Income Inequality in America

Causes and Solutions

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Income inequality is a wide gap between the money earned by the richest people in an economy when compared to the poorest. Income includes wages, investment earnings, rent, and sales of real estate.

How It’s Measured

The U.S. Census Bureau measures income inequality using household income. It compares it by quintile, which is the population divided into fifths.

Another commonly-used measurement is the Gini index. It summarizes the distribution of income into a single number. It ranges from zero, which is a perfectly equal distribution, to one, where only one person has all the money.

Key Takeaways

  • National and global income inequality are becoming a growing issue that will need to be addressed. 
  • The top earners benefited more from the economic recovery than the bottom earners.
  • In the United States, the top 10% receive more than 50% of total income.
  • Inequality has grown thanks to outsourcing and companies replacing workers with technology. 
  • The United States could improve income inequality with employment training and investing in education.

Current Statistics

In 2018, the top 20% of the population earned 52% of all U.S. income. Their average household income was $233,895. The richest of the rich, the top 5%, earned 23% of all income. Their average household income was $416,520.

The bottom 20% only earned 3.1% of the nation’s income. Their average household income was $13,775. Most low-wage workers receive no health insurance, sick days, or pension plans from their employers. They can't get ill and have no hope of retiring. That creates health care inequality which increases the cost of medical care for everyone. People who can't afford preventive care wind up in the hospital emergency room. In 2009, half of the people (46.3%) who used a hospital said they went because they had no other place to go. They use the emergency room as their primary care physician. The hospitals passed this cost along to Medicaid.

The U.S. Gini index was 0.483 in 2018. That’s slightly better than in 2017 when it was 0.489. But it’s much worse than in 1968 when it was just 0.386.

Around 30% of American workers make less than $10.10 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.

Income Inequality Has Worsened

The rich got richer through the recovery from the 2008 financial crisis. Between 1993 and 2015, the average family income grew 25.7%. The top 1% of the population received 52% of that growth. The chart below tracks average income growths and losses during the 22-year period. It then calculates how much of that total growth was accrued by the top 1% of the population.

This worsening of income inequality had been ongoing even before the recession. Between 1979 and 2007, household income increased 275% for the wealthiest 1% of households. It rose 65% for the top fifth. The bottom fifth only increased by 18%. That's true even after "wealth redistribution" which entails 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 wealthiest 1% increased their share of total income by 10%. Everyone else saw their piece of the pie shrink by 1%-2%. Even though the income going to the poor improved, they fell further behind when compared to the richest. As a result, economic mobility decreased.

During this same period, average wages remained flat. That’s despite an increase of worker productivity of 15%. Corporate profits increased by 13% per year. 

Causes

Income inequality is blamed on cheap labor in China, unfair exchange rates, and job 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 United States has lost 20% of its factory jobs since 2000. These were traditionally higher-paying union jobs. Service jobs have increased, but these are much lower paid. 

Education is also a powerful factor in improving economic mobility. Education increases the income that generates greater economic growth. Over a lifetime, Americans with college degrees earn 84% more than those with only high school degrees. A McKinsey study found that this achievement gap has cost the U.S. economy more than all recessions since the 1970s.

Deregulation means less stringent investigations into labor disputes. That also benefits businesses more than wage earners. Technology, not globalization, feeds income inequality. It has also replaced many workers at factory jobs. Those who have training in technology can get higher paid jobs. 

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.

President Trump's tax plan has helped businesses and investors more than wage earners. This creates structural inequality.

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

The U.S. minimum wage remained at $5.15 an hour until 2007. Ten years later, it only rose to $7 an hour. 

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 helped the top 10%, who own 91% of the wealth in stocks and bonds. Other investors have been buying commodities, driving food prices up 40% since 2009.  This hurts the bottom 90%, who spend a greater percentage of their income on food. 

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. Their workforces 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 global income inequality. The richest 1% of the world's population has 40% of its wealth. Americans hold 25% of that wealth. But China has 22% of the world's population and 8.8% of its wealth. India has 15% of its population and 4% of its wealth.

As other countries become more developed, their wealth rises. They are taking it away from the United States, the European Union, and Japan. In America, the least wealthy bear the brunt.

Solutions

The United States must accept that 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.

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

The government should provide the bottom two-fifths access to education and employment training. Investing in human capital is the best way to increase individual wealth and improve the labor force. Equity in education would bring everyone up to at least a minimum standard. It would be a better solution than increasing welfare benefits or providing a universal basic income.

Congress 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.

Regulations are another part of the solution.The Dodd-Frank Wall Street Reform Act required corporations to disclose employee pay. Its goal is to help shareholders better understand executive compensation practices compared to the average employee pay.

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