Income Inequality in America

Causes of Income Inequality

Worsening income inequality means the rich are getting richer. Photo: Colin Anderson/Getty Images

Over one-quarter of American workers make less than $10 per hour. An income that low is below the federal poverty level. These are the people who wait on you every day: cashiers, fast food workers and nurse's aides. Or maybe they are you.

Meanwhile, the top 10 percent of earners took home 50 percent of all income in 2012. That's the highest percent in the last 100 years, since the government began collecting income data.

The top 1 percent took home 20 percent of the income, according to a study by economists Emmanuel Saez and Thomas Piketty. (Source: "The Rich Get Richer Through the Recovery," The New York Times, September 10, 2013.)

Income Inequality Facts

Despite an economic recovery, the number of Americans in poverty increased 15 percent between 2000 and 2006. By 2006, almost 33 million workers earned less than $10 per hour, which adds up to an annual income of less than $20,614. This is below the federal poverty level for a family of four.

Most low-wage workers receive no health insurancesick days or pension plans from their employers. That means they can't get sick and have no hope of retiring. During this same time period, average wages remained flat despite a 15 percent increase of worker productivity. Corporate profits increased 13 percent per year. (Source: The Big Squeeze, Steven Greenhouse, February 10, 2009, pp.6-9)

Meanwhile, the rich got richer compared to the poor. That's true even after "wealth redistribution." That's subtracting taxes and adding income from Social Security benefits, welfare payments, etc. Between 1979 and 2005, household income tripled for the richest 1 percent of households. It rose 80 percent for the top fifth.

It increased 21 percent for the middle fifth and only 6 percent for the bottom fifth. (Source: The Big Squeeze, Steven Greenhouse.)

Since the rich got richer faster, their piece of the pie grew larger. The richest 1 percent increased their share of total income by 10 percent by taking it from everyone else, who saw their piece of the pie shrink by 1-2 percent. In other words, even though income increased for the poor, they fell further behind when compared to the richest. (Source: “Trends In The Distribution Of Household Income, 1979-2007,” Congressional Budget Office, May 17, 2012.)

Who or What Is to Blame?

Politicians blame Income inequality on cheap labor in China, unfair exchange rates and outsourcing. Corporations are often blamed for putting profits ahead of workers. U.S. companies must compete with lower-priced Chinese and Indian companies who pay their workers much less. As a result, many companies have outsourced their high-tech and manufacturing jobs overseas.

The United States has lost 20 percent of its factory jobs since 2000. Many of these were higher-paying union jobs. Service jobs have increased, but they pay much less.

During the 1990s, companies went public to gain more funds for investing in growth.

Managers must now produce ever-larger profits to satisfy stockholders. Since payroll is usually the largest budget line item, there is pressure to do more with fewer full-time employees and hire more contract and temporary employees. Immigration provides people willing to fill low-paying service positions.

Wal-Mart is the nation's largest employer at 1.4 million. It has set new low standards for employee pay and benefits. Its competitors must copy its practices to match the company's "Low Prices."

Recent government tax policies have helped investors more than low wages. Plus, cuts in government regulatory agencies mean less stringent investigations into labor disputes. In addition, the U.S. minimum wage remained at $5.15 an hour until 2007. (Source: The Big Squeeze, Steven Greenhouse, pp. 12-14.)

Technology also increased inequality. It has replaced many workers at factory jobs, while those who have training in technology can obtain higher paid jobs. (Source: “Technology, Not Globalization, Feeds Income Inequality,” The Wall Street Journal, July 24, 2008.)

In recent years, the Federal Reserve deserves some of the blame. Record-low interest rates were supposed to spur the housing market, making homes more affordable. While that is the case, housing prices have leveled off in recent years as the average American still doesn't have enough income to buy a home. This is especially true for younger people who typically form new households. Without good jobs, they're stuck living at home or with roommates.

By keeping U.S. Treasury bond rates low, the Fed created an asset bubble in stocks. This helps the top 10 percent of the population, who now own 91 percent of the wealth in stocks and bonds. Other investors bought commodities, driving food prices up 40 percent since 2009. This hurts the bottom 90 percent who spend a greater percentage of their income on food. (Source: "Liberals Love the 1 Percent," The Wall Street Journal, July 30, 2014.)

Take A Global Perspective

Many of the causes of income inequality in the United States can be traced to an underlying shift in the global economy. Emerging markets, such as China, Brazil and India, are seeing an increase in their income as they become more competitive in the global marketplace. Their work forces are becoming more skilled. Their leaders are becoming more sophisticated in managing their economies. As a result, wealth is shifting from developed countries like the United States.

Even though it has increased U.S. inequality, this shift is about lessening global income inequality. The richest 1 percent of the world's population has 40 percent of its wealth. Twenty-five percent of that wealth is held by Americans. China, on the other hand, has 22 percent of the world's population but only 8.8 percent of its wealth. India has 15 percent of its population and 4 percent of its wealth. (Source:  "Estimating the Level and Distribution of Global Household Wealth," World Institute for Development Economic Research, November 2007.)

As other countries become more developed, and their wealth rises, it will decline in the United States, the EU and Japan. In America, the brunt is being born by the least wealthy.

What Is the Solution?

Trying to prevent U.S. companies from outsourcing will not work. That would just be punishing them for responding to a global redistribution of wealth. Neither will protectionist trade policies or walls to prevent immigrants from entering illegally.

The United States must accept that a global wealth redistribution is occurring. Those in the top fifth of the U.S. income bracket must realize that those in the bottom two-fifths cannot bear the brunt forever. Changes in tax policies, access to education and employment training should be planned now so that the transition is gradual and healthy for the economy overall.