Sample Essay: Income Inequality

Income Inequality

Table of Contents

Introduction. 3

Trends in Income Inequality. 3

Reasons Behind Income Inequality. 3

Concluding Remarks. 4

References. 5

Introduction

According to the Organization for Economic Co-operation and Development (OECD), income inequality has been on the rise since the World War II (Atkinson, Piketty, and Saez 2011). Income inequality can be defined as the disparities in income from labor as well as from capital and within U.S., income inequality is measured from the annual Current Population Survey (CPS) of households and the Internal Revenue Service (IRS) tax records (Mullholland and Shupe, 2018). Traditionally, the Gini coefficient is utilized to measure the income inequality as it looks at the share of income accruing to each percentile of the population and it measures income concentration at each percentile with values ranging from 0 (perfectly equal) to 1 (perfectly unequal) (Owyang and Shell, 2016). Income inequality is is also measured by dividing the population into quintiles, or five even buckets of 20% each, but it fails to measure income inequality at higher income due to large income gap between the 98th and 99th percentiles (Owyang and Shell, 2016).

After World War II, income inequality had just started to present itself within U.S., but starting in the 1970s, the Gini coefficient grew significantly from 0.394 in 1970 to 0.482 in 2013 (Owyang and Shell, 2016). This essay looks into the changing rates of income inequality in the U.S. in the post World War II period. The shifts in income of the high earners and low earners within this period will be analyzed to understand what contributed to such changes, and their impact on the overall economy of the U.S. This essay will also look at the wealthiest 1 percent’s changing income share and how they continue to accrue wealth while expanding the income gap between the top 1 percent and the rest.

Trends in Income Inequality

In the post World War II period, the Gini coefficient was largely flat, especially for the period 1947 to 1970 (Piketty and Saez, 2003). However, income inequality had peaked in the 1920s and the same kind of peak in income inequality was again observed in 2013 (Owyang and Shell, 2016). While looking at the income inequality within U.S., it is also imperative to look at the changing role of the top 1 percent and their income share. More importantly, the widening gap between 1 percent and the rest 99 percent is more prominent in terms of wealth accumulation (Stiglitz and Bilmes, 2012). Between 1947 and 1979, in the post World War II period, the top 5 percent of households experienced only 1.9 percent change in income compared to the lower percentiles. This was largely due to lack of income inequality and equal wages for most in this period. However, after this period till 2007, the top 5 percent saw average annual income growth of 2 percent, while the bottom fifth quintile experienced zero growth and the middle fifth received 0.6 percent growth (Saez, Slemrod and Giertz, 2012).

Reasons Behind Income Inequality

There are several reasons behind the rising income inequality among the population in the U.S. Largely, this income divide can be attributed to the rent-seeking attitude of the top 1 percent of the population, leading to distortion in resource allocations and weakened economy (Stiglitz and Bilmes, 2012). Rent-seeking is a zero-sum activity wherein the top 1 percent of the population have laid their hands on accumulated wealth and continue to churn this wealth to acquire rents from the bottom half of the population (Stiglitz and Bilmes, 2012).

Economists have attributed several reasons behind the income inequality. One of the primary reasons has been the widening gap in terms of wage growth for the lower and middle income group workers in the U.S. (Donovan, Labonte and Dalaker, 2016).  From the 1970s to 2000, income gap rose rapidly as incomes grew more rapidly for the top quintile or top 20% of the U.S. population (Donovan, Labonte and Dalaker, 2016). Further, between 2000 and 2015, although income did not rise significantly for the top quintiles, but it fell significantly for the bottom three quintiles, ultimately resulting in higher income inequality (Donovan, Labonte and Dalaker, 2016).  Technological changes, globalization, declining unionization and the rapidly fluctuating minimum wage within U.S. are important reasons for such high-income inequality in the U.S. (Donovan, Labonte and Dalaker, 2016). According to Donovan, Labonte and Dalaker (2016) and (Stiglitz and Bilmes (2012), changes in pay dynamics and rise in CEO pay are also responsible for rising high income of the top 1 percent population and continue gap in income equality within U.S.

The changes in labor income can be attributed to technological changes over the last several decades which has affected workers in production jobs (Autor, 2015). With technological improvements and innovation, employees have also resorted to offshoring work or outsourcing work, reducing the demand for production workers. Reduction in union membership among wage and salary workers from 20.1% in 1983 to 11.1% in 2015 shows the declining nature of unionization in the U.S., which has significantly impacted the collective bargaining power of the middle and lower-income groups (Donovan, Labonte and Dalaker, 2016). This has affected the bargaining power over pay, which further impacted the income inequality among high-income and low-income workers.

According to Stiglitz and Bilmes (2012), rent-seeking attitude of the top quintile population has also created a huge divide in the income level. The growth of stock options and other incentives for the CEOs and other top-management officials has created outsized income gains for few individuals (Donovan, Labonte and Dalaker, 2016). Pay-setting dynamics and compensation structure has also created a rich divide between the low and middle-income earners and the top superstar earners who have increasingly larger market access over various platforms (Donovan, Labonte and Dalaker, 2016).

Concluding Remarks

Overall, the consequences of income inequality within the U.S. is a growing concern of failed society. According to Stiglitz and Bilmes (2012), the income inequality will lead to consumption problem as the spending capacity of the average American will be significantly reduced. Since higher-income individuals spend a fraction of their, the concentration of riches will lead to lower demand within the economy, leading to a situation like the Great Recession (Stiglitz and Bilmes, 2012). Overall, it can be concluded that the economy needs the top 1 percent of the population quintal to acknowledge the income inequality and start paying taxes, invest in education, health-care and science to enrich the society and create a balance in way of social peace and economic stability for the U.S. This should be largely undertaken for their own selfish interest, if not for any altruistic reasons. Historically, greater income inequality has led to poorer governance, reduced growth and barriers to advancement. To control such disparities, the top 1 percent to start active participation in measures that will redefine the income inequality within the U.S.

References

Atkinson, A.B., Piketty, T., and Saez, E. (2011). Top Incomes in the Long Run of History. Journal of Economic Literature, 49(1), 3–71.

Autor, D.H. (2015). Why Are There Still So Many Jobs? The History and Future of Workplace. Journal of Economic Perspectives, 29(3), 3-30.

Donovan, S.A., Labonte, M. and Dalaker, J. (2016). The U.S. Income Distribution: Trends and

Issues. Congressional Research Service. Retreived from https://fas.org/sgp/crs/misc/R44705.pdf

Mullholland, S.E. and Shupe, C. (2018). Income Inequality in the United States. Mercatus Working Paper, Mercatus Center at George Mason University, Arlington, VA.

Owyang, M.T. and Shell, H. (2016). Measuring Trends in Income Inequality, in The Regional Economist. Federal Reserve Bank of St. Louis.

Piketty, T. and Saez, E. (2003). Income Inequality in the United States, 1913-1998. The Quarterly Journal of Economics, 118(1), 1-39.

Saez, E., Slemrod, J., and Giertz, S. (2012). The Elasticity of Taxable Income with Respect to Marginal Tax Rates: A Critical Review. Journal of Economic Literature, 50(1), pp. 3–50.

Stiglitz, J.E. and Bilmes, L.J. (2012). The 1 Percent Problem. VanityFair. Retreived from https://www.vanityfair.com/news/2012/05/joseph-stiglitz-the-price-on-inequality on 11 Nov 2019.

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