Immigration and Income Inequality

Income inequality was the topic de jour during much of the election.   The left argued that median wages had stagnated, and tried very hard to date this stagnation from 1980 so that it could be blamed on Ronald Reagan.   Others have argued that the the whole median family wage stagnation thing was overblown, as 1) families had changed alot over 30 years;  2) Compensation had changed (such that wages were less of total compensation with the rise in value of health care plans); and 3) individuals matter, not quartiles, and individuals were doing well and still had mobility between income bands.

My sense is that the income inequality numbers have always been fraught with problems.  For example, rich people have huge incentives to manage the income numbers on their tax returns, so trying to draw conclusions about top earners from their tax returns is a bit dangerous.  Just the shift from C to S corps and LLC's over the last 30 years has fundamentally shifted what income high net worth entrepreneurs show on their tax returns.

All that being said, I think it is clear the income gap has grown, and it really started growing in this country around 1970.  Whether this matters is a different story - its clear from comparing to European countries that while our gap has spread vs. their income gaps, its almost 100% because our rich are richer than their rich.  Our lowest quintile is pretty comparable (here).  If that is the case, its an interesting question to see if this bothers folks.

Anyway, I think there still is work to be done to fully explain and rationalize these income inequality numbers.  But I still find it hard to believe they are not somehow related to immigration.  After all, dropping 20 million new immigrants, many of them quite poor, into the bottom quintile of US workers over the last 20 years certainly tends to pull down medians.  Just compare these two charts, with income inequality on the top and the percentage of residents in any given year that are foreign-born (legal or illegal immigrants).  I fitted the two charts together manually to get the time scales to line up, I don't have time to replot them together as I should.  Click to enlarge.


Its hard to see, by the way, how the top chart really reflects a trend starting with Reagan (as much as the left so desperately wants it to be true).  Something happened around 1970 to reverse the curve.  I have offered one possible cause.  I do so reluctantly, because I don't want to be misunderstood -- I am a big supporter of open immigration and would hate to give the anti-immigration folks any ammunition.

Anyway, you are welcome to discuss.  It is something I am thinking about but don't have an answer for.

Postscript: This is the chart comparing the top and bottom US deciles to countries in Europe on an absolute dollar basis. The conclusion I draw is that our poorest are in about the same shape as the poorest in Europe, but our rich are richer than in Europe.  Given this, does our income inequality still worry you?

The reason the analysis is done this funny way is that what one usually sees is some country like Chad with the poor at 80% of the median income.  But 80% of almost nothing is still almost nothing.  So this chart converts everyone to apples and apples - almost.  I still think it underestimates how well off the US poor are, maybe some sort of exchange rate vs. PPP problem.

  • Bart Hall (Kansas, USA)

    I think you're on to something. If you have the raw data you might wish to determine a correlation coefficient and give us an R^2 on the thing. My eyeball guess is that you'll get something on the order of R=0.7 and R^2=50%. Nice catch.

    As to the other 50% (or whatever it turns out to be), I think we can blame inflation to no small degree. Inflation always and everywhere increases income disparity because the chief beneficiaries of inflationary "dollars" (or whatever) are those first in line. Wage increases are a lagging indicator in inflationary environments. The inflection point of your graph(s) also tracks rather closely with a shift t serious inflation (first Viet Nam and second Nixon's closing of the gold window).

    In that respect, we should expect that our current roll-over to a profoundly deflationary environment -- dealing with debt (whether by repayment or default it is always deflationary) and deflation of real estate, equities, and commodities -- we s hall see the disparity decrease.

    Given the nature of America -- at least to this point -- I see income disparity as a feature, not a bug, and out family income currently sits at about the 30th percentile. If government allow us, we'll be much closer to 70% in a decade.

    It ought not to be their decision.

    "Put not your trust in princes and men of power, because they will lead you astray for their own purposes." Psalm 146

  • Esox Lucius

    AARRGGHH! Figure 8 says the share of income "RECEIVED". Why do they always say "Income Received" or "Income Flowing to..." or my personal favorite "Income Distributed". I have been an entrepreneur for 16 years now and never once have I found the Income Distribution line, Received any income or found the sweet, sweet undertow of flowing income. All of it, every penny, has been earned.

    Why is that so hard to say "Earned" it's got a nice ring to it...

    My guess is you can't say the word "earned" or it blows the socialist's whole argument.

  • Craig Loehle

    The basic numbers are very suspect. College students count as "poor" as do retired people. Many in the illegal immigrant community work for cash and don't pay much taxes, thus count as poor. Many at the lower income range get various kinds of government assistance. The middle class gets lots of perks such as frequent flyer miles or a company car or 401k company contributions which don't count as "income". Do it yourself home repairs don't count as income. In certain consumer goods categories prices have fallen so you can get a good computer now for $1000 vs many times that just a few years ago for the same thing. This means your income goes farther. Same for cars & many home appliances. Not captured properly in the CPI I don't believe. Very squishy numbers.

  • Michael

    The immigration act of 1965 opened up the US to immigration from poorer areas of the world. Also family reunification visas were unlimited. This brought a lot of uneducated people in to the country as the visas were based of fist come first served.

    Whether you look at immigration as good or bad, having lived in NYC, that city couldn't function without large numbers of legal and illegal immigrates working in the underground cash economy.

  • Evil Red Scandi

    It also corresponds roughly with the beginning of Lyndon Johnson's thoroughly evil "war on poverty" (it should have been called the "war to keep people with darker skin in the ghetto," as that has been the primary effect)

  • John Turner

    Testing since my last comment did not post.

  • John Turner
  • Esox Lucius

    I love how they always say "Income Received" or "Income flowing to..." or "Income Distributed to" when they talk about income inequality.

    I would love to receive income, or have it distributed to me. I would also like to drown in the sweet, sweet undertow of flowing income but all I could ever manage was to earn my income.

    I must be standing in the wrong river.

  • kebko

    Real income inequality has clearly gone down in the last 40 years. Using leisure time, basic household luxuries, house size, etc. etc. etc., the poor & middle class are doing very well.

    I think a big factor here is that the natural forces of higher wealth will increase the measured inequality because in the last 40 years, we have added many years in the typical lifespan of schooling and retirement. We are all living lives which internally are statistically unequal. This is a product of our wealth. If inequality doesn't change at all & we keep getting wealthier, the measured inequality will continue to grow because of these factors. If my lifeplan goes as planned, I will live a wealthy, leisure filled life, which will have a lifelong Gini, statistically, of a third world country.

  • Chris

    A few years after the beginning of time, one cave family discovered fire. Because cave families in other parts of the world had not yet discovered fire, worldwide inequality of caveman income (or standard of living) spiked dramatically.

    Whether it be caveman days or today, income inequality is a measure of PROGRESS! We all have relatives, friends, etc. who choose to "stay in the cave" rather than go out and make something happen. These people are always going to anchor the low end of the income scale at a near constant number. Therefore, if mankind continues to progress and overall wealth increases, the income disparity between productive and non-productive people is going to increase. As long as the number of truly suffering or starving poor does not rise, we should wear "increasing income inequality" as a badge of honor.

  • DrTorch

    I think you have far more to do to tie this to immigration.

    It looks to me like a prize-winner for Labor Unions.

    I would tend to suggest that the disparity started its climb from 1970 just as manufacturing left the US, to more efficient locales. And since I believe that labor unions and burdensome regulations contributed greatly to this, I wouldn't use it to promote big labor.

    Regardless, I'll offer it as an alternative to your thesis, and could be convinced that a few other theories might be legit too. I just don't think these limited data point to any one conclusion.

  • tex

    Note that its "family" income inequality and you can explain much of that by noting the increase of working women with increasing wages and their selection of husbands making even more. And these women have been working longer before motherhood and they are having fewer children allowing them to work even more. Also higher income men have been increasingly marrying well educated and high income women rather than keeping the "little lady" at home.

    In times past it was much more common for lower income husbands and wives to both work while upper income husbands worked and their wives did not. Now you are comparing lower income working husbands + wives with upper income husbands + high income wives.

    It is not a bad thing and any attempt to "spread the wealth" will diminish our nation's wealth.

  • Foxfier

    Tex-- you're right, except that it's comparing lower income working single parent homes (female headed households are notoriously on the low end of the income gap) vs DINKs 40 years into their careers.

  • Michael

    The other change is in the number of persons per household. It's dropped from around 3.8 in the 50s to 1.7 today. End the end, no matter how one plays with the numbers, that standard of living for everyone is better today than the 50s.

  • Lorenzo (from downunder)

    Two things to add. "Life-cycle" inequality has indeed got more pronounced: more "poor" students in their 20s who become high paid professionals in their 40s.

    Secondly, women into the workforce also increases the labour supply in a way that puts downward pressure on wages.

    Economic ratios (land/labour in low-tech societies, capital/labour in hi-tech societies) are a crude but useful way of understanding long term trends. How much capital newcomers bring with them affects how much downward pressure they put on wages and at which skill level.