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Rising income dispersion in the United States and other developed nations has become a source of concern. Since the early 1970s, incomes for the highest US earners have raced ahead, while those at the bottom of the income distribution have stood still and those in the middle have increased more modestly than the post-war average. Strikingly, even in the current recession, this underlying trend is not reversing. Lack of clarity on the causes of the trend has so far hampered progress on what policy responses, if any, may be appropriate. This paper shows that widening income dispersion reflects labor market institutions that have been too slow to respond to ongoing structural changes in the US economy.
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