TOP EARNERS AND THE GREAT COMPRESSION IN THE US 1918-1949

Wage inequality in the United States declined substantially in the years surrounding the Second World War. This phenomenon stands out as a primary catalyst in the broader process of reducing income inequality. However, important questions remain about the causes and pace of the Great Compression remain.

Building upon a new top-income methodology, Miguel Artola Blanco and Victor Manuel Gómez-Blanco present new estimates of wage inequality in the United States from 1918 to 1949. They provide various definitions of top wage groups that account for the sharp fluctuations in the employed population during this period.

Key findings

• The results confirm the decline in wage inequality during the Second World War, primarily due to the relative stagnation of the top 1% group and a sharp increase at the bottom.
• However, the underperformance of top wage earners was driven by a significant compositional shift that resulted from an unprecedented rise in the corporate tax. This change prompted a shift in business preferences regarding their legal status, fostering a surge in partnerships during the 1940s.
• Consequently, a significant number of workers transitioned from salaried positions to self-employment, which amplified the compression observed in the wage distribution.

AUTHORS

• Miguel Artola Blanco, Universidad Carlos III de Madrid
• Victor Manuel Gómez-Blanco, Universitat de València