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.



