Social Issues: Income Inequality
This article presents an overview of income inequality in the United States. The inequality gap within the U.S. can be explained by an increase in the number of millionaires and billionaires within the country, as well as stagnancy of wages in lower and middle-income houses and increasing costs of living. Factors indicating levels of controllable consumption (such as house size and vehicle weight) continue to increase as savings and asset levels decrease and other less controllable expenses (such as the cost of education and healthcare) are also rising. High levels of localized income inequality also have a strong correlation with social problems such as divorce, bankruptcy, and early death. However, discussing income inequality is not synonymous with discussing poverty. Some of the available evidence suggests that many of these inequality problems derive as much or more from psychological compulsions and behavioral conditioning as economic circumstances.
Keywords Consumption Inequality; Gilded Age; Gini Coefficient; Kuznet's Curve (or Hypothesis); Lorenz Curve; Positional Good; SES Gradient; Social Capital; Whitehall Studies (of Health and Social Status)
Increasing wealth among the extremely wealthy in the late twentieth and early twenty-first century has been compared to the boon of wealth the United States experienced during the Gilded Age (1878 to 1889). The Gilded Age, so coined by Mark Twain, was a time similar to the America’s modern economic circumstances: the highest concentration of wealth was held by .01 percent of the workforce. Such a polarization during the Gilded Age, however, can be explained as a result of the government's defense of established business and property interests, low taxation, and the high rate of return of on investments. In contrast, modern day wealth polarization is more genuinely a consequence of market-forces. Forces such as wage stagnation, increasing numbers of wealthy individuals, lower taxes, difficulties in achieving upward mobility, deregulation and globalization are all factors in the debate over income inequality within the United States.
Households among the bottom 90 percent of earners (that is, those making less than about $150,000 annually) have only made modest economic gains in recent decades. The Great Recession resulted in a 36.1 percent decrease in median household wealth in the United States. Median household income in America decreased substantially between 2007 and 2011, after increasing annually between 1995 and 1999. Overall, the wealthy are recognizing more gains while the less fortunate are experiencing wage stagnation.
A Growing Population of the Wealthy
In 1982, there were only 13 billionaires living in the United States; five of them were children of Texas oil tycoon, H.L. Hunt. In 2013, the number of billionaires living in the United States rose to 442, with the number of households worth a million dollars or more at about 5.2 million.
The United States has also experienced a steady decrease in the amount of taxes paid by the extremely wealthy. In the 1970s, individual tax and corporate gains tax rates were 70 and 39 percent, respectively. In 2013, tax rate percentages number 20.6 and 12.1 percent.
Before 1980, it was argued by economists that education was not monetarily beneficial in the majority of cases and that those with a college degree faced strict competition for a small pool of well-paying jobs (Cowen, 2007; Krugman, 2007). As is obvious in today's environment with a huge emphasis on educational experience and higher education becoming more and more of a norm, After 1980, a new emphasis on educational experience and higher education resulted in a higher premium being placed on advanced education. The pool of people financially or motivationally willing and able to attain higher education grew rapidly, especially with government borrowing programs and lower tuitions. In turn, this larger group of college-educated workers drove down wages for unskilled workers and raised accepted skill expectations. For those who are not able to attain a higher education, whether due to lack of motivation, pressing responsibilities, or financial trouble, the playing field became uneven.
In the 1980s, the system of economic regulation that had been established by the New Deal and maintained through the post-war years was partially eliminated. Telecommunications, banking, trucking, airlines, and energy production were deregulated. Trade barriers that benefited domestic steel and vehicle production were dismantled, as the international economy became increasingly globalized. Some antitrust measures were loosened, allowing for mergers that would previously have been disallowed, such as multi-faced financial companies. These measures encouraged entrepreneurial activity and allowed for very high profits in high-risk ventures. Stock options were offered as incentives for executives (Lowenstein, 2007). Hedge fund managers and other top-earning executives that profited from the bull market generally transferred money from the wealthy to the extremely wealthy (Cowen, 2007). These economic reforms were triggered by poor stock market performance and high unemployment and inflation in the 1970s (Lowenstein, 2007). While this deregulation meant greater overall economic prosperity and opportunity for adventurous entrepreneurs, it fostered income inequality to become pronounced.
In the modern global economy, United States trade practices have focused on exporting skill-intensive products like aircraft, supercomputers, and Hollywood movies and importing labor-intensive goods like kitchen utensils and toys (Krugman, 2007). This strategy, while proving lucrative, reduces job opportunities for less-skilled American workers, and increases demand for more skilled workers.
International Trends for Comparison
Investigations into international economies have highlighted some commonalities helpful for analyzing income inequality within the United States. For example, it has been noted that growing levels of income inequality are relatively common as nations continue to develop. In addition, it has been observed that the hours worked typically correspond to income inequality; top earners work more hours than middle-earners, who in turn work more hours than lower-earners (Glazer, 2005). While these commonalities are important to recognize, several important differences have been highlighted within the international socioeconomic arena as well. For example, in Switzerland and Italy, the relationship between labor and prosperity is reversed, with the poor work more hours than the well off. In Sweden, everyone works roughly the same number of hours (Glazer, 2005).
These international perspectives have direct implications on the status of the American labor system. While increasing amounts of income inequality are to be expected within developed/developing nations, income inequality is especially pronounced in the United States. In addition, laborers in the United States work the heaviest hours as compared to international standards; with even the lowest-level earners in the United States logging unusually long work hours. Single mothers and other traditionally low-income earners in the US work about double the number of hours than their counterparts in the UK, Germany, or Canada do. Males in the United States work about 100 hours a year more than they did thirty years ago while the figure is about 200 additional hours per year for women (Frank, 2007). It can be said through such comparison that the United States contains the hardest working population of the working poor and the highest poverty rate in the developed world (Glazer, 2005).
Social Programs Formerly used to Diminish Income Inequality
Throughout the past, there have been numerous attempts (in the forms of legislation, organizations and treaties) to diminish the levels of income inequality within the American population. Taxation, union membership and the Treaty of Detroit are all examples of such measures.
In the 1920s, the top 10 percent of earners only paid 1 percent of their earnings in income tax. However, the demotion of the nation's top earners happened very suddenly in 1946 with the establishment of higher taxation both on income and on capital (that is, on revenue from stock ownership; 70 percent of which was owned by one percent of the population in 1929). The taxation rate for affluent individuals grew as high as 79 percent during the New Deal in the 1930s and 91 percent in the post-war period; the current top rate is 35 percent. Corporate taxes increased from 14 percent in 1929 to 45 percent after World War II, and the estate tax rate increased from 20 percent to as high as 77 percent on the largest inheritances (Krugman, 2007).
Between 1933 and 1938, union membership tripled, and by 1947 it almost doubled again. Previously, union organizers were often arrested and even deported. The Fair Labor Relations Act of 1935 established governmental defense of a right to collective bargaining, with union organization also escalating independently in the US and elsewhere. Such union strength and a wartime onward standardization of wages continued into the 1970s. This thirty-year period of effort towards the equalization of income appears to defy the conventional economic laws of supply and demand, with economic expansion and high job growth taking place despite greater controls and regulations. Interestingly, during this period of economic expansion in the US, Europe was experiencing relatively low employment rates and slow economic growth, a pattern eventually termed "Eurosclerosis" by economists (Krugman, 2007). In 2012, union membership was 11.3 percent, down from 11.8 percent in 2011. Union membership nationwide has declined precipitously since 1983, when it stood at 20.1 percent.
Reuther's "Treaty of Detroit"
The 1949 Reuther's "Treaty of Detroit" was a labor agreement between the United Auto Workers and the Big Three automakers. This treaty served as a model for several labor agreements in numerous other industries. According to the agreement, physical laborers were granted raises in proportion to the rise in productivity as well as additional retirement and health benefits. While such agreements still have a place within the American and international labor arenas, union membership in the United States declined from 39 percent 1973 to 13 percent in 2005, and non-manufacturing employers have successfully resisted unionization. The percentage of workers who are paid according to performance increased from 30 percent of all workers in the 1970s to 40 percent in the 1990s. Interestingly, there is a study which attributes 25 percent of the increase in income inequality to performance-based pay due to the fact that it can result...
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