New paper on Midcentury American Inequality

The mid-20th century American decline in income inequality has been called “the greatest leveling of all time,” despite a similarly unmatched rate of economic growth. To establish this insight, pioneering research has tracked a century of top income shares. However, limitations in the historical data had meant that we still do not fully understand the dynamics of change within the bottom 90% of the income distribution (prior to the 1960s).

This working paper sheds light on changes within the middle class—to study early and midcentury trends in income and wage inequality, by applying a powerful statistical model to archival tax records and survey data. The results show that: (i) pre-war economic growth (and reduction in inequality) reached the upper middle class sooner than it (and they) reached the poorest households; and (ii) wartime relative income gains for the poorest were short-lived, while they proved durable for the upper middle class. In short, the relative gains from the New Deal, World War II and postwar eras were both more pronounced and more durable for the upper middle class than for the poorest. However, postwar wage compression lasted 30 years, to the particular benefit of the working poor.

The data are available here

Figure: Top 10% share of total fiscal income, equal-split adults, 1913-75: Goldsmith-OBE pre-World War II interpolations harmonized with SOI tax data