A discussion on the causes and consequences of income inequality in the United States of America
The following writing is based on a paper written in 2015, during my time as a graduate student. While some economic conditions have changed, the issue of income inequality remains largely unaddressed, its causes and consequences still remaining the same.
The widening gap in Income inequality has become a publicly discussed issue in recent times in America due to the recession and hardships faced by a large segment of society. Such a gap in the level of inequality is incompatible with the widely held beliefs of social justice and equality of opportunity. I hope to discuss the primary causes of income inequality, and the social and economic consequences of its widening gap.
Causes of income inequality
Technology and Education.
The rapid progression of technological advancement in the 21st century and its vital role in businesses have increased the demand for highly skilled workers. This new technology catalyzes inequality because workers at the bottom of the income scale (the unskilled workers) are increasingly losing jobs to higher educated skilled workers. According to US Census data, in 1975, 66 percent of all jobs were held by those with high school degrees or less, while 34 percent required some postsecondary education. By 2012, 65 percent of all jobs required post-secondary education, while 35 percent were available to those with high school degrees or lesser level of education. (1). Not only are these highly skilled workers sort after but they are highly valued and earn higher income compared to other non-skilled labor, which contributes to wage inequality. The market for highly skilled workers are scares and employees are willing to pay high Wages (efficacy wages) to retain the skills of these workers while the wage rate for unskilled workers remains low. (Minimum Wage Rates)
Globalization and outsourcing.
In a global marketplace, more and more corporations are now searching for talented skilled workers in foreign labor markets. This trend is not limited to skilled workers. Over the last few decades, The US has increased trade with developing countries. This is problematic because developing countries often offer lower wages for their labor compared to the US. This, in turn, drives down the wages of unskilled workers in America since domestic employers are caught in the battle to keep costs as low as possible. According to the department of commerce, American multinational corporations that employ a fifth of all American workers cut their workforce in the U.S. by 2.9 million during the 2000s while increasing employment overseas by 2.4 million (2)
Public Policy: Taxes and Wages
Political campaigns in the near past have shown us the rising cost of campaigns. With political donations and lobbying, more and more corporations have been able to influence public office and its policy in their favor. This can best be exemplified by the tax breaks given to corporations. “During Eisenhower’s presidency, the top marginal tax rate clocked in at 90%. The rich have been slowly chipping away at this tax rate—70% during Nixon, 50% during Reagan; the top marginal tax rate today is 39.6%. Compared to income taxes, capital gains are barely taxed and the super-rich are finding numerous loopholes in order to keep their money.”(3)
Similarly, policies keeping minimum wages stagnant have caused for less wealth to be distributed among the poor. Not limited by just low minimum wages, the slow wage growth rate is to blame for the widening gap in inequality. The median earnings of full-time workers have stagnated, partly owing to a slowdown in productivity growth.
Consequences of income inequality
Reduction of the middle class.
The widening gap in income inequality has led to a smaller share of economic gains going to the middle class. Meanwhile, the essential needs of the middle class, such as child care, higher education, health care, and housing have rapidly increased. This has caused an increase in debt for most of the middle class. Now lesser people are saving with new expenses, and as such credit and mortgage debt has soared, as households attempted to keep pace with their consumption norms.
The economic value of the middle class is, that they are the consumers that drive consumption, they are the ones who spur Entrepreneurship and provide the necessary skilled labor force vital for economic development.
Hinder economic growth.
There are two schools of thought on this factor. Some believe that if the corporations in America are doing well and accumulating wealth that they will be investing in the economy and will create more jobs and opportunities. This was the basis for the tax breaks for the corporations. But the other school of thought on this matter is that the middle class as the biggest consumer, needs to be healthy and that, that is the key to long-term economic growth.
The middle class will contribute in the long run to the labor force and human capital. This effect of income inequality could be offset if it led to faster economic growth or if the government increased transfers of economic gain to the poor, but in the U.S. neither has happened.
An increase in debt
The inequality in income diverts income growth from middle- and low-wage workers who are acquiring more debt. At the same time, high-income households acquire more assets. This increases the savings of wealthy households relative to lower-and middle-income households. In order to keep their living standards from declining, the middle class borrows more. The combination of rising middle-class debt and stagnant middle-class incomes increases instability in financial markets.
Create class warfare.
As witnessed by the Occupy Wall Street protest, as people are being made aware of the high wages and the wealth of the high-income earners, there has been a wave of anger and disdain created by both parties for each other. The high-income earners and established professionals see the lower income earners and unemployed as mochas (welfare state) or a strain on the economy, while the lower income earners see the higher income earners as greedy and self-indulgent. Without significant changes in the system, the have nots, don’t see a way to support themselves, and turn toward crime, which has seen an increase in recent years.
One of the critical issues discussed in the recently concluded Global Economic forum of 2015 was the rising socioeconomic inequality. While people are escaping extreme poverty, they are yet remaining poor. The American dream has always consisted on the basis, that anyone who works hard is able to achieve their dreams and be anything they want to be. In 2008, a son to an immigrant father and a single mother, with immense challenges became the 44th president of the United States. With this level of inequality, the possibilities and opportunities for the less fortunate are disappearing. If action isn’t taken to balance these inequalities, in the long run, income inequality will lead to greater instability and the decline in values in the United States of America.
- “United States Census Bureau.” Educational Attainment CPS Historical Tables. N.p., n.d. Web. 24 Jan. 2015.
- David Wessel. “Big U.S. Firms Shift Hiring Abroad.” WSJ. N.p., 19 Apr. 2012. Web. 23 Jan. 2015.
- Mary Lou Ferguson. “Inequality in America — Change-Magazine.” Change Magazine Inequality in America Comments. N.p., 21 Apr. 2014. Web. 24 Jan. 2015.
- Jared Bernstein. “The Impact of Inequality on Growth.” Jared Bernstein (n.d.): n. pag. www.americanprogress.org. Dec. 2013. Web.
- Global Risks 2015, 10th Edition is published by the World Economic Forum within the framework of The Global Competitiveness and Benchmarking Network