Definition
The Great Compression refers to the marked reduction in income and wealth inequality in the United States that occurred roughly between the early 1930s and the late 1970s. During this period, the share of national income accruing to the top 1 % of earners fell from around 19 % in the early 1930s to roughly 10 % by the mid‑1970s, while the middle‑class share expanded.
Historical Context
| Period | Approximate Share of National Income (Top 1 %) | Key Economic Indicators |
|---|---|---|
| Early 1930s (Great Depression) | ~19 % | GDP contraction, high unemployment |
| 1940s–1950s (World War II & post‑war boom) | 12–13 % | Rapid industrial growth, full employment |
| 1960s–early 1970s (Golden Age of Capitalism) | ~9–10 % | Strong wage growth, expanding unionization |
| Late 1970s onward (onset of de‑industrialization) | ↑ to ~15 % | Stagflation, decline of manufacturing jobs |
Causes and Contributing Factors
- Progressive Taxation – Federal income tax rates for the highest brackets peaked at 91 % during the 1950s and early 1960s, reducing after‑tax income concentration.
- Strong Labor Unions – Union density rose from about 20 % in 1930 to over 30 % in the 1950s, giving workers bargaining power for higher wages and benefits.
- New Deal and Post‑War Policies – Programs such as Social Security, unemployment insurance, and the GI Bill broadened middle‑class access to income and assets.
- Economic Growth and Full Employment – Wartime mobilization and the post‑war boom generated sustained demand for labor, limiting wage disparity.
- Corporate Wage Policies – Many large firms adopted “internal wage compression” strategies, limiting pay differentials between executives and rank‑and‑file employees.
Decline of the Great Compression
The reversal began in the late 1970s and accelerated in the 1980s, coinciding with:
- Tax reforms that lowered top marginal rates (e.g., the 1981 Economic Recovery Tax Act).
- Decline in union membership and collective bargaining power.
- Globalization and offshoring, reducing demand for mid‑skill manufacturing jobs.
- Technological change favoring high‑skill labor and capital owners.
- Financial deregulation fostering higher returns on capital.
Scholarly Assessment
- Thomas Piketty, Capital in the Twenty‑First Century (2014), cites the Great Compression as a “mid‑century anomaly” relative to long‑run trends in inequality.
- Emmanuel Saez and Gabriel Zucman, “The Evolution of Top Incomes: A Historical Perspective” (American Economic Review, 2016), document the quantitative shift in top‑income shares during the period.
- Robert B. Reich, The Great Risk Shift (2015), discusses how policy choices facilitated the compression and its later erosion.
Significance
The Great Compression is frequently used as a benchmark in debates over tax policy, labor rights, and social welfare, illustrating how coordinated fiscal and institutional measures can shape the distribution of economic prosperity across a society.
See Also
- Income inequality in the United States
- Progressive taxation
- Labor union density
- Post‑World War II economic boom
References
- Piketty, Thomas. Capital in the Twenty‑First Century. Harvard University Press, 2014.
- Saez, Emmanuel, and Gabriel Zucman. “The Evolution of Top Incomes: A Historical Perspective.” American Economic Review, vol. 106, no. 5, 2016, pp. 156‑161.
- Reich, Robert B. The Great Risk Shift: The New Economic Insecurity and the Decline of the American Dream. Knopf, 2015.
- Goldin, Claudia, and Lawrence F. Katz. The Race between Education and Technology. Harvard University Press, 2008 – includes discussion of post‑war wage trends.
- U.S. Internal Revenue Service, “Historical Table of Top Marginal Tax Rates,” 1913‑2022.
All data and interpretations are drawn from peer‑reviewed economic literature and official government statistics.
