Edward Conard

Top Ten New York Times Bestselling Author

  • “A full-throated defense of economic dynamism.” - The Wall Street Journal
  • “…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
  • “…a very valuable contribution.” - Larry Summers, former Secretary of the Treasury and director of the National Economic Council, president emeritus, Harvard University
  • “…a comprehensive explanation of the modern economy.” - Julian Robertson, Founder, Tiger Management
  • “…reminds us that inequality sends a signal of what society lacks most, in America’s case, entrepreneurship and risk taking.” - Lawrence Lindsey, CEO, The Lindsey Group, former Director of the National Economic Council
  • “Unintended Consequences is full of substance, it is one of the must-read books of the year, and once I finish it I will be giving it a second read through right away.” - Tyler Cowen, Professor, George Mason University
  • “…a must-read for serious students of economic policy.” - Glenn Hubbard, Dean, Columbia Business School, and former Chairman of the Council of Economic Advisers
  • “…a very valuable contribution.” - Larry Summers, former Secretary of the Treasury and director of the National Economic Council, president emeritus, Harvard University
  • “…reminds us that inequality sends a signal of what society lacks most, in America’s case, entrepreneurship and risk taking.” - Lawrence Lindsey, CEO, The Lindsey Group, former Director of the National Economic Council
  • “…a must-read for serious students of economic policy.” - Glenn Hubbard, Dean, Columbia Business School, and former Chairman of the Council of Economic Advisers
  • “Unintended Consequences should be read by anyone who takes for granted the superiority of progressive taxation and has not thought carefully about the trade-offs involved.” - The New Republic
  • “…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
Upside of Inequality Oxford Unintended Consequences

Macro Roundup


Monday, October 24, 2022

AI Summary. Sectors targeted by China's Five-Year Plans saw a 15% increase in new domestic firms while corresponding U.S. sectors saw about a 5% decline in firm births, employment, and output, with a 1% rise in Chinese employment associated with a 0.1% decline in U.S. sector employment. China's private firms, which received over half of government subsidies, drove the displacement.

Vyacheslav Fos Stanford University
Date Posted:
Is Database:
Database

China’s government support for private firms drove a 15% increase in new domestic firms in targeted sectors, while U.S. peers saw 5% fewer firms and declines in income, employment, and output.

How do China's industrial plans affect U.S. firms and employment?

Core argument: Sectors targeted by China's Five-Year Plans saw a 15% increase in new domestic firms between 1998 and 2020, while corresponding U.S. sectors saw a 5% decline in firm births, employment, and output.

Between 1998 and 2020, sectors targeted by China's Five-Year Plans (FYPs) saw a 15% increase in new domestic firms, while corresponding U.S. sectors experienced a 5% decline in firm births, employment, and output. A 1% rise in employment in China's firms correlated with a 0.1% decline in U.S. sector employment. The displacement effect was driven by China's private firms, which received over half of government subsidies. U.S. industries initially matched growth trends of unsubsidized Chinese sectors but declined post-FYP implementation. The impact shifted from labor-intensive to capital-intensive U.S. industries over time, highlighting the strategic role of China's government support in enhancing its firms' competitiveness and contributing to the relative decline of U.S. industries across the value chain.

Takeaways by Macro Roundup® AI

  1. Sectors targeted by China's Five-Year Plans saw a 15% increase in new domestic firms between 1998 and 2020, while corresponding U.S. sectors saw a 5% decline in firm births, employment, and output.
  2. A 1% rise in employment at China's firms in targeted sectors correlated with a 0.1% decline in U.S. sector employment, with the displacement effect driven by China's private firms, which received over half of government subsidies.
  3. U.S. industries initially matched the growth trends of unsubsidized Chinese sectors but declined after Five-Year Plan implementation, with the impact shifting from labor-intensive to capital-intensive U.S. industries over time.

“…Between 1998 and 2020 a rise in China’s firm births is correlated with higher firm exits and slower growth one and two years later for U.S. firms in corresponding sectors. A 1% rise in employment in China’s firms predicts a 0.1% decline in employment in the corresponding U.S. sector. The evidence suggests that U.S. industries were not outcompeted by subsidized Chinese firms prior to their being subsidized. However, in the years following a new FYP, the number of China’s firms in targeted sectors surged by 15% compared to non-targeted sectors, while firms and total job postings at U.S. firms in the corresponding sectors experienced a roughly 5% decrease. U.S. firms in these sectors also experienced a decline in earnings and output….”

Xiao Cen, Vyacheslav Fos, and Wei Jiang, "Race to Lead: How China’s Government Interventions Shape U.S.-China Industrial Competition,"Stanford University, August 1, 2022,
https://sccei.fsi.stanford.edu/china-briefs/race-lead

Race to Lead: How China’s Government Interventions Shape U.S.-China Industrial Competition

Between 1998 and 2020, a rise in China’s firm births is correlated with higher firm exits and slower growth one and two years later for U.S. firms in corresponding sectors.

Sectors targeted and subsidized through China’s Five-Year Plans experience a surge in new firms, while the corresponding sectors in the U.S. see declines in firm births, output, employment, and earnings.

China’s earlier Five-Year Plans tend to displace labor-intensive sectors in the U.S., while more recent ones displace capital-intensive sectors in the U.S.

China has become a serious competitor in economic sectors previously dominated by U.S. industry. In recent years, trade conflicts between the two countries have become more common, especially given the view that China’s government intervenes a great deal to help domestic firms compete. Research explores to what extent industries targeted and subsidized through China’s Five-Year Plans (FYPs) have displaced U.S. firms up and down the value chain.

The data. Researchers collected data on 1,643,000 U.S. firms and 1,100,000 Chinese firms from the U.S. Census Longitudinal Business Database (LBD) and the China Industrial Enterprises Database (CIED). Both databases capture firm-level characteristics and changes in economic activities over time, including firm births and deaths, employment, sales, exports, total assets, and others. China’s CIED database also includes data on the amount of state subsidies firms receive. Researchers then organized the merged data from both countries according to industry sector and identified those sectors that China’s government targeted for development in each of its FYPs from 2001, 2006, 2011, and 2016. Researchers supplemented this database with job posting data from 1.28 million U.S. firms between 2007 and 2020 from Burning Glass.

China’s firms displace same-sector U.S. firms. To examine the relationship between trends in industrial activity in China and the U.S., researchers compared the rates of firm births, firm exits, and employment by sector in the U.S. and China between 1998 and 2020. They found that a rise in China’s firm births is correlated with higher firm exits and slower growth one and two years later for U.S. firms in corresponding sectors. Further, they found that a 1% rise in employment in China’s firms predicts a 0.1% decline in employment in the corresponding U.S. sector.

Race to Lead: How China's Government Interventions Shape U.S.-China Industrial Competition: Extended Excerpt Image 1


When disaggregating by firm ownership type, researchers found that this displacement dynamic appears driven by China’s private firms rather than by state-owned enterprises. China’s private firms proliferated rapidly during the period of study and received over half of all government subsidies (53.5%), a higher share than state-owned enterprises (37.7%) and foreign-owned firms (8.8%).

Government subsidies may bolster China’s firms in targeted industries at the expense of U.S. firms. Prior to the release of a FYP, U.S. industries that were counterparts to those supported by the government in China exhibit growth trends similar to unsubsidized industries in China. In other words, the evidence suggests that U.S. industries were not outcompeted by subsidized Chinese firms prior to their being subsidized.

However, in the years following a new FYP, researchers found that the number of China’s firms in targeted sectors surged by 15% compared to non-targeted sectors, while firms and total job postings at U.S. firms in the corresponding sectors experienced a roughly 5% decrease. U.S. firms in these sectors also experienced a decline in earnings and output.

The strength of the correlation held even when removing China’s fastest-growing firms from the analysis, suggesting that the changes were driven by government targeting and subsidies rather than “natural” dynamism occurring irrespective of government support. Researchers also found that capital markets in the U.S. failed to predict any decline in fortunes for U.S. firms in sectors later targeted by a FYP, further suggesting that competition with China’s newly-subsidized firms played a role in the observed decline at U.S. firms.

China’s industrial policy differentially affects U.S. firms, industries. Certain U.S. firms and industries were able to offset the negative impact of China’s industrial policy. U.S. firms that depended heavily on China as a source of revenue and those that relied heavily on China’s imports benefited somewhat from rapid growth in the upstream sectors fostered by China’s industrial policies. In addition, while firms with limited presence in China suffered significantly, some U.S. firms offset the negative effects by offshoring production capacity to China.

Race to Lead: How China's Government Interventions Shape U.S.-China Industrial Competition: Extended Excerpt Image 2


The impact of the industrial policies embedded in the FYPs shifted over time from lower-skilled industries to higher-skilled industries. Early FYPs (i.e., the 10th and 11th plans covering 2001 to 2010) tended to displace production in labor-intensive industries in the U.S. such as consumer electronics, textiles, and furniture manufacturing. However, the more recent FYPs (i.e., the 12th and 13th plans covering 2011 through 2020) squeezed higher capital-intensive industries like telecommunications and clean energy.

China’s government support for industry important in its race to lead. The analysis shows that China’s government support plays a significant role in enhancing the competitive standing of China’s firms. Decisions by China’s government to elevate its global prowess in certain industries has led to the relative decline of such industries in the U.S., not just in low-skill “sunset” industries from which the U.S. may have been happy to retreat, but also in higher-skill industries that both countries are eager to lead.

Monday, October 31, 2022

AI Summary. Wage growth remains too fast to be consistent with the Federal Reserve's inflation target, but would likely slow if the economy weakens, and past wage and rent increases may partly reflect a one-time adjustment to pandemic-related shocks. The author argues considerable future disinflation is already in the pipeline.

Paul Krugman Krugman Wonks Out
Date Posted:

Citing a slowdown in the Employment Cost Wage index, @paulkrugman argues there is a “strong case to be made there’s considerable disinflation in the pipeline” and admits, “Over the past year, optimists like me were wrong, while pessimists were right.”

Is considerable disinflation already in the pipeline despite fast wage growth?

Core argument: Wage growth remains too fast to be consistent with the Federal Reserve's inflation target, though wage growth will probably weaken if the economy weakens.

Wages are still rising too fast to be consistent with the Fed’s inflation target, but if the economy is really set to weaken, wage growth will probably weaken too. Furthermore, you can argue that past wage growth, like surging rents, partly reflected a one-time adjustment to pandemic-related shocks, which will go away over time. I’d argue, a strong case to be made that there’s considerable future disinflation already in the pipeline. Over the past year, optimists like me were wrong, while pessimists were right. But past results are no guarantee of future performance.

Takeaways by Macro Roundup® AI

  1. Wage growth remains too fast to be consistent with the Federal Reserve's inflation target, though wage growth will probably weaken if the economy weakens.
  2. Past wage growth and surging rents partly reflected a one-time adjustment to pandemic-related shocks that will fade over time, an argument implying considerable disinflation is already in the pipeline.
  3. Inflation optimists were wrong over the past year while pessimists were right, but past results are no guarantee of future performance.

AI Summary. High inflation should spur deregulation that both lowers prices and improves economic performance, including easing shipping-cost rules like the Jones Act, strategic tariffs, restrictions forcing oil and gas onto trucks rather than pipelines, and punitive zoning limits. Restoring price stability at low cost is necessary but not sufficient.

Lawrence Summers Washington Post
Date Posted:

@LHSummers argues that the current inflationary environment should spur regulatory reforms “that will both reduce prices and make the economy work better.”

Should high inflation prompt deregulation that lowers prices and improves growth?

Core argument: Regaining price stability at as low a cost as possible is necessary but far from sufficient to maximize American economic performance.

The crisis of inflation should not be wasted. A bright spot in the dismal inflation period of the 1970s was the collaboration of Stephen G. Breyer (then counsel to the Senate Judiciary Committee), Sen. Edward M. Kennedy (D-Mass.) and the Carter administration on airline deregulation. In this era, high inflation should be a spur to regulatory changes — from addressing Jones Act increases in shipping costs, to strategic tariffs, to rules that force oil and gas to be transported via truck rather than pipeline, to punitive zoning restrictions — that will both reduce prices and make the economy work better. Regaining price stability at as low a cost as possible is far from sufficient to maximize American economic performance, but it is necessary.

Takeaways by Macro Roundup® AI

  1. Regaining price stability at as low a cost as possible is necessary but far from sufficient to maximize American economic performance.
  2. Airline deregulation, produced by collaboration among Stephen G. Breyer as Senate Judiciary Committee counsel, Sen. Edward M. Kennedy (D-Mass.) and the Carter administration, was a bright spot of the inflationary 1970s.
  3. High inflation should spur regulatory changes that both reduce prices and improve how the economy works, including addressing Jones Act shipping costs, strategic tariffs, rules forcing oil and gas onto trucks rather than pipelines, and punitive zoning restrictions.

AI Summary. Goldman Sachs economists estimate the household, nonfinancial corporate and small-business sectors ran a surplus of income over spending equal to 1.1% of gross domestic product, and on a three-year average the measure is healthier than before any US recession since the 1950s. Federal Reserve economists estimate households hold roughly $1.7tn in excess savings.

Nick Timiraos Wall Street Journal
Date Posted:

American households still have $1.7 trillion in excess savings, $350 billion of which are in the hands of the lower half of the income distribution. @NickTimiraos @WSJ

Do strong private sector finances keep interest rates higher for longer?

Core argument: Goldman Sachs economists calculate that U.S. households, nonfinancial corporations and small businesses ran a combined surplus of income over spending equal to 1.1% of GDP in April through June.

Household, nonfinancial corporate and small-business sectors ran a surplus of total income over total spending equal to 1.1% of gross domestic product in the quarter of April to June, according to economists at Goldman Sachs Group Inc. Using a three-year average, the measure is healthier than on the eve of any U.S. recession since the 1950s. U.S. households still have around $1.7 trillion in savings they accumulated through mid-2021 above and beyond what they would have saved if income and spending had grown in line with the prepandemic economy, according to estimates by Fed economists. Around $350 billion in excess savings as of June were held by the lower half of the income distribution, or around $5,500 per household on average.

Takeaways by Macro Roundup® AI

  1. Goldman Sachs economists calculate that U.S. households, nonfinancial corporations and small businesses ran a combined surplus of income over spending equal to 1.1% of GDP in April through June.
  2. On a three-year average basis, Goldman Sachs finds this surplus measure healthier than on the eve of any U.S. recession since the 1950s.
  3. Fed economists estimate U.S. households still hold about $1.7 trillion in savings accumulated through mid-2021 beyond prepandemic trends, with roughly $350 billion as of June held by the lower half of the income distribution, about $5,500 per household on average.

AI Summary. Treasury securities with similar maturities are trading at larger-than-normal price differences, with newly issued Treasurys commanding a growing premium over older notes that come due at the same time — a sign the older securities have become harder to sell. Big banks and asset managers that have long been significant buyers are in retreat.

Matt Grossman and Sam Goldfarb Wall Street Journal
Date Posted:

.@WSJ reports, “Treasury securities with similar characteristics are trading at larger-than-normal price differences” as large buyers like big banks and asset managers reduce purchases.

Are older Treasurys becoming harder to sell than newly issued ones?

Core argument: Treasury securities with similar characteristics are trading at larger-than-normal price differences, while big banks and asset managers that have long been significant buyers are in retreat.

Treasury securities with similar characteristics are trading at larger-than-normal price differences. Major players, including the big banks and asset managers that have long been significant buyers, are in retreat. One problem is a growing difference between yields on the newest Treasurys in the market and older vintages that are still traded among investors. Theoretically, a five-year note sold this year should trade at the same yield as a five-year-old 10-year note, because both come due in 2027. But fresh Treasurys are trading at a growing premium to older notes, a sign the older securities have become harder to find buyers for.

Takeaways by Macro Roundup® AI

  1. Treasury securities with similar characteristics are trading at larger-than-normal price differences, while big banks and asset managers that have long been significant buyers are in retreat.
  2. Newly issued Treasurys are trading at a growing premium to older vintages with the same maturity date, a sign the older securities have become harder to find buyers for.
  3. A five-year note sold this year and a five-year-old 10-year note both come due in 2027 and theoretically should trade at the same yield.

AI Summary. An American co-chief executive of a China-based kitchenware and grilling-tools manufacturer with six mainland factories says every customer is pressuring the company to build factories outside China. He adds that the supply chain built in China over 30 years remains unmatched.

Jason Douglas and Stella Yifan Xie Wall Street Journal
Date Posted:

“There’s not a customer that we have that isn’t pressuring us, suggesting, hoping that we will build factories outside of China,” an American manufacturer in China reports @WSJ 

Are customers pushing manufacturers out of China despite unmatched supply chains?

Core argument: Jacob Rothman, co-chief executive of Velong Enterprises, which operates six factories in mainland China, says every customer is pressuring, suggesting or hoping that the company will build factories outside China.

It took Jacob Rothman two decades to build a Chinese manufacturing business with his friends and family. Now the 49-year-old American executive says customers want him to make some of his grilling tools and kitchen products elsewhere. He knows it isn’t going to be easy. “There’s not a customer that we have that isn’t pressuring us, suggesting, hoping that we will build factories outside of China,” says the co-chief executive of Velong Enterprises Co., which has six factories in mainland China and serves big retailers and consumer brands such as Walmart Inc. and grill maker Weber Inc. Yet “there’s nothing like China,” he added. “We’ve built this supply chain for 30 years to work like a Swiss clock. There’s just nothing like it.”

Takeaways by Macro Roundup® AI

  1. Jacob Rothman, co-chief executive of Velong Enterprises, which operates six factories in mainland China, says every customer is pressuring, suggesting or hoping that the company will build factories outside China.
  2. Velong Enterprises supplies grilling tools and kitchen products to large retailers and consumer brands including Walmart and grill maker Weber.
  3. Rothman, who spent two decades building the business with friends and family, says shifting production will not be easy, citing a supply chain built over 30 years "to work like a Swiss clock.".

AI Summary. China's direct and, especially, indirect subsidies to manufacturers exceed those of any other country, and their scale explains China's large domestic imbalances and persistently weak domestic demand. Manufacturers stay because subsidies and costly upgrades to energy, transport, logistics and communications infrastructure make production in China cheaper than elsewhere.

Michael Pettis @michaelxpettis
Date Posted:

.@michaelxpettis notes that decoupling from China will be hard because, with subsidies in “energy, transportation, logistical and communications infrastructure, they can effectively produce more cheaply in China than elsewhere.”

.@michaelxpettis notes that decoupling from China will be hard because, with subsidies in “energy, transportation,...

Do manufacturing subsidies explain China's competitiveness and weak domestic demand?

Core argument: Pettis argues Chinese subsidies to manufacturers — direct and especially indirect — exceed those of any other country, which is why China-based producers are so competitive internationally and why decoupling will be difficult.

Decoupling won't be easy because there is a reason China-based manufacturers are so "competitive" internationally. Chinese subsidies to manufacturers – not just direct but, especially, indirect – are far greater than those of any other country. The extent of these subsidies explains China's huge domestic imbalances and the persistent weakness in its domestic demand. Manufacturers are in China because as long as China subsidies them directly and indirectly, with constant (and expensive) upgrades to energy, transportation, logistical and communications infrastructure, they can effectively produce more cheaply in China than elsewhere. Even rising Chinese wages won't matter because as long as the total income of Chinese workers – and households more generally – doesn't exceed, or even lags, the growth in total production, China will always be a relatively "low wage" economy.

Takeaways by Macro Roundup® AI

  1. Pettis argues Chinese subsidies to manufacturers — direct and especially indirect — exceed those of any other country, which is why China-based producers are so competitive internationally and why decoupling will be difficult.
  2. Pettis attributes China's large domestic imbalances and persistently weak domestic demand to the extent of these manufacturing subsidies, which include constant and expensive upgrades to energy, transportation, logistical and communications infrastructure.
  3. Rising Chinese wages will not erode that cost advantage, according to Pettis, because as long as total worker and household income lags growth in total production, China remains a relatively low-wage economy.

AI Summary. US earnings inequality has plateaued because wages at the bottom grew rapidly, with the 10th percentile up 14% in real terms versus 9% at the median and under 10% at the 90th percentile. The authors link this compression to higher pay premiums in low-paid occupations and tighter labor markets rather than worker composition or minimum wage increases.

Nathan Wilmers Proceedings of the National Academy of Sciences
Date Posted:
Is Database:
Database

US earnings inequality has plateaued since 2012, driven by rapid wage growth among low-wage workers, not median-wage workers catching up with top earners.

Has rapid wage growth at the bottom halted rising US earnings inequality?

Core argument: From 2012 to 2018, US earnings at the 10th percentile grew 14% in real terms, outpacing the median's 9% and the 90th percentile's growth of under 10%.

Since 2012, US earnings inequality has plateaued, primarily due to rapid wage growth among low-wage workers rather than median-wage workers catching up with top earners. The variance in labor earnings has stalled or decreased, with the variance of log hourly earnings stabilizing around 0.35 and log weekly earnings showing a slight decline. From 2012 to 2018, the 10th percentile of earnings grew by 14% in real terms, outpacing the median's 9% increase and the 90th percentile's under 10% growth. This compression in the bottom two-thirds of the earnings distribution has offset rising inequality, despite persistent top-end inequality. The trend is linked to increased premiums in low-paid occupations and tightening labor markets, rather than changes in worker composition or minimum wage hikes. Consequently, the gap between the 10th and 50th percentiles has shrunk, while the 90 to 50 gap continues to grow more slowly.

Takeaways by Macro Roundup® AI

  1. From 2012 to 2018, US earnings at the 10th percentile grew 14% in real terms, outpacing the median's 9% and the 90th percentile's growth of under 10%.
  2. US earnings inequality has plateaued since 2012, with the variance of log hourly earnings stabilizing around 0.35 and log weekly earnings declining slightly.
  3. The compression in the bottom two-thirds of the US earnings distribution is linked to higher premiums in low-paid occupations and tightening labor markets, rather than shifts in worker composition or minimum wage increases.

Overall US earnings inequality has plateaued in the last decade, driven by fast earnings growth among low-wage workers, rather than median-wage workers catching up with those at the top

Key Finding

"…Our main finding is that variance in labor earnings has stalled or decreased since around 2012.As shown in Fig. 1 A-C, this finding holds across all of the household surveys and all of the earnings quantities we examine—hourly, weekly, or annual. The variance of log hourly earnings increased in the CPS-ORG from 0.25 in 1982 to about 0.35 in 2012 before stabilizing. The variance of log weekly earnings has actually decreased in recent years; the CPS-ORG and the ASEC both show a slight decline from 2012 to the end of the decade, by about 1% in the case of the CPS-ORG. Inequality in annual earnings has also stabilized in the last decade—although the level where this stabilization occurred depends on the data source, with the ASEC plateauing at a lower level and slightly earlier than the ACS. The similarity in trends across surveys and earnings concepts supports the claim that earnings variance has stopped increasing in recent years…."

Clem Aeppli and Nathan Wilmers, "Rapid wage growth at the bottom has offset rising US inequality,"Proceedings of the National Academy of Sciences, October 3, 2022, https://www.pnas.org/doi/10.1073/pnas.2204305119

"… By contrast, labor markets across the country tightened over the last decade. Workers at the bottom of the national earnings distribution were, therefore, able to benefit from the declining local unemployment rate.The unemployment rate counterfactual (Fig. 4, Lower Left) confirms this description; increasing local unemployment rates to 2018 levels would have boosted earnings at the bottom of the national distribution and helps to explain the earnings compression that we observe…."

Changes In demand

"…Fig. 3 showed that from 2012 to 2018, workplace premiums increased slightly more for lower-paying workplaces than for higher-paying workplaces. However, this pattern is similar to 2002 to 2012, and changes to workplace premiums are relatively small. In contrast, the lowest-paid occupations enjoyed rapid premium increases from 2012 to 2018, following decreases in 2002 to 2012…."

"…The variance of earnings could decrease as all workers’ earnings converge, or it could reflect compression in a single part of the distribution. Fig. 2 shows the trends in the 10th, 50th, and 90th percentiles of hourly (Fig. 2A), weekly (Fig. 2C), and annual (Fig. 2E) earnings. This figure shows that in the 1980s, disparities between the bottom and the middle and between the middle and the top were both increasing. Since the 1990s, however, the gap between workers in the bottom and the middle stabilized, while the gap between workers in the middle and the top of the distribution continued to grow. These patterns are consistent with prior research…In the period since the recovery from the Great Recession, trend differences between top and bottom inequality intensified. Growth in the 10th percentile of earnings accelerated in the last decade—in log weekly earnings from 5.38 in 2012 to about 5.51 in 2018, a 14% boost in real dollars. While earnings growth has been robust during this period, its magnitude has not been uniform across the distribution; median weekly earnings have increased by only 9%, half as fast as the bottom 10th percentile. The 90th percentile has grown in pace with the median—increasing by under 10%. As a result of these different rates of earnings growth, the gap between the 10th and 50th percentiles has shrunk since 2012—shown by the solid lines inFig. 2 B, D, and F. In contrast, the 90 to 50 gap has continued to grow (dashed lines inFig. 2), although more slowly than in the earlier period of stagnant median earnings growth. Earnings in the bottom 10th percentile have advanced toward the median, while earnings at the top remain consistently above the median. InSI Appendix, section B, we directly link these changes in percentiles to the overall variance trend. The change in inequality trends after 2012 was largely due to compression of pay in the bottom two-thirds of the distribution rather than in the top third. The part of the earnings distribution that dominated rising inequality from the 1990s through the 2000s is not the part that explains the recent reversal of the trend since 2012. After decades of rising inequality, overall earnings inequality stopped growing, and possibly declined, since 2012. This fact raises two related questions. How can this unexpected departure from the trend be reconciled with prior research on earnings inequality, which focused on secular drivers of inequality? Additionally, does the recent break in rising inequality mark a new era of labor market conditions, as did the increase in earnings inequality in the early 1980s? We find little evidence that the last decade reversed the main drivers of rising inequality, like shifting worker and occupational composition, union decline, or unequal workplace premiums. Additionally, the top-end inequality that these drivers contribute to has persisted. However, this top-end inequality has been offset by rapid earnings growth for workers at the bottom of the earnings distribution. This earnings growth is not mainly driven by worker composition change, workplace-specific changes, or rising subnational minimum wages. Instead, it is associated with broadly increased premiums in the lowest-paid occupations: occupations that had faced particularly slow wage growth from 2002 to 2012. At the local labor market level, pay increases for low-wage workers were associated with tightening labor markets. These dynamics delivered a period in which earnings growth has been higher for workers at the bottom than at the middle or the top….”

Distributional Changes

"…First, in the dashed line in Fig. 1A, we show the variance of hourly wages based on theOEWS. The OEWS has a top code that increases in nominal terms throughout the period, at around the 98th percentile. However, it shows a decline in inequality similar to, and even sharper than, the household survey sources. Second, the short-dashed line in Fig. 1C shows the variance of annual earnings in the LEHD (from ref. 29 and top coded at the 99.999% level). Unlike the ACS and the ASEC, the LEHD has no information on weeks or hours worked. As a result, the level of inequality is higher in the LEHD, inflated by partial year and marginally labor market-attached workers. However, notwithstanding the level differences, the initially rising trend, subsequent leveling, and small decline are similar to the household sources. Third, in Fig. 1D, we use administrative data without top codes to show another measure of inequality: the share of US labor income going to the top 50%. The SSA shows different levels than PSZ and AS; in 2013, the share is 0.86 in the SSA data and 0.83 in PSZ. However, all three exhibit similar trends; the share of labor income going to the top half increased until about 2012, when it stabilized and even began to drop. This trend was interrupted in the SSA series in 2020, but this is likely due to COVID-19-related unemployment spells, which strongly affect annual earnings inequality measures that do not adjust for partial year employment. Overall, these distinct data, with a distinct inequality concept, also show a stabilization in inequality starting around 2012…"