THE TRUTH ABOUT INCOME INEQUALITY

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Despite the conventional wisdom of Democrats, income, properly measured, has not fallen in America. Moreover, the supposed gaps between income and private sector productivity growth are greatly exaggerated, says Robert J. Gordon, a professor at Northwestern University in his new study entitled, "Misperceptions About the Magnitude and Timing of Changes in American Income Inequality," published by the National Bureau of Economic Research.

The conventional view is that income growth has seriously lagged productivity, so that increases in productivity yield returns to shareholders and corporate management but not to workers. However, Gordon finds that labor incomes are higher than previously measured:

• Most measures of income are constructed on the basis of households; since the number of people per household has been declining over time due to increasing divorce, longer life expectancy, and later marriage, income per person has increased faster than income per household.
• The most common inflation measure used, the Consumer Price Index for Urban areas, is too high, so incomes calculated by the CPI-U are too low; when the gross domestic product (GDP) deflator, the same measure used to calculate productivity, is used, then incomes adjusted for inflation are higher than would be the case otherwise for the bottom 90 percent of the income distribution.
• Productivity measures generally cover only the nonfarm business sector, which represented just 76 percent of GDP in 2007; less-productive sectors of the economy, such as government and households, are excluded. When these are included, total productivity is lower.

When these adjustments are made, the gap between income and productivity is far lower, says Gordon:

Horror stories about worsening income distribution in America are largely scare tactics; new policies and laws in Washington should rise or fall on the merit of the underlying facts and ideas, not on the fear that American society is spiraling hopelessly into extremes of income distribution...

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