There has been sustained growth in the standard of living, but what has happened to the distribution? Should growth be enhanced at the expense of a more egalitarian distribution? Is such a trade-off inevitable, or is it possible to have an increase in social welfare without a rise in inequality? Although growth in the standard of living is of central concern, its distribution is also used as an indicator of economic success. Indeed, a casual examination of the menu of government programs reveals that distributional issues, along with growth, play an influential role in the design of public policy.

As with measures of the standard of living, estimates of inequality have focused on the distribution of family income. The Bureau of the Census reports that inequality decreased over the two decades following World War II but reversed its trend in the late 1960s. In 1998 it reached its highest level since 1947, and that is disheartening in light of the dramatic growth of government expenditures on social insurance and means-tested transfer programs.

What accounts for the infamous U-turn in inequality? A common and compelling explanation is based on the movements in the distribution of labor earnings, the largest component of income for most families. There is near unanimity of opinion that earnings inequality has increased. Some researchers believe that over the period in which total income inequality fell, increased dispersion of earnings was more than offset by the rise in government transfers to the poor.