Why did the gap between rich and poor suddenly shrink in the 1940s?
A car union's 1949 deal with General Motors is one of the stories behind the years when US income gaps narrowed sharply.
▶ Start the storyEconomists call it the Great Compression: a period of substantial in the United States that began in the early 1940s, when the gap between rich and poor became much smaller than it had been before. The term is reportedly from the economists Claudia Goldin and Robert Margo in a 1992 paper, a takeoff on the Great Depression, during which the compression started.
What caused it is still debated. The economist Paul Krugman credits not only progressive income taxation but other and World War II policies of President Franklin D. Roosevelt. Other accounts stress unions: by 1947 more than a third of non-farm workers in the US were union members. A famous example is the 1949 Treaty of Detroit, a bargain between the United Auto Workers and General Motors in which union members were guaranteed wages that rose with productivity, and health and retirement benefits, and in return GM had relatively few strikes.
Krugman argues that policy explains the compression better than the market forces of a Kuznets curve, because a natural change would have been gradual, and the compression was sudden. Not everyone agrees on the timing: a 2022 study in the Economic Journal pointed to a gradual decline in inequality during the Great Depression that extended into the war years, and challenged the view that World War II was a great leveler.
Policy and institutions
- Progressive taxes and the
- Strong unions, wage controls in wartime
- Little foreign competition
Slower forces and timing
- A natural change would have been gradual
- 2022 study: decline began in the Great Depression
- Kuznets-style market forces
The story does not end there. According to the economists Thomas Piketty and Emmanuel Saez, tax data show the compression ended in the 1970s and has since reversed in the United States, and to a lesser extent in Canada and England.
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Recap
The Great Compression was sudden, which is why Krugman credits policy and unions, while other economists question its timing and its causes.
💡 A trick to remember it · A squeeze, then a stretch: the 1940s squeezed the income gap, and from the 1970s it stretched back out.
Surprising fact · Switzerland, where progressive taxation was never implemented, never had a compression at all.
Connects to
- 💻 Did computers and schooling push wages apart?
- ⛰️ Does inequality first rise, then fall, as a country gets rich?
- 🔝 What does it mean when the top 1% receive a fifth of all income?
- 🕯️ Why was World War II the deadliest war in history?
- 🪙 Why did the countries that abandoned gold escape the Great Depression first?
Sources (2)
No source, no claim. Every fact in this lesson (16 claims) cites at least one of these.