NCPA - National Center for Policy Analysis

Income Inequality Is Not the Problem It's Claimed to Be

October 21, 2014

Last Friday, Federal Reserve Chair Janet Yellen addressed economic inequality during a speech to the Federal Reserve Bank of Boston. She told the audience, "The past several decades have seen the most sustained rise in inequality since the 19th century after more than 40 years of narrowing inequality following the Great Depression."

Addressing economic inequality, says Diana Furchtgott-Roth, director of Economics21 at the Manhattan Institute, is not the role of the Federal Reserve. She explains the reasons behind the rise in inequality since 1970 and why it should not be a concern of the Fed:

  • With more women working outside the home today (a trend that began in the 1980s), more families have two earners. In fact, households in the top quintile had an average of two earners in every household in 2013; in the bottom quintile, however, households had an average of just 0.5 workers per household. Households with more earners, therefore, are going to have higher incomes than households with one or fewer earners.
  • Households have also changed in size over the last three decades. Households in the bottom income quintile tend to have fewer than two members, while households in the top quintile have three members. Income inequality statistics do not account for the higher costs that households with more members must pay.
  • In 1987, the tax code changed to make the top individual income tax rate lower than the top corporate tax rate. As a result, more businesses began to file as individuals. The income bump that appears to have taken place after 1987 is a reflection of these tax changes.
  • Income inequality statistics rarely look at government transfer payments or taxes paid, rather they look at incomes before taxes and before individuals have received welfare payments. Accounting for those things, professors Bruce Meyer and Richard Burkhauser of the University of Chicago and Cornell University, respectively, have determined that inequality has not increased.
  • Individuals constantly move about the income ladder, often starting poor and moving up the ladder over time. Yet a statistical snapshot fails to account for movement up, or down, the income ladder. A recent NCPA study by Richard McKenzie discussed this fact, explaining why official inequality statistics are profoundly misleading.

Furchtgott-Roth writes that the Federal Reserve needs to focus on improving economic growth and not concern itself with income inequality.

Source: Diana Furchtgott-Roth, "5 reasons Janet Yellen shouldn\'t focus on income inequality," MarketWatch, October 20, 2014. 


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