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Do Rising Top Income Shares Affect the Incomes or Earnings of Low and Middle-Income Families?
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Do Rising Top Income Shares Affect the Incomes or Earnings of Low and Middle-Income Families?

Jeffrey P. Thompson and Elias Leight
Federal Reserve Board, 2012
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Editorial Rating

7

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Recommendation

Economic researchers Jeffrey P. Thompson, an economist at the Federal Reserve Board, and Elias Leight, a scholar at Princeton University, approach the question of income inequality in a novel way. Rather than focusing on whether widening income gaps influence overall economic growth – the query driving much of the existing literature, with conflicting results – they set out to determine whether top earners’ increases have an impact on the incomes and standard of living of middle- and lower-income groups. Their original analysis of US data gathered at the state level included multiple variables – like educational achievement, union membership and unemployment rates – over varying time periods. The authors are quick to remind readers that this topic is simply too complex to yield broad declarations on the basis of one study and that policy makers need more data to make decisions. Nonetheless, getAbstract recommends this paper to economists, policy makers and sociologists interested in how rising incomes among the top group help or hinder outcomes for the rest of society. This work is a helpful step in exploring whether the rich are getting richer while the poor (and middle class) are getting poorer.

Summary

Analyzing the Avalanche of Data

Economists have been collecting and analyzing data on the subject of income inequality for several decades. They have mostly concentrated on how rising incomes in one group affect overall economic growth levels. Research so far has produced consistent conflicting statements about the income chasm’s positive and negative effects on overall growth. Some past studies have suggested that if incomes continue to rise for the “top share” of wage earners, then middle- and lower-tier wage earners could see their incomes grow in direct proportion – but only if total economic growth occurs at an appropriate rate. Other investigations, however, have found negative correlations between overall growth and rising income inequality – the greater the gap, the less growth in general.

More recent studies are trending away from investigating the general “distribution of income” and moving toward examining the “economic and social effects of inequality.” Such information is necessary for politicians, legislators and government officials who must decide whether the impact of income inequality should have any role in setting social and economic policies.

About the Authors

Jeffrey P. Thompson is part of the Microeconomic Surveys Section of the Federal Reserve Board. Elias Leight is a doctoral candidate in politics at Princeton University.

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