Reassessing the great compression among top earners: The overlooked role of taxation and self-employment Articles uri icon

publication date

  • April 2025

start page

  • 101651-1

end page

  • 101651-18

volume

  • 96

International Standard Serial Number (ISSN)

  • 0014-4983

Electronic International Standard Serial Number (EISSN)

  • 1090-2457

abstract

  • This paper provides new estimates of wage inequality in the United States from 1918 to 1949, leveraging a novel top-income methodology that integrates both tax records and census data. Our analysis reveals no sustained decline in wage inequality before the Second World War but a marked decrease during the war years. This decline was driven primarily by stagnation among the top 1 % of earners and significant wage growth at the lower end of the income distribution. However, the relative underperformance of the top earners was largely influenced by a major compositional shift triggered by unprecedented increases in corporate and personal income tax rates. These tax changes led to a shift in business preferences toward partnerships, resulting in a substantial transition from salaried employment to self-employment. This shift, previously overlooked in inequality studies, resulted in a 30 % overestimation of wage compression, significantly altering the wage distribution dynamics of the 1940s.

subjects

  • History
  • Politics

keywords

  • wage inequality; great compression; self-employment; corporate tax; business preferences