The common belief today is that income inequality has exploded—the rich are getting richer while the incomes of the middle class and poor stagnate. But a new study from the Urban Institute reviews several studies on income inequality and finds that this perception is not accurate. Unfortunately, earlier incomplete studies have influenced several state and local governments, causing them to pursue policies aimed at reducing income inequality while ignoring policies that would actually expand opportunities for lower-income people.
The study that got everyone talking about income inequality was published in 2003 by economists Thomas Piketty and Emmanuel Saez. They found that income inequality displayed a U-shaped pattern over time, and was substantially higher in the 1990s than in the 1950s. They also found that people in the top 10% of the income distribution received all of the income growth from 1979 to 2002, while median incomes fell by 8%.
In his recent Urban Institute study, Stephen Rose reviews several studies that examine income inequality and finds Piketty and Saez’s 2003 study to be an outlier. He looks at three metrics—median income growth, share of income growth going to the top 10%, and change in the income share of the top 1%—and finds that the numbers are not as favorable to the wealthy as commonly believed.
Rose concludes that real median incomes grew by a little over 40% from 1979 to 2014, the top 10% only captured about 45% of income growth, meaning 55%—not 0%—went to the remaining 90% of people, and that the income share of the top 1% only grew by 3.5 percentage points rather than the 11.9 percentage point increase reported by Piketty and Saez.
So it appears income inequality has gone up a bit over the last several decades, but it’s far from a crisis. Unfortunately, many local government officials still believe median incomes have stagnated and income inequality is exploding. Two recent surveys (here and here) of U.S. mayors found that inequality was a big concern among many of them, and big city mayors such as Bill de Blasio of New York have made reducing income inequality a key part of their political agenda.
As a result, many cities are trying to implement policies aimed at reducing income inequality, such as progressive income taxes and minimum wage increases. Both seem like intuitive solutions for getting more money to low-income people—redistribute money from rich to poor and force employers to pay people more—but in reality they have unintended consequences, especially at the local level.
Higher minimum wages reduce incomes for the lowest-skilled workers, such as teenagers, by forcing some businesses to close, cut hours, or employ fewer people. And in areas where only some cities raise their minimum wage, employers can shift their investment to nearby cities that don’t. Cities that set their minimum wage much higher than surrounding cities put themselves at a disadvantage when it comes to attracting investment that will help lower-income workers get jobs.
Progressive income taxes also don’t work particularly well in cities. Since there are so many different cities to choose from and wealthy people are especially mobile, if a city tries to tax high-income people too much, they move. There’s plenty of academic research (here and here) and anecdotal evidence supporting the idea that high-income people move if tax rates get too burdensome. Large, unique cities that lack a lot of good substitutes, such as New York City, may be able to get away with a progressive income tax, but even New York City’s income tax is only slightly progressive.
The most dynamic cities are always going to have relatively high levels of inequality because they are places of opportunity . Poorer workers from small towns and rural areas in developing and developed countries alike move to cities for higher-paying jobs, more amenities, and better access to public goods and services. As Harvard economist Ed Glaeser says, “Cities aren’t full of poor people because cities make people poor, but because cities attract poor people with the prospect of improving their lot in life.”
Local officials who want to help lower-income people should focus on expanding access to their cities rather than income redistribution. The obvious place to start is by allowing more housing, since high housing prices are the biggest barrier in the way of a decent middle-class life in many cities.
Minneapolis recently passed a new comprehensive plan that allows triplexes in areas where previously only single-family homes could be built. This is a good start and other high-price cities like Seattle, San Francisco, and Boston should follow suit. Cities also need to get rid of minimum parking requirements, minimum lot sizes, and height requirements, all of which limit the supply of housing and raise prices.
Limiting housing is not the only way cities restrict opportunity. Many other city regulations also get in the way. A recent story in USA Today describes the hurdles food truck owners have to clear in many cities, like permits that cost thousands of dollars, onerous restrictions on where trucks can park, and permit waiting times that stretch over a decade. Food trucks are a great, low-cost way for aspiring chefs to get their products to market, and cities that stifle them stifle opportunity.