing slower than their incomes.
• There is no substitute for a strong U.S. labor market. To reduce income inequality in the United States and increase the share of income that households earn from wages, workers need greater bargaining power.
• Income inequality will likely increase because of policies pursued by President Donald Trump and the Republican-controlled Congress that erode the power of workers and cut benefits in major government programs, such as nutrition assistance, health care, and housing energy assistance.

Taken together, these findings are disconcerting. Although inequality has largely stopped expanding, the current level of inequality in the United States is high, and an analysis of the components of income suggest that there is significant weakness along the entire income distribution, outside of the top decile. The primary culprit is a labor market that no longer generates strong wage growth for U.S. households.

As others have pointed out, the macroeconomic impact of rising inequality is likely to be slowing growth. Lower-income households have high propensities to consume. Even modest erosion of their incomes could lead to significant drops in consumption. The likely result is a double whammy of weak and unevenly distributed economic growth.

U.S. income inequality in the 21st century

It is generally accepted that income inequality in the United States was high during the 1920s but declined through the first half of the 20th century, reaching relatively low levels in the 1970s. Yet income inequality rose again throughout the 1980s and 1990s, reaching levels similar to the 1920s, or perhaps a bit lower. Different datasets yield different answers about how steeply inequality went up in the 1980s and ‘90s, but the pre-1970s dip and subsequent rise is not disputed.

Likewise, it is generally accepted that in the 21st century, income inequality has advanced slowly or not at all, remaining steady at a high level. To measure inequality, scholars often use the Gini coefficient, a value ranging from 0 to 1 with values closer to 1 representing more inequality. As Figure 1 below shows, the average Gini coefficient of U.S. income over the period 2000 to 2023 was 0.457; in 2023, it was barely above this, at 0.458. (See Figure 1.)

Figure 1

As Figure 1 shows, inequality actually dipped sharply in 2020, thanks to federal COVID-19 pandemic policies that funneled money to U.S. households through an expanded Unemployment Insurance program, a more generous Child Tax Credit, and pandemic-era stimulus checks. These government transfers boosted incomes for many U.S. households, alleviating some of the rise in income inequality that accumulated in the 1980s and 1990s. In 2022, most of these programs expired, however, and inequality quickly returned to trend.

While the Gini coefficient provides a helpful one-number summary of inequality, it does not provide a comprehensive picture of how inequality is changing in a country. The BEA Distributing Personal Income dataset, meanwhile, allows for a much more granular examination of how income inequality has changed between 2000 and 2023.

The BEA data show that there have been clear winners and losers in the 20th century. Aggregate Personal Income, adjusted for inflation using the Personal Consumption Expenditure Price Index, grew 66 percent between 2000 and 2023. But growth over this period varied substantially by the decile of the income distribution into which a household fell. The lowest-income households, those in the first decile, experienced 80 percent growth over this period, while the 8th decile experienced the slowest growth, at just 59 percent. (See Figure 2.)

Figure 2

Rather than use deciles, some economists break the income distribution into three groups that are coincidentally quite useful for examining changes in the income distribution between 2000 and 2023. The first group is the bottom 50 percent, representing half of all households in the United States that have income equal to or less than median income. This group is the first five deciles in the BEA data. The second group is the subsequent four deciles, representing households with income in the 50th percentile to 90th percentile. We call these households the upper 40 percent. Finally, there’s the 10th decile, or the top 10 percent of households, those with the highest income.

In terms of these three groups, Figure 2 shows that the bottom 50 percent and the top 10 percent have both exceeded average income growth in the 21st century. At the same time, the upper 40 percent has fallen behind, with each decile in that group seeing smaller income gains than the average.

Similarly, this slow income growth in the upper 40 percent is reflected in each group’s share of Personal Income as well. The bottom 50 percent increased their income share by 0.7 percentage points overall, while the upper 40 percent saw their share fall by 1.5 percentage points. The top 10 percent saw the greatest benefits of all, increasing their income share by 0.8 percentage points. (See Figure 3.)

Figure 3

In other words, the headline story of no change in U.S. inequality as told by the Gini coefficient is a little more complicated under the hood. The upper-middle class has suffered some, while households at the bottom and the very top have done well. What is driving these dynamics?

Income growth has lagged for groups dependent on wages

Looking at streams of income sheds some light on this question. This is where the BEA Distribution of Personal Income dataset really shines. It allows analysts to further break down income into five streams. (In the BEA dataset, there are six streams of income, but Equitable Growth subtracts payments to the government to fund social programs, such as Social Security, from government transfer payments to reflect the balance of government transfers that U.S. households are receiving.) How these five streams combine to produce household income varies substantially by income decile.

Households at the bottom of the income distribution, for example, receive a significant amount of their income in the form of government transfers. These include both cash assistance, such as Social Security, and transfers in-kind, such as medical insurance coverage through Medicaid and Medicare. When accounting for income, it is common to include these latter programs as transfers that raise household income by the average per-capita expenditure of the program.

Receiving Medicaid, for example, adds a few thousand dollars to a household’s income, depending on the year. Even some relatively wealthy households receive transfers because of programs such as Social Security and Medicare, which are available to all seniors, regardless of income level.

For the first two deciles of the income distribution, government transfers are the largest single component of their income. For every other decile, the largest component of income is wages, which include employers’ contributions to social insurance and retirement plans. In fact, wages make up about 61 percent of Personal Income overall. Moving up the income deciles, transfers shrink as a share of income and wages expand as a share of income. (See Figure 4.)

Figure 4

At the very top of the income distribution, other sources of income matter as well. Specifically, top income deciles make significant amounts of income from returns on assets. Importantly, these are not proceeds from the increasing value of assets but rather consist of interest and dividend income earned on asset holdings. (The increasing value of assets, generally called capital gains, are not included in this BEA dataset because capital gains generally are not a part of the National Income and Product Accounts. Pure capital gains have grown quickly over the past two decades, and adding either realized or unrealized gains to the BEA data would show increasing inequality in the 21st century.)

Two other categories of income appear in Equitable Growth’s tracker. Business income is defined as income earned by the sole proprietors of businesses. This income stream is much more important for high-income households. Finally, income from renting out property makes up a small but relatively steady proportion of income across the distribution.

Let’s now consider each of these income streams across the three income groups of households discussed above. Figure 4 shows that the bottom 50 percent of households rely on a mix of wages and transfers. The upper 40 percent rely mostly on wages, with a small role for asset income, while the top 10 percent has the most diversified income portfolio, with significant percentages coming from wages, assets, and businesses.

Figure 5 below shows the compound annual growth rate for each of these streams of income between 2000 and 2023. Wages are the slowest-growing component of income over this time, increasing just 1.74 percent per year. Income from all other categories was at least 2 percent per year, with rental income increasing by more than 5 percent per year. (See Figure 5.)

Figure 5

Low wage-growth largely explains why U.S. households in the upper 40 percent have suffered in the 21st century. The bottom 50 percent households have been supported by strong growth in government transfers, and the top 10 percent of households have benefitted from growth in business and asset income that exceeds wage increases.

This is not a result of wage growth being soft for specific deciles. Unlike in the 1980s and 1990s, when wage growth diverged for low- and high-income workers, growth in wage income has been relatively even for workers up and down the distribution in the 21st century. Since 2000, the compound annual growth rate of wages was 1.59 percent for the bottom 50 percent, 1.67 percent for the upper 40 percent, and 1.92 percent for the top 10 percent. (See Figure 6.)

Figure 6

Even though wage growth for the upper 40 percent compared favorably to wage growth along the rest of the income distribution, this group still fell behind because most of their income comes from wages and wages underperformed other categories of income.

As Figure 6 shows, other categories of income, such as assets and business income, show disproportionately high growth at the top end of the income distribution, which explains why this decile outperformed the upper 40 percent despite wages making up 54 percent of the 10th decile’s income. Indeed, growth in business income is low across the distribution, except for in the 10th decile (growth in the 2nd decile appears high, but the business income base in this decile is miniscule, making the estimate noisy). Similarly, income from assets grew much faster in the 10th decile than anywhere else.

The weak performance of wages in the 21st century is an outlier in recent U.S. economic history. Although wages also were the slowest-growing category of income in the 20 years between 1980 and 2000, they grew at nearly twice the rate that wages have grown in the 21st century: 3.26 percent per year versus 1.74 percent. In the 1960s and 1970s, when inequality in the United States reached relative lows, wages grew at nearly 4 percent per year, faster than rental and business income. (See Figure 7.)

Figure 7

As seen in Figure 7, recent growth in government transfers is not outside the norm. Transfers grew similarly from 1980 to 2000 as they did from 2000 to 2023. They grew even faster between 1960 and 1980, but this largely reflects the creation of large new transfer programs, including Medicaid and Medicare, which did not exist until 1966.

A shift to income from government transfers harms low-income households

The collapse in wage growth since 2000 has significantly harmed middle- and upper-middle-class households, which primarily depend on wages for their incomes. But they are not the only losers. While households in the bottom 50 percent have kept pace with, and even increased, their income share, their success is largely predicated on the government making up for declining wage growth with transfers. This is a bad sign for the future of this group for two reasons.

First, transfers are not guaranteed to grow indefinitely. Once benefits are extended to a population, further income gains can be produced by expanding them or if their values rise faster than inflation. The increases shown in Figure 7, for example, are largely due to a steady expansion of social programs by Congress. In the 2000s, that includes expansions of the Earned Income Tax Credit and the Child Tax Credit and the Affordable Care Act’s expansion of Medicaid, in which the federal government expanded the eligible population for Medicaid and shouldered most of the cost of enrolling these new households. In the case of the Affordable Care Act, there is still some low-hanging fruit to be plucked: Texas and Florida, among other states, have rejected Medicaid expansion, and if some of these states changed course, it would provide in-kind support for millions of Americans.

Medicaid expansion aside, however, growth in transfer payments seems unlikely in the near future. With huge tax cuts looming on top of comparatively high levels of debt relative to U.S. Gross Domestic Product, stable or even falling transfer payments are more likely. The House Republican budget resolution implies a nearly 30 percent cut to spending on Medicaid, a program that is heavily tilted toward low-income families. Under the reasonable assumption that those receiving Medicaid are concentrated entirely in the bottom 50 percent of households, current Medicaid spending at the state and federal level represents nearly 18 percent of this group’s income, according to the BEA data. Aside from Medicaid, current budget discussions suggest that other transfer programs, including the Low Income Home Energy Assistance Program and the Supplemental Nutrition Assistance Program, also are under threat.

Second, the growing share of transfers in the bottom 50 percent’s income implies that overall welfare—by which economists mean the overall well-being of a person—for this group is increasing more slowly than it is for other groups. Much of the increase in transfer payments comes from the expansion of in-kind services such as Medicare and Medicaid. In fact, according to BEA data, 48 percent of all growth in transfer payments in the 21st century is thanks to growth in Medicare and Medicaid.

These are not cash transfers to households. Rather, they are in-kind transfers that provide a service to households. Though Medicare and Medicaid are real substitutes for income—if households didn’t receive it, they would have to choose between not having health insurance or buying private insurance—economic research finds that people do not value in-kind transfers at their full cash value.

In other words, if the government spends $3,000 providing health care to a person, that person’s economic welfare increases by less than $3,000. Consequently, $20,000 of income that comes purely from wages provides more welfare to the recipient than $20,000 of income in which half is from wages and half is from government transfers. As Equitable Growth’s U.S. Inequality Tracker shows, transfers have increased as a share of income for the bottom 50 percent, from 31 percent of income in 2000 to nearly 39 percent in 2023, suggesting that economic welfare for this group has increased substantially less than Personal Income has.

Conclusion

Taken together, these arguments suggest that bottom 50 percent’s income growth in the 21st century is not as strong as it appears, and that it may even fall behind in the next few years. Yet the prospects are not especially good for the upper 40 percent either, who depend much more heavily on wage growth to grow their incomes.

Wages grow fastest when the labor market is tight, meaning that demand for labor is strong, attractive employment offers are drawing people into the labor market, and worker power is high. As many economists have documented, worker bargaining power cratered in the waning decades of the 21st century as union membership declined and policy shifted in business’s favor. That led directly to the increase in inequality in the 1980s and 1990s and largely explains why wage growth has been so poor in the 21st century.

The second Trump administration is actively attacking what little bargaining power workers still hold by ending bargaining rights for federal workers, dismissing a member of the National Labor Relations Board (the independent federal agency tasked with protecting workers’ right to unionize) and two Equal Employment Opportunity Commission members, rescinding a Biden administration executive order that increased the minimum wage for federal contractors, and more (though many of these actions are being legally challenged). Despite these attacks, as of this writing, the labor market remains relatively strong, but signs of declining business and consumer confidence could signal weakening in the near future.

In the face of reduced bargaining power and a flagging labor market, U.S. income inequality is likely to start increasing again. The Trump administration and the Republican-controlled Congress are pursuing cuts to multiple government transfer programs for which benefits are concentrated at the bottom of the income distribution. As discussed above, the bottom 50 percent is increasingly dependent on these income supports to keep up with income growth along the rest of the distribution.

In recent years, it has become conventional wisdom that inequality has declined slightly in the 21st century. While this view is not inaccurate, Equitable Growth’s new Inequality Tracker shows where things stand in more detail in the United States: Inequality is very high, relative to other eras of U.S. economic history, but it can still go higher.

Over the past 20 years, in the absence of wage growth, the government has propped up households in the bottom 50 percent with increased transfer payments. Meanwhile, without the benefit of higher transfer payments, the upper 40 percent has fallen behind. At the same time, the top 10 percent of the income distribution has continued to grow its income share thanks to gains in business and asset income. Unless wage growth returns to trend or the federal government undertakes significant expansions of social programs, this moment of stable inequality is unlikely to last.

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