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How would you summarize your findings regarding the distribution of U.S. economic recoveries since the 1950s?

I had a basic question: when income grows, who gains? The chart compares the bottom 90 percent of families to the wealthiest 10 percent. If we consider periods of economic growth during the entire postwar period, we find that in every expansion the bottom 90 percent of families have been capturing a smaller and smaller share of that growth. If, for example, average income grows from $50,000 to $55,000, we would like to know how the $5,000 is distributed. It used to be the case that the vast majority of that growth went to the vast majority of the population. But today, it’s exactly the opposite: that extra $5,000 goes to the top 10 percent of families, who actually capture even more than that, because the incomes of the bottom 90 percent have been shrinking during the latest expansion. GDP has been growing and labor markets are slowly improving, but most people don’t really feel the benefits of the economic recovery. There is disturbing long-term erosion in the way income gains have been shared.

Pavlina Tcherneva illustrates the dramatic shift in who has benefited from economic recoveries over the past 60 years. In the Journal of Post Keynesian Economics.

What has caused the change?

We have to be very careful not to offer singular causal explanations for this complex phenomenon. There are many factors. My main research focuses on fiscal and monetary policy, so I look at what I call the “policy regime”—that is the institutional and policy context that helps generate or reinforce the forces of income inequality. For example, I examine the different measures governments have taken to stabilize and grow the economy after every postwar downturn. My research indicates that the way we grow increasingly favors the incomes of the very wealthy, which over the last few decades have progressively taken the form of stock options, carried interest, and other cash flow from financial asset ownership. Because macroeconomic stabilization policy has prioritized the recovery of the financial sector, by design, it has resuscitated and grown the incomes of the wealthy. By contrast, the vast majority of households count on wages and salaries. So, when we stabilize the economy in a way to first stabilize the banking sector and the stock market, those policies surely favor the incomes of those who own financial assets.  If at the same time, unemployment is still relatively high, labor markets are not improving quickly, and wages are stagnating, then people who count on wages and salaries are not going to do as well. In other words, the failure of policy to secure strong income growth from wages and salaries along with tight full employment over the long run (that is, a situation where everyone who would like to work has a job opportunity that offers decent pay), is a key contributor to the increase in income inequality.

What kinds of government policies would provide support for the 90 percent so that graph doesn’t look so lopsided?

There are two ways to improve the income distribution. One is to allow the market to generate incomes the way it already does, and then to redistribute them after the fact by taxing the wealthy and giving transfers to the poor. But then we still have the institutions and policies that fundamentally create or support unequal incomes. It’s hardly an achievement when the income distribution improves because people rely on more welfare payments, income support, and various other transfers. I suggest that we change the way we create income to begin with. Ideally policy would focus on creating strong labor markets from the outset. Good jobs at decent pay need to be a primary policy objective. Currently, we aim to create growth and hope that it will deliver many jobs afterward. But we increasingly experience jobless recoveries—the jobs don’t materialize in sufficient numbers. I propose to do it the other way around: create jobs first and allow growth to become a byproduct of a job-led recovery.

How do we do it? I favor direct employment. There are millions of people who are ready, willing, and able to work, who want jobs with decent pay but cannot find them because the private sector is not doing sufficiently well to hire them. So while the government was stabilizing the banking sector in 2008, it could have directly created many useful jobs as well. There are many things we need to get done. Consider the terrible state of our infrastructure. The American Society of Civil Engineers gives the U.S. a grade of D+ on the quality of our overall infrastructure. We have levies, bridges, and public spaces to rebuild; we have urgent environmental needs to address. These are investments that are not being done by the private sector; they serve the public purpose and require public sector initiative. At the same time, we have millions of people who are sitting idle and require work. This is meaningful, productive, and useful work. If we put the two together—the needs with the resources—we will not only produce a job-led recovery but will also stabilize and raise incomes from the bottom, while tackling many pressing needs and social problems that go unaddressed decade after decade. This is not trickle-down economics; it is economics from the bottom up.

Follow Professor Tcherneva on Twitter @ptcherneva

Read “Growth for Whom?” a summary of her research from the Levy Economics Institute (PDF)