While it is difficult for individuals to overcome limited opportunities, the ability of entire communities to reinvent themselves has become increasingly important as evidence mounts suggesting how important social surroundings can be for individual success.

I will review trends in income and wealth inequality over the past several decades, then identify and discuss four sources of economic opportunity in America.. The first two are widely recognized as important sources of opportunity: resources available for children and affordable higher education. The second two may come as more of a surprise: business ownership and inheritances.

The concept of success leads me to consider so-called meritocracies and their implications. We have been taught that meritocratic institutions and societies are fair. Putting aside the reality that no system, including our own, is really entirely meritocratic, meritocracies may be fairer and more efficient than some alternatives. But fair in an absolute sense? Think about it. A meritocracy is a system in which the people who are the luckiest in their health and genetic endowment; luckiest in terms of family support, encouragement, and, probably, income; luckiest in their educational and career opportunities; and luckiest in so many other ways difficult to enumerate-these are the folks who reap the largest rewards.

The trend across various measures definitely suggests that economic disparity has increased over the past 30 years and has accelerated in the past decade.

This phenomenon appears to be driven primarily by the rapid growth in income and assets for those in the top 1 percent of the distribution, while most everyone else has experienced stagnation. This inequality is destabilizing and undermines the ability of the economy to grow sustainably and efficiently.

Even though average economic well-being has increased considerably over time, the degree of inequality in economic outcomes over the past three decades has increased as well.  Economists continue to grapple with the reasons for this trend...

What should we do about rising economic inequality? Answering this question inevitably involves difficult value judgments and tradeoffs. But approaches that inhibit the dynamism of our economy would clearly be a step in the wrong direction. To be sure, new technologies and increased international trade can lead to painful dislocations as some workers lose their jobs or see the demand for their particular skills decline. However, hindering the adoption of new technologies or inhibiting trade flows would do far more harm than good over the longer haul. In the short term, the better approach is to adopt policies that help those who are displaced by economic change. By doing so, we not only provide assistance to those who need it but help to secure public support for the economic flexibility that is essential for prosperity.

In the long term, however, the best way by far to improve economic opportunity and to reduce inequality is to increase the educational attainment and skills of American workers...

The fact that there are some very wealthy people doesn't necessarily make me or you worse off if they're creating value. You know, I'm a baseball fan. I like to watch Alex Rodriguez. And I don't particularly care that he earns a lot more money than I do.

But we do need to make sure that people throughout the income scale have opportunities to raise their own standards of living and make progress in our society.

And that's why I've advocated the principle of trying to give people opportunity through education, through skills, through support during periods of transition between jobs to make them more productive and more able to deal with the disruptions that come with a globalized economy.

Although average economic well-being has increased considerably over time, the degree of inequality in economic outcomes has increased as well. Importantly, rising inequality is not a recent development but has been evident for at least three decades, if not longer.

The challenge for policy is not to eliminate inequality per se but rather to spread economic opportunity as widely as possible.  Policies that focus on education, job training, and skills and that facilitate job search and job mobility seem to me to be a promising means for moving toward that goal.

Certainly some market-determined income differences are needed to create incentives to work, invest, and take risks. However, there are signs that rising inequality is intensifying resistance to globalization, impairing social cohesion, and could, ultimately, undermine American democracy. Improvements in education are an imperative for reducing inequality and an easily justifiable investment, given its high social return.

I have stressed the importance of redressing the apparent imbalances between the supply and demand for labor across the spectrum of skills. Those imbalances have the potential to hamper the adjustment flexibility of our economy overall. But these growing imbalances are also aggravating the inequality of incomes in this country. The single central action necessary to ameliorate these imbalances and their accompanying consequences for income inequality is to boost the skills, and thus earning potential, of those workers lower on the skill ladder.

Our goal as central bankers should be clear: We must pursue monetary conditions in which stable prices contribute to maximizing sustainable long-run growth. Such disciplined policies will offer the best underpinnings for identifying opportunities to channel growing knowledge, innovation, and capital investment into the creation of wealth that, in turn, will lift living standards as broadly as possible.