Federal Reserve Bank of Atlanta. "Untangling the Complex Causes of Inequality," Economy Matters : Economic Research (December 4, 2018). https://fraser.stlouisfed.org/title/8588/item/657463, accessed on May 2, 2025.

Title: Untangling the Complex Causes of Inequality

Author: Davidson, Charles
Date: December 4, 2018
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image-container-0 ECONOMY MATTERS ECONOMIC RESEARCH Untangling the Complex Causes of Inequality December 4, 2018 ANNUAL REPORT ECONOMIC RESEARCH BANKING & FINANCE REGIONAL ECONOMICS COMM/ECON DEV INSIDE THE FED DEPARTMENTS Financial Tips Podcast Quizzes Staff & Credits Subscribe to e-mail updates As concerns about widening gaps in income and wealth permeate economic policy discussion, the Federal Reserve Bank of Atlanta assembled some of the field's leading thinkers to explore the roots of inequality from various perspectives. When considering a topic as complex as inequality, economists and policymakers advance numerous questions such as the role of education and school quality in the intergenerational transmission of income, the economic importance of a person's physical location, and the role that higher education financing occupies in economic potential. Indeed, Harvard University economist Raj Chetty recently grabbed headlines with his trailblazing Opportunity Atlas, a look at how one's physical location can social mobility. Chetty recently visited the Atlanta Fed to discuss his work as part of the Bank's ninth annual employment conference, "The Changing Nature of Inequality across Firms, Geography, and Generations." Melinda Pitts, research economist and director of the Atlanta Fed's Center for Human Capital Studies, organized the conference along with Richard Rogerson of Princeton University and Robert Shimer of the University of Chicago. Atlanta Fed research conferences showcase new analytical work on important economic questions. In this case, inequality intrigued Pitts and her team because the divergence of income, wealth, and opportunity is a pressing concern in research and policy circles. Perhaps as a result, some of the most interesting labor market research today explores these matters, she said. The Atlanta Fed's Melinda Pitts, one of the conference organizers. Photo by Keith Gray "We like to bring in a diversity of research methods—micro, macro, theoretical, and applied—so that the focus is big-picture and policy oriented," Pitts explained. While focused broadly on inequality, the conference convened economists who are exploring the subject from different angles, ranging from the implications of hyper-productive "superstar firms" to economic mobility in underserved neighborhoods. The conference's keynote presenter was Raj Chetty, the Harvard economist whose work on economic mobility by individual census tract has garnered widespread acclaim. Additional conference papers examined the stagnation of median lifetime incomes over the past half century, states' financing of higher education, and the degree to which a few large employers dominate local labor markets, among other topics. Below are summaries of some of the papers presented at the conference. Please visit the conference web page the complete papers.
image-container-1 David Dorn at the Atlanta Fed conference. Photo by Keith Gray Superstar firms pay well but contribute to lower labor share of GDP A widely cited 2017 paper presented at the conference, "The Fall of the Labor Share and the Rise of Superstar Firms," examines the rise of "superstar firms" that are so productive they have amassed huge profits and increasingly large market shares in various industries. These companies do not appear to skimp on salaries, said David Dorn, a coauthor who presented the paper. Rather, they contribute in a different way to the declining share of overall income that flows to labor, what economists call "the labor share." These companies are so profitable, with fewer employees relative to traditional large firms, that more of their income flows to capital as opposed to labor, thus exacerbating an ongoing trend throughout the economy. In retail trade, the combined market share of the four biggest firms has more than doubled since the early 1980s, rising to 30 percent, Dorn and his coauthors found. Meanwhile, the share of those sales flowing to payroll has dipped by about 7 percent. Dorn and his fellow authors find that industries where sales have concentrated most show the sharpest declines in the share of income funneling to workers. It's not entirely clear what is causing this concentration of market share. However, the researchers point to technology as a probable reason. The rise in concentration of sales, according to the paper, is "disproportionately apparent in industries experiencing faster technical change … suggesting that technological dynamism, rather than simply anticompetitive forces, is an important driver of this trend." The rise of superstar firms and decline in the labor share of income also may be related to the proliferation of outsourcing, according to Dorn. Large employers, he explains, increasingly use contracting firms, temporary help agencies, and independent contractors for a wider range of work that traditionally was done in-house. Incomes stagnating across generations Another paper discussed at the conference analyzes the trajectory of workers' career-long incomes. In a nutshell, the news is not good. The researchers' findings are significant. Such a sweeping examination of lifetime income distribution is unusual, as most research looks at incomes at a particular point in time—say, comparing what people in different generations earn at age 40— because the mass of data needed to explore ongoing incomes of millions of people across decades has typically been unavailable. In fact, the presenter, Fatih Guvenen of the University of Minnesota and the Federal Reserve Bank of Minneapolis, and his coauthors write that they believe their paper—titled "Lifetime Incomes in the United States"—is the first analysis of lifetime income distributions for a large number of age groups in the United States. The researchers examined a 57-year-long set of data, from 1957 to 2013. The oldest group they analyzed turned 25 years old in 1957, and the youngest turned 55 in 2013. Guvenen and his coauthors found that for a vast swath of the workforce, median lifetime incomes adjusted for inflation declined.
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Date: December 4, 2018
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Arriving at answers about economic inequality requires research from a variety of perspectives because isolating the relevant factors behind it is a formidable challenge. Some top researchers recently visited the Atlanta Fed to discuss their work on the matter.
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