Slower Productivity and Higher Inequality: Are They Related?

Abstract

Income growth for typical American families has slowed dramatically since 1973. Slower productivity growth and an increase in income inequality have both contributed to this trend. This paper addresses whether there is a relationship between the productivity slowdown and the increase in inequality, specifically exploring the extent to which reduced competition and dynamism can explain both of these phenomena. Productivity growth has been uneven across the economy, with top firms earning increasingly skewed returns. At the same time, the between-firm disparities have been important in explaining the increase in labor income inequality. Both these findings are consistent with the observed reductions in competition, as evidenced by increasing concentration and economic rents, and business dynamism. The authors also explore the scenarios under which government policies can help mitigate, or contribute to, declining competition and dynamism.