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The Great Debate: Income inequality is increasingly "permanent"

By Ryan McCarthy

We've heard about rising income inequality for years — it's become a post-recession rallying cry. Even Jamie Dimon seems to think inequality is bad.

The hope, however, was that this was a cyclical problem — when the economy got cranking again, those of us hit hard by the downturn would start earning more and income inequality would fall.

A new paper, however, looking at male and household earnings, finds that income inequality is increasingly permanent. (The study didn't break out women's income.) "Rising Inequality: Transitory or Permanent?," which was submitted as part of the Brookings Papers on Economic Activity, looks at pre- and after-tax incomes from 1987 to 2009 and finds some disturbing trends.

Take a look at the chart below, which shows that men's earnings have become increasingly volatile over two year periods. This has big implications for the economy: It's one thing to lose your job, get a new one, and get by on a slightly lower income. It's an entirely other thing for your income to swing wildly from year to year.

The study's authors find that the effects of this variance are increasingly lasting. They differentiate between "transitory inequality" and "permanent inequality." The former might come from getting laid off in a bad economy or from people moving up the economic ladder by pulling in higher salaries. Permanent inequality, the authors find, is the key driver of the growth in income inequality for men. Worse, "for household income, both before and after taxes, the increase in inequality over this period was predominantly, although not entirely, permanent," the study's authors find.

What does this mean? It could lend credence to the idea that American men simply don't have the skills that economy needs right now. "Our data would imply stories such as skill-biased technical change or globalization that has increased the inequality of lifetime incomes," one of the study's authors told the FT.

It could also mean that a key component of the way we think about the U.S. economy could be broken. We tend to think that America is a pull-yourself-up-by-the-bootstraps economy. Lose your job? Just work harder, move or get new skills. This study — and the 4.8 million Americans who are officially considered among the long-term unemployed — suggest that it's much harder to get back on our feet economically than we think. As University of Michigan economist Justin Wolfers said: "The rich are getting richer and staying richer. The poor are getting poorer and staying poorer."

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