Top Earners and the Great Compression: New Estimates Based on Tax Records

Résumé 0

This paper presents new estimates of wage inequality in the United States from 1918 to 1949. Building upon a new top-income methodology, we provide various definitions of top wage groups that account for the sharp fluctuations in the employed population during this period. The results confirm the decline in wage inequality during the Second World War, primarily due to the relative stagnation of the top 1% group and a sharp increase at the bottom. However, the underperformance of top wage earners was driven by a significant compositional shift that resulted from an unprecedented rise in the corporate tax. This change prompted a shift in business preferences regarding their legal status, fostering a surge in partnerships during the 1940s. Consequently, a significant number of workers transitioned from salaried positions to self-employment, which amplified the compression observed in the wage distribution.