Rising income dispersion in the United States and other advanced nations has become a source of concern. Since the early 1970s, incomes for the highest U.S. earners have raced ahead, while those at the bottom of the income distribution have stood still and those in the middle barely increased. Strikingly, even in the current recession, this underlying trend is not reversing.
In an effort to provide a comprehensive, well-founded explanation to policymakers and other interested parties, the McKinsey Global Institute and McKinsey Social Sector Office have conducted a study of changes in income dispersion and their causes from 1991 to 2005, the height of the economic cycle. The study analyzed a broader, deeper data set than previous research in the area, making it the first attempt to estimate the contribution to rising dispersion of fundamental changes in the U.S. economy’s mix of industries and occupations. Its findings show that redeveloping America’s human capital should be the focus of labor market policy coming out of the recession.
Understanding the patchwork of the United States’ labor market is key to understanding what has happened to income growth. Labor income largely accounts for 75 to 85 percent of household pretax income across the income distribution, and the analysis shows that differential rates of growth in labor incomes were the most significant sources of the differential rates of household income growth across the income distribution. For this reason, the research takes as its starting point the labor market rather than household incomes as most previous studies have done, resulting in a more detailed picture than was previously available.
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