Real Earnings and the Distribution of Earnings, 1995-2005

Publication Date: January 2007

Publisher: Library of Congress. Congressional Research Service

Author(s):

Research Area: Economics

Type:

Abstract:

Real earnings and the distribution of earnings are indicators of a nation's economic well-being. Changes in the level of real earnings (i.e., actual earnings adjusted for inflation) show how the standard of living has changed over time. Changes in the distribution of earnings show how the relative standards of living of different individuals or families have changed over time.

When studying changes in earnings it is useful to compare years when overall labor market conditions are similar. The civilian unemployment rate was 5.6% in 1995 and 5.5% in 2004. (Although annual data are available for 2005, the unemployment rate was 5.1%.) A study of earnings can examine the earnings of all workers (i.e., full-time and part-time, part-year and full-year) or, to try to control for changes in annual hours worked, the earnings of full-time, year-round workers.

From 1995 to 2004, real weekly earnings increased for workers across the earnings distribution. Most of this growth occurred between 1995 and the recession year of 2001. Although men earned more than women, the earnings gap between men and women narrowed from 1995 to 2004.

Among all workers, real earnings increased more at the top and bottom of the distribution than in the middle. Some analysts describe this phenomenon as the "hollowing out" of the middle of the distribution. The hollowing out occurred among men, but not women. Two factors may help explain the hollowing out of the distribution. First, from 1995 to 2004, the average workweek of lower-wage workers increased relative to the average workweek of workers in the middle of the distribution. Second, the average hourly wage of lower-wage workers increased relative to the average hourly wage of workers in the middle of the distribution. In both cases, these increases occurred mainly between 1995 and 2001.

Among full-time, year-round workers at the bottom and middle of the earnings distribution, the growth in earnings was more evenly distributed than at the top of the distribution. Among the highest paid workers, the growth in earnings was approximately double the growth for other workers.

Between 1995 and 2004, earnings equality appears to have peaked in 1999. The distribution of weekly earnings among all workers differed from the distribution among full-time, year-round workers. Among all workers, inequality declined slightly from 1995 to 2004. But, during the period, inequality declined from 1995 to 1999, before increasing from 1999 to 2004. In contrast, inequality increased among full-time, year-round workers from 1995 to 2004. Inequality increased because the top 5% of earners received a larger share of total earnings, while workers in the middle of the distribution received a smaller share of total earnings.

Some evidence suggests that earnings inequality declined after the 2001 recession until 2004. This report will be updated periodically.