In industrialized market economies such as the United States, the primary reason for differences in families' annual incomes is the difference in wages and salaries. About three-fourths of all income received are wages and salaries -- the remaining fourth is divided among rents, profits, and interest payments.
The overall pattern of income distribution has not changed very much in most market economies since the end of World War II. In the United States, the 20 percent of families with the highest incomes receive about 43 percent of all income in any given year, the 20 percent of families with the next-highest incomes receive about 24 percent, the middle 20 percent of families about 17 percent, the 20 percent of families with the next-to-lowest incomes about 11 percent, and the 20 percent of families with the lowest incomes only about 5 percent of all national income.
These figures do not reflect the fact that people with higher incomes pay higher taxes than those with low incomes or that many low-income families benefit from government assistance programs. Adjusting for these differences raises the share of total income going to the poorest 20 percent of families to about 7 percent and reduces the share of total income received by families with the highest incomes to about 37 percent. But that is still a very large difference in income, and many people have long asked why that is so.
There are several reasons for these differences in family income that go beyond the basic wage and salary differentials noted earlier and suggest why different families may see their incomes rise or fall over time. For example, who workers have just entered the labor force (typically young workers with little job experience) and older workers who have retired or taken part-time jobs are, not surprisingly, heavily represented among the low-income families. Most workers -- and especially those with more education and training -- see their incomes rise in the early years of their careers. Other workers see their wages or salaries temporarily fall as a result of short-term layoffs, illness or injuries, or other factors.
For all of these reasons, and despite the general stability in the overall distribution of income, there is a great deal of income mobility in market economies. That just means that we consistently see families moving up and down in these income categories from year to year. For example, one recent study found that in just seven years, more than half of the families that were initially among the 20 percent of U.S. families with the highest incomes slipped down into some lower category, and 6 percent fell all the way down to the 20 percent of families with the lowest annual incomes. During those same seven years, almost half (45 percent) of the families who were initially among the group of families with the lowest incomes rose to some higher group; almost 4 percent rose all the way up to the 20 percent of families with the highest incomes.
Over longer periods of time, it has been found that most children of wealthy parents will also have higher-than-average incomes; but on average, their incomes will be not nearly as high as their parents'. Similarly, most children of poor parents will have below-average incomes, but not as far below average as their parents'. Over three generations, say in considering the grandchildren of today's wealthy or poor families, almost all of the earnings advantages or disadvantages are wiped out. That outcome does not hold for all wealthy or poor families, to be sure; but it does for most of them.
This statistical evidence demonstrates two important things: first, the markets for labor and other productive resources are open and flexible enough to provide considerable freedom and opportunity to most workers in market economies -- even to a large part of those who receive the lowest incomes in any given year. But, second, despite those opportunities, the pace of change in market economies is now so fast that some workers can be left behind, requiring carefully designed training and assistance programs to get them back into competitive labor markets or just to help them maintain a decent standard of living.
Since the decade of the 1930s and the Great Depression, governments in all of the major market economies have responded to these challenges by offering extensive income-assistance programs to low-income families. The level and form of this support remain controversial political issues in most of those countries. But even the most conservative political administrations in market economies now accept the need for a "safety net" of government aid and basic social services to protect the poorest families -- and especially the children in those families.
Although these programs have helped alleviate the effects of poverty, they have not been particularly successful in ending poverty. So the debate about how best to help the poor goes on, even though the question of whether the government should tax middle- and upper-income families to provide that help has, for all practical purposes, been settled for some time.