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A Firm-Level Perspective on the Role of Rents in the Rise in Inequality

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A Firm-Level Perspective on the Role of Rents in the Rise in Inequality

US Government,

5 min read
5 take-aways
Audio & text

What's inside?

To understand why income inequality is growing, look to home prices and workers’ mobility.

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Editorial Rating

8

Qualities

  • Innovative

Recommendation

Inequality is a hot topic among practitioners of the dismal science, but this report from two noted economists sheds new light on the oft-probed issue. Jason Furman and Peter Orszag delve into new corners of the income-inequality picture, noting that returns to housing-related capital have outpaced returns to other types of capital. In another insight, they find that American workers no longer move around the country as they once did, a shift with implications for economic mobility. Alas, their text is replete with economics jargon. Nonetheless, getAbstract recommends this innovative study to investors and policy makers seeking fresh ideas on the problem of income inequality.

Summary

The top 1% of American earners saw their share of total income jump from 8% in 1970 to 17% in 2010. That increase reflects a change in the relative distribution of capital and labor to total income: Starting in 1985, capital income as a fraction of total income began to grow for the top 1%. But that shift accounts for only about 20% of the rise in income inequality.

Research on income inequality focuses on the role of “economic rents” – “the return to a factor of production [for example, labor or capital] in excess of what would be needed to keep it in the market.” Intriguingly...

About the Author

Jason Furman is chairman of the President’s Council of Economic Advisers. Peter Orszag is vice chairman of corporate and investment banking at Citigroup.

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