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Wealth gap widens as labor's share of income falls

Labor income has dropped as a share of total income earned in the United States, widening the gap between rich and poor, according to a study by the Cleveland Federal Reserve Bank.

Citing data from the Bureau of Economic Analysis, one of three data sources used in the report, the Cleveland Fed said labor's share of gross national income had declined to 63.8 percent now after fluctuating around 67 percent during the 1980s, 1990s, and early 2000s.

That has resulted in a spike in income inequality, the dispersion of annual incomes across households. Inequality had been declining up to the late 1970s.

"Since labor income is more evenly distributed across U.S. households than capital income, the decline made total income less evenly distributed and more concentrated at the top of the distribution, and this contributed to increase income inequality," it said.

According to the Cleveland Fed, between 1967 and 1980, the average real income of the bottom 20 percent of households grew by 1.34 percent, faster than the 1.09 percent growth rate of the top 20 percent and the 0.67 percent of the top 5 percent.

After that period, however, average real income grew by only 0.05 percent for the bottom 20 percent of households while it grew by 1.24 percent for the top 20 percent and by 1.67 percent for the top 5 percent.

The Cleveland Fed blamed the trend on changes in the technology used to produce goods and services, globalization, trade openness, and developments in labor markets and policies.

The Cleveland Fed said it expected labor's share of income to regain ground as the economic recovery continues, adding: "Income inequality will not necessarily decrease, though."

The wealth gap could still widen, it said, because inequality is also affected by the way income is concentrated, or distributed across the households, and because capital income is strongly correlated to business cycles and tends to rise during recoveries

"This suggests that capital income will become more concentrated at the top in the coming years of the recovery, helping to raise income inequality even further. This effect has dominated the dynamics of income inequality during the past two business cycles," the Cleveland Fed said.

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