We use cross-sectional and longitudinal data from Germany (Socio-Economic Panel) and the United States (Panel Study on Income Dynamics) to show how the income distribution changed over the 1980s business cycle in these two countries. Consistent with other researchers we find income inequality in the United States increased over the peak years of the 1980s business cycle and that the middle of the income distribution shrank. However, we also find that the great bulk of the disappearing middle shifted to the right— became richer— over the period. Hence, it was disproportionate gains from growth rather than the “immiseration” of the middle class that explains the rise in inequality over the period. Focusing on the upswing years of the 1980s business cycle, we find that cross-sectional comparisons understate the gains to persons who lived in working-age households over the period. This is especially true of persons who were living in nonworking households at the start of the period. We find similar results for Germany. However, regardless of the data used, the distribution of the fruits of economic growth during the 1980s were more evenly distributed in Germany than in the United States. Economic gains by persons living in nonworking households and in households headed by relatively low educated workers in Germany were much closer to the gains of other working age households than was true in the United States
