Rising US income inequality was fueled by Reagan’s attacks on unions, and continued by Clinton’s financial deregulation


Image: Reuters via Newsweek.

by David Jacobs

“It is our job to glory in inequality and to see that talents and abilities are given vent and ex­pres­sion for the benefit of us all.” –  Margaret Thatcher

“A quick glance at the curves describing wealth inequality or the capital/income ratio is enough to show that politics is ubiquitous and that economics and political changes are inextricably in­ter­twined and must be studied together.” – Thomas Piketty, Capital in the Twenty-First Century, p. 577

What factors best explain the remarkable expansion in U.S. income inequality?  In a striking re­ver­sal in the long trend toward greater economic equality in the affluent democracies since 1900, the dif­fer­enc­es in U.S. family incomes accelerated sharply after 1980 (see Fig­ure 1) after experiencing only modest growth.  This de­par­ture, although present in other wealthy demo­cracies, has been less pro­noun­ced else­where.  Yet as the quotes above suggest, it is difficult to be­lieve that po­litics did not have a major influence on the rapid increase in income inequality after 1980.  To date, however, little syste­matic evidence for such a claim has been avail­able.  Yet political ac­counts are likely to mat­ter more in some per­iods as gov­ern­mental con­trol shifts from one political party to another.

Figure 1 –   Fluctuations in U.S. Income Inequality, 1951 – 2011


Note: Larger values denote greater inequality; vertical lines denote partisan shifts in the Presidency and “Rep” stands for Republican while “Dem” stands for Democratic Presidents.

With these as­sumptions in mind, Lindsey My­ers and I con­ducted a longitudinal analysis of the factors that pro­duced yearly changes in family in­come inequality from 1951 to 2010. We find that the steep decline in union strength and deregulation of the financial industry that occurred after Ronald Reagan’s presidency began in 1981 has contributed to the stagnation of middle incomes and the rise of income inequality.

One determinant of income inequality that is highly dependent on political decisions is union strength.  In a prior study, Daniel Tope and I analyzed changes in union recognition elec­tions that de­ter­­mine if a U.S. work place will be unionized.  We found that soon after Ron­ald Reagan became president, a pre­cipitous decline occurred in these elec­tions (see Figure 2)—which are reg­ul­ated by the National Labor Relations Board, under close presi­dential control.  Why would union strength mea­sured by the per­cen­tage of union members matter?  Stronger unions decrease the differences in earnings within firms.  And be­fore the po­li­ti­cal­ly in­duc­ed steep decline in union strength that began in 1981, unions probably were the most ef­fec­tive pressure group that lobbied for policies helpful to less economically for­tunate U.S. citi­zens.

Figure 2 – Number of Union Recognition Elections and Union Victories, 1962 – 2001


Note: Verti­cal lines denote partisan shifts in the presidency

In light of President Reagan’s aversion to unions and his distaste for political attempts to protect less prosperous citizens from destructive labor market changes, we suspected that we would find evidence for two conditional poli­tical relationships.  First, increased union strength be­fore Rea­gan’s presidency should reduce income in­equal­ity after adjusting for other determin­ants, but union strength should not matter dur­ing and after the Reagan administration’s tenure be­cause the then politically weakened unions no longer had much political in­flu­ence. 

Second, Reagan’s resolute anti-union stance was partly based on sympathy for policies that ad­vantaged his political party’s affluent base.  These citizens wish to avoid higher taxes and often profit from cheap labor.  For example, findings show that tax po­li­­cies most helpful to the pros­per­ous—that at least indirectly increased tax burdens on oth­er citi­zens—became in­creas­ingly like­­ly after Republican presidents took office.  Republican macro­eco­no­mic poli­cies also favored the affluent by stressing curbs on inflation at the expense of high­er un­em­ploy­ment.  Such predi­lections enhanced the economic distance be­tween the least af­fluent—who suf­fer more from job­less­ness—and their more fortunate counterparts.  Be­cause the Rea­gan neo­liberal departure—which was endorsed by subsequent Republican presidents—in­creased the economic and political re­sources of bus­iness and the affluent, we expected to find that the pre­sence of Re­pub­lican ad­min­­istrations dur­ing and after Reagan’s pre­si­dency would pro­duce additional in­creases in fam­ily in­come in­equality.

Our results support both hypotheses.  After many competing expla­na­tions are taken into ac­count, our findings suggest that in the per­iod before Rea­gan’s presidency, a 10 percent increase in union strength would have produced about a 2.7 percent decrease in in­come in­equal­ity.  Yet during and after Reagan’s tenure, because he and subsequent neoliberal presidents decreased union strength, fluctuations in this strength had no effect on in­equal­ity.  And again after adjusting for many plau­sible accounts, our findings show that a shift to a post 1980 Re­pub­li­can president increased in­come in­equality by about 3 percent.

A somewhat surprising result concerns Presi­dent Clin­ton’s policies, which also enhanced in­equality.  Although Clinton was a Demo­crat and this party is less sympa­the­tic to neo­lib­eral mar­ket solutions than Republicans, Clinton was ex­cep­tion­al.  Im­medi­ately before his pre­s­idency Clinton chaired the Demo­cratic Leadership Coun­cil.  This as­so­ciation was dom­in­ated by “New Dem­ocrats” who opposed collective bar­gain­ing and other cen­­ter left poli­cies.  As presi­dent Clinton endorsed glo­balization by signing into law the NAFTA free trade agree­ment between the U.S., Canada and Mexico.  Clin­ton al­so supported a change to a neoliberal mar­ket driv­en welfare sys­tem and he fur­ther dereg­ula­ted the financial in­dus­try.

The deregulation of the financial sector prov­ed to be influential.  Sociological studies show that many firms—which before had special­iz­ed in other economic activities—began to reap sig­ni­fi­cant profits from purely fi­nancial under­tak­ings.  This change occurred shortly before and dur­ing the great ac­cel­eration in eco­nomic inequality after 1980 partly because such activ­ities were de­reg­u­la­ted by Reagan ap­poin­tees and by sub­sequent neoliberal ad­min­istra­tions.  Our findings and others sug­gest this deregulation produced greater eco­nomic in­equal­ity probably because it let fi­nancial special­ists nego­tiate substantial increases in their com­pen­sa­tion.

But our results do not corroborate other plausible accounts.  Despite al­most universal sup­port within the economics profession, we find no evidence that a growth in the pro­por­tion of adults with four or more years of college created subsequent increases in inequality, but these negligi­ble findings may be attributable to measurement problems.  Other popular ac­counts that do not ex­plain the sharp post 1980 growth in U.S. inequality include increases in global­iza­tion and in­ter­national trade, the growth in women’s employment, and em­­ploy­ment shifts into ser­­vices or away from manufacturing.

In short, our findings suggest that the politically induced reduction in union strength helped produce stagnation in the incomes of those near to or below the middle of the income distribu­tion during times when most prosperous family incomes accelerated rapidly.  These events oc­curred when political de­reg­ula­tion of finance also contributed to the post 1980 ac­cel­eration in U.S. income inequal­ity probably by increasing the ability of financial spe­cial­ists to bar­gain for high­er pay.  Our investigation clearly suggests that the substantial ac­cel­eration in U.S. income in­equality af­ter 1980 is at least par­tially attributable to politics.

David Jacobs is professor emeritus of sociology at The Ohio State University. This article is based on the paper “Union Strength, Neoliberalism, and Inequality: Contingent Political Analyses of U.S. Income Differences since 1950” in the American Sociological Review.

Cross-posted at USAPP-United States Politics & Policy.


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