Great Compression

The Great Compression refers to "a decade of extraordinary wage compression" in the United States in the early 1940s. During that time economic inequality as shown by wealth distribution and income distribution between the rich and poor became much smaller than it had been in preceding time periods. The term was reportedly coined by Claudia Goldin and Robert Margo in a 1992 paper, and is a takeoff on the Great Depression, an event during which the Great Compression started.

According to economists Thomas Piketty and Emmanuel Saez, analysis of personal income tax data shows that the compression ended in the 1970s and has now reversed in the United States, and to a lesser extent in Canada, and England where there is greater income inequality metrics and wealth concentration. In France and Japan, who have maintained progressive taxation there has not been an increase in inequality. In Switzerland, where progressive taxation was never implemented, compression never occurred.

Economist Paul Krugman gives credit for the compression not only to progressive income taxation but to other New Deal and World War II policies of President Franklin Roosevelt. From about 1937 to 1947 highly progressive taxation, the strengthening of unions of the New Deal, and the wage and price controls of the National War Labor Board during World War II, raised the income of the poor and working class and lowered that of top earners. Krugman argues these explanation are more convincing than the conventional Kuznets curve cycle of inequality driven by market forces because a natural change would have been gradual and not sudden as the compression was.

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