Using data from both surveys and federal tax records, analysis by the Congressional Budget Office (CBO) reveals that pre-tax income in the United States has become significantly more unequal since 1980. Pre-tax income includes wages, business and capital income, and social insurance benefits like Social Security and unemployment insurance. Between 1980 and 2019, incomes for the bottom fifth of households rose by 45 percent, middle-income households saw a 34 percent increase, and incomes for the top fifth surged by 111 percent. Meanwhile, the top 1 percent experienced a staggering 232 percent increase, clearly showing that the highest earners have pulled far ahead.

What happens when we factor in government programs such as food stamps, welfare, and the Earned Income Tax Credit, and then subtract federal taxes? Since these programs primarily benefit lower-income households and taxes are applied progressively, incomes at the bottom rise more when we take these programs into consideration. Yet even with these adjustments, inequality remains significant and has continued to grow. According to the CBO, between 1980 and 2019, post-tax income for the bottom fifth of households rose by 89 percent, middle-income households saw a 51 percent increase, and the top fifth experienced a 119 percent gain. At the very top, the post-tax income of the top 1 percent climbed by an extraordinary 248 percent, widening the gap between them and the rest of the population.

There is some debate among scholars over the precise increase in household income inequality since 1980. The CBO estimates focus on "fiscal income," which includes wages, business income, capital gains, Social Security, and unemployment benefits, among other sources. However, economists Gerald Auten and David Splinter claim that these official figures miss a substantial amount of hidden income—unreported to the IRS—collected by non-wealthy taxpayers. This leads them to conclude that the rise in inequality has been less dramatic than it appears in official data.

In contrast, Thomas Piketty, Emmanuel Saez, and Gabriel Zucman argue that it's the rich who have increasingly underreported income, especially from pass-through businesses and funds sitting in offshore accounts. They contend that the wealthiest households are responsible for the bulk of unreported income, leading them to estimate a greater rise in inequality than both the CBO and Auten-Splinter.

My own reading of the evidence is closer to Piketty, Saez, and Zucman. But whatever the exact numbers, there is little doubt that U.S. income inequality has risen markedly since 1980. As the Nobel laureate Daron Acemoglu remarked, technical disputes shouldn't obscure the bigger picture: The U.S. economy has been malfunctioning for over four decades. Another laureate, Paul Krugman, famously dubbed this era the "Great Divergence," reflecting the widening chasm between the rich and everyone else.

Here is the bigger point. While early twentieth-century inequality was largely driven by asset ownership and inherited wealth, today's gap is powered by labor income. In their 2003 landmark study, Piketty and Saez put it succinctly: "[T]he working rich have replaced the rentiers at the top of the income distribution." And no one seriously disputes that wage inequality has soared over the past forty-five years.

To understand why incomes at the top—whether for business owners or highly paid executives—have skyrocketed while most American workers' pay has lagged behind productivity growth, we need a closer look at how 'wages' are set. Government programs may have softened some of the blow, but the underlying story remains much the same: The market wages of ordinary Americans have not kept pace with the country's rising prosperity.

Ultimately, wages lie at the heart of the divide between the rich and the rest. This book sets out to examine how pay is determined and why they've diverged so sharply.

A BROADER LOOK ACROSS THE WORLD

We live in a globally connected world—trade and investment flow across borders, and major technological advancements spread rapidly from one country to another. This interconnectedness may lead some to assume that rising wage inequality in the United States is part of a universal trend. But the numbers tell a different story. Inequality in wages and incomes has grown more sharply in America than in most comparable economies.

Figure 1.2 (not shown) presents data from the Organization for Economic Cooperation and Development (OECD), tracking wage gaps between the top 10 percent and bottom 10 percent (deciles) of full-time workers across thirty-eight high—and middle-income countries. While the OECD's older data is spotty for the 1980s and 1990s, from 2000 onward we have a solid record.