fedgazette

On the growing disparity between the rich and the poor

fedgazette Editorial

Arthur J. Rolnick - Senior Vice President and Director of Research, 1985-2010

Published July 1, 1994  |  July 1994 issue

The 1980s has been called the decade of greed. It is well known for leveraged buyouts, S&L bailouts and jail sentences for some very influential financiers. But one of the most disturbing developments coming out of the '80s was the growing disparity between the rich and the poor. While the average amount of income people earned increased between 1980 and 1990, the gap between the rich and the poor increased even more.

The facts

The numbers are not in dispute. Between 1980 and 1990, households in the upper bracket saw double-digit increases in their inflation-adjusted income while households in the lower bracket saw declines. As a result, the disparity between the rich and the poor grew by close to 20 percent.

Our region of the economy was not immune to this trend. During the '80s, we also experienced a 20 percent increase in the disparity between the rich and the poor.

The explanations

Many have blamed this trend on President Reagan. Under his presidency the tax rate on upper-income families fell by more than half.

The problem with this explanation is that while the tax rates on the rich declined, the rich ended up paying no less in taxes. Once the tax rate was lowered, the rich had less incentive to shelter income; the resulting increase in taxable income roughly offset the decrease in the tax rate.

A much better explanation for the increased disparity between the rich and the poor is found in another set of numbers: the earnings of workers with different levels of education and skills. These data show that during the '80s those with college degrees increased their earnings far greater than workers with only high school diplomas. And those with high school diplomas increased their earnings far greater than those with less than a high school diploma. In other words, during the 1980s the premium grew for skilled and educated employees, which at least partly explains the disparity between the rich and the poor.

The challenge

This explanation presents a challenge for policymakers and parents: Both need to find ways to keep children in school longer. To help reverse the trend of growing income disparity,

  • More students must finish high school.
  • More high school students must go on to college or vocational school.
  • And more opportunities must be created for our work force to enhance their skills.

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