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

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  • Artola Blanco, Miguel
  • Gómez-Blanco, Victor Manuel

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.

Suggested Citation

  • Artola Blanco, Miguel & Gómez-Blanco, Victor Manuel, 2025. "Reassessing the great compression among top earners: The overlooked role of taxation and self-employment," Explorations in Economic History, Elsevier, vol. 96(C).
    • Handle: RePEc:eee:exehis:v:96:y:2025:i:c:s0014498324000779
    DOI: 10.1016/j.eeh.2024.101651
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    More about this item

    Keywords

    Wage inequality; Great Compression; Self-employment; Corporate tax; Business preferences;
    All these keywords.

    JEL classification:

    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J82 - Labor and Demographic Economics - - Labor Standards - - - Labor Force Composition
    • N32 - Economic History - - Labor and Consumers, Demography, Education, Health, Welfare, Income, Wealth, Religion, and Philanthropy - - - U.S.; Canada: 1913-

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