Income Inequality in America

Causes of Income Inequality

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

One-quarter of American workers makes less than $10 per hour. That creates an income below the federal poverty level. These are the people who wait on you every day. They include cashiers, fast food workers and nurse's aides. Or maybe they are you.

In 2012, the top 10 percent of earners took home 50 percent of all income. That's the highest percent in the last 100 years. 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

From 2000 through 2006, the number of Americans living in poverty increased 15 percent. By 2006, nearly 33 million workers earned less than $10 per hour. Their annual income is less than $20,614. This is below the poverty level for a family of four. Most of these low-wage workers receive no health insurance, sick 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. That’s despite an increase of worker productivity of 15 percent. Corporate profits increased 13 percent per year. (Source: The Big Squeeze, Steven Greenhouse, pp.6-9.)

Between 1979 and 2007, household income increased 275 percent for the richest 1 percent of households. It rose 65 percent for the top fifth.

The bottom fifth only increased 18 percent. That's true even after "wealth redistribution." In other words, subtracting all taxes, and adding all income from Social Security, welfare and other payments.

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.

Everyone else saw their piece of the pie shrink by 1-2 percent. In other words, even though the income going to the poor improved, 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?

Income inequality is blamed on cheap labor in China, unfair exchange rates and jobs outsourcing. Corporations are often blamed for putting profits ahead of workers. But they must to remain competitive. 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 U.S. has lost 20 percent of its factory jobs since 2000. These were traditionally higher-paying union jobs. Service jobs have increased, but these are much lower paid.

During the 1990s, companies went public to gain more funds to invest in growth. Managers must now produce ever-larger profits to please stockholders. For most companies, payroll is the largest budget line item. Reengineering has led to doing more with fewer full-time employees. It also means hiring more contract and temporary employees.

Immigrants, many in the country illegally,  fill more low-paid service positions. They have less bargaining power to demand higher wages.

Wal-Mart is the nation's largest employer, at 1.4 million. Unfortunately, it has set new standards in reducing employee pay and benefits. Its competitors must follow suit to provide the same "Low Prices."

Recent government tax policies have helped investors more than low wage earners. Deregulation means less stringent investigations into labor disputes.

The U.S. minimum wage remained at $5.15 an hour until 2007. Ten years later, it’s only risen to $7 an hour. (Source: The Big Squeeze, Steven Greenhouse, pp. 12-14.)

Technology also increases inequality. It has also replaced many workers at factory jobs. Those who have training in technology can get 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. 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 Treasury rates low, the Fed created an asset bubble in stocks. This helps the top 10 percent, who now own 91 percent of the wealth in stocks and bonds. Other investors have been buying 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 U.S. income inequality can be traced to an underlying shift in the global economy. Emerging markets incomes are increasing. Countries such as China, Brazil and India, are becoming more competitive in the global marketplace. That's because their work forces are becoming more skilled. Also their leaders are becoming more sophisticated in managing their economies. As a result, wealth is shifting to them from the United States and other developed countries.

This shift is about lessening a global income inequality. The richest 1 percent of the world's population has 40 percent of its wealth. Americans hold 25 percent of that wealth. But China has 22 percent of the world's population and 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, their wealth rises. They are taking it away from the United States, the EU and Japan. In America, the least wealthy bear the brunt.

What Is the Solution?

Trying to prevent U.S. companies from outsourcing will not work. It is 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. The government should provide the bottom two-fifths access to education and employment training. It can raise taxes on the top fifth to pay for it. It should make these changes now so that the transition is gradual and healthy for the economy overall.