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Income Inequality in America

Causes of Income Inequality

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income inequality

Thanks to high unemployment during the recession, today's young people might not ever catch up.

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Share of Income After Transfers and Taxes, 1979-2007

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A homeless person is viewed in Penn Station on January 28, 2014 in New York City.

Photo: Spencer Platt/Getty Images

One-quarter of American workers make less than $10 per hour, which creates an income 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% of earners took home 50% of all income in 2012. That's the highest percent in the last 100 years, when the government began collecting income data. The top 1% took home 20% of the income, according to a study by economists Emmanuel Saez and Thomas Piketty.(Source: NYT, The Rich Get Richer Through the Recovery, September 10, 2013)

Everything has been blamed from cheap labor in China, unfair exchange rates and Wal-Mart to outsourcing, greedy corporate executives and illegal immigrants.

Income Inequality Background

Despite an economic recovery, the number of Americans in poverty increased 15% between 2000-2006. By 2006, nearly 33 million workers earned less than $10 per hour, which creates an annual income of less than $20,614. This is below the poverty level for a family of four.

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

Meanwhile, the rich got richer compared to the poor.That's true even after "wealth redistribution." In other words, subtracting all taxes, and adding all income from Social Security, welfare, etc.  Between 1979 and 2007, household income :

  1. Nearly tripled (increased 275%) for the richest 1% of households.
  2. Rose 65% for the top fifth.
  3. Only increased 18% for the bottom fifth. 

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

Who or What Is to Blame?

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 U.S. 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.

During the 1990s, companies went public to gain more funds to invest in growth. Managers must now produce ever-larger profits to satisfy stockholders. Since payroll is usually the largest budget line item, re-engineering has led to doing more with fewer full-time employees and hiring more contract and temporary employees. Immigration also allows those with less power to fill low-paid service positions.

Wal-Mart is the nation's largest employer, at 1.4 million. It has set new standards, unfortunately, in lessening 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. Cuts in government regulatory agencies mean less stringent investigations into labor disputes. Finally, the U.S. minimum wage remained at $5.15 an hour until 2007. (Source: The Big Squeeze, Steven Greenhouse, pp. 12-14)

Technology also increases inequality. It has also replaced many workers at factory jobs, while those who have training in technology can obtain higher paid jobs. (WSJ, Technology, Not Globalization,Feeds Income Inequality, July 24, 2008)

A Global Perspective Is Needed

Many of the causes of income inequality in the U.S. 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, and their leaders are becoming more sophisticated in managing their economies. As a result, wealth is shifting to them from developed countries, such as the U.S.

This shift is about lessening a global income inequality. The richest 1% of the world's population has 40% of its wealth, and 25% of that wealth is held by Americans. China, on the other hand, has 22% of the world's population but only 8.8% of its wealth, while India has 15% of its population and 4% of its wealth. (Source: World Institute for Development Economic Research, "Estimating the Level and Distribution of Global Household Wealth, November 2007)

As other countries become more developed, and their wealth rises, it will decline in the U.S., EU and Japan. Unfortunately in the U.S., the brunt is being born by the least wealthy.

What Is the Solution?

Trying to prevent U.S. companies from outsourcing will not work because it is punishing them for responding to a global redistribution of wealth. Neither will protectionist trade policies or walls to prevent illegal immigrants. The U.S. 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 indefinitely. Changes in tax policies, access to education and employment training should be planned for now so that the transition is gradual and healthy for the economy overall. Article updated February 14, 2014.
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