Income Inequality

Income Inequality

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Describe the level of income inequality in the U.S. and compare it to other countries

According to OECD income inequality data, the Slovak Republic has the lowest level of income inequality while South Africa has the highest level of income inequality. The United States is on the higher end of the income inequality spectrum, coming after Turkey, Bulgaria, Mexico, Chile, Costa Rica, and South Africa (OECD, 2017). The income inequality gap in the United States is much greater than in other countries in the OECD. The U.S. has a Gini coefficient of 0.4 and South Africa’s Gini coefficient was 0.62. The Gini coefficient of the Slovak Republic is 0.22.

Several factors could contribute to the wide gap in income inequality rates in the United States. These include structural changes in the economy; changes in wages; globalized trade or technology, and educational opportunities. One’s race, gender, sexual orientation, or religious beliefs may also factor into the inequality gap.

One factor that may contribute to the income gap in the U.S. is structural changes in the economy. Industries that have traditionally provided middle-class incomes are becoming automated or outsourced, which means that workers will not be able to work those jobs anymore and will have to seek jobs in other industries. The result is that people with low education levels and prior work experience struggle to find jobs because their skillsets may no longer be in demand by employers (Dabla-Norris et al., 2015). Globalization has also resulted in income inequality. Research shows that countries with greater trade share have higher levels of income inequality. The globalization of the economy has caused multinational corporations to have a large role in U.S. industries and to outsource jobs overseas. Additionally, technology is a factor in the increase of income inequality. Technology has allowed fewer people to be employed (DeSilver, 2013). A result of the high unemployment is caused by technological growth which made traditional occupations obsolete, it directly leads to a high-income inequality disparity in the United States.

People’s race, gender, sexual orientation, or religious beliefs may also contribute to the widening gap between the rich and poor in America. Comparatively, the income gap between white Americans and African-Americans is larger than the income gap between African Americans and whites or Asians. Another factor that could contribute to income inequality is the gender wage gap. The gender wage gap is a concerning issue that requires governmental attention. Compared to other countries, the United States has a high level of gender wage inequality (Schaeffer, 2020). The United States has higher wages for work done by men but lower wages for work done by women. Women with advanced degrees have higher median earnings than men without a high school diploma, but the pay gap between men with advanced degrees and their female peers is greater than those between women with advanced degrees and their male peers.

Why should or should we not care about income inequality?

Inequality affects everyone. The quality of life in a community cannot be sustained when a single group has excessive wealth, while the majority of people live below the poverty line. And yet, since the 1980s, income inequality has been on the rise in America. A rising trend in income inequality can be traced back to the shift from an agricultural economy to an industrial one, which caused labor jobs to be automated, which led to lower wages for many (Santacreu & Zhu, 2017). Most people experience income inequality, even though the rich are only a minority of the population. But does a rise in inequality matter?

A rise in income inequality over the past 30 years has coincided with a decline in happiness levels. This suggests that rising income inequality is negatively related to both happiness and life satisfaction. In today’s world, a majority of people believe wealth is distributed unfairly, and many believe money is the root of all evil (DeSilver, 2013). When the gap between the rich and poor grows larger despite everyone’s hard work, trust in society declines (Schaeffer, 2020). This makes the individuals at the lower end of the income spectrum to be distrustful of a State’s systems since they may believe that they are disproportionately disadvantaged (Dabla-Norris et al., 2015).

A higher level of inequality also means more people are living in poverty. In 2008, about 13 million Americans lived on less than $2 per day. More than one-fifth (21.6%) of Americans lived in poverty that year. Additionally, about 46 million were living on an income below the poverty line (Solt, 2016). Although most politicians care about these issues, few have proposed policies to address them.

Many economists argue that income inequality needs to be addressed, but many are unsure of how to go about structuring a fair tax system. Many policies have been suggested in the past and none have worked. The poor do not benefit from trickle-down economics, because they can’t afford to buy the products that trickle down from their rich counterparts. Rather than looking at ways to redistribute wealth, many economists suggest ways to improve the supply side of the economy (Santacreu & Zhu, 2017). They want more free markets for goods and services and less taxation on trade. In practice, this means cutting regulations on businesses.

The past forty years have seen a tremendous increase in income inequality. While income inequality is not a problem as long as everyone’s standard of living remains the same, it poses challenges if people’s quality of life is diminishing. The quality of life in a community cannot be sustained when a single group has excessive wealth, while the majority of people live below the poverty line (Solt, 2016). For a majority of the population, building wealth becomes difficult when individuals are always at risk of losing their jobs or when they live paycheck to paycheck.

A better way is to introduce policies that promote upward social mobility and reduce poverty through greater access to education. Income inequality affects students’ ability to get higher education (DeSilver, 2013). If higher education becomes obsolete due to automation and international competition, students may be left behind, denying them access to job opportunities, which will hinder their ability to move up the social ladder.

What are the consequences of income inequality on society and the economy?

First off, inequality has a great impact on society. The gap between rich and poor people has increased to levels not seen since the Great Depression. This eventually leads to low social mobility for lower-class children as well as decreased public investment in education and infrastructure (Dabla-Norris et al., 2015). Furthermore, when your government is for large conglomerates like big oil companies and banks instead of citizens, it can lead to corruption including insider trading scandals like Enron or Panama Papers. Low social mobility can lead to a classist society.

Social mobility refers to the ability or potential that a child has to reach a higher class in society than their parents. If the government invests in education and infrastructure for citizens, then there will be high social mobility. This is important because if lower classes have the same level of education and knowledge as higher classes, then they will be able to better themselves and move up in society. This more closely resembles a meritocracy where people get what they deserve based on hard work and intelligence instead of family wealth. Low social mobility leads to large discrepancies between classes which could lead to extreme inequality in the future if left unaddressed.

Income inequality can lead to more unethical behaviors by both individuals and businesses. Without tight financial restrictions, wealthy individuals will be able to orchestrate tax evasion schemes like the Panama Papers and Enron. Thus, without taxes to stop it, the rich end up with more money in their pockets, which can lead to more payouts to police and other officials so they are willing to overlook crimes such as corruption or embezzlement (Santacreu & Zhu, 2017). Because there is such a great difference between rich people and poor people in terms of income, this leads to great differences in power and access that gives wealthier people far more access than they deserve.

Furthermore, a poor government is often one that cannot afford to invest in infrastructure or education. This results in a decrease in public goods and services for citizens. Without the ability to invest in many things, citizens are not satisfied with their government and do not trust them to do a good job. This leads to low support for governments, which can lead to civil unrest and even riots. In addition, income inequality can lead to decreased levels of innovation (OECD, 2017). When a society is not fair, it leads to lower levels of people feeling they owe something back. This can result in people working hard just for the money rather than trying harder than their competition or trying to innovate new products and companies because they have little motivation other than money.

Economically, income inequality can lead to lower economic growth. One of the biggest impacts of inequality is that it leads to less consumption. When a lower class has little money and few opportunities, they are less likely to spend on luxuries or new products (Dabla-Norris et al., 2015). Because of this, businesses will make less money and are much less likely to hire workers or invest in improvements. Thus, income inequality at extreme levels can lead to low rates of consumption and large unemployment rates which could result in recession.

References

Dabla-Norris, E., Kochhar, K., Suphaphiphat, N., Ricka, F., & Tsounta, E. (2015). Causes and consequences of income inequality: A global perspective. Staff Discussion Notes, 15(13), 1. https://doi.org/10.5089/9781513555188.006

DeSilver, D. (2013, December 19). Global inequality: How the U.S. compares. Pew Research Center. https://www.pewresearch.org/fact-tank/2013/12/19/global-inequality-how-the-u-s-compares/

OECD. (2017). Inequality – Income inequality – OECD Data. TheOECD. https://data.oecd.org/inequality/income-inequality.htm

Santacreu, A. M., & Zhu, H. (2017, October 16). How does U.S. income inequality compare worldwide? Federal Reserve Bank of St. Louis. https://www.stlouisfed.org/on-the-economy/2017/october/how-us-income-inequality-compare-worldwide

Schaeffer, K. (2020, February 7). 6 facts about economic inequality in the U.S. Pew Research Center. https://www.pewresearch.org/fact-tank/2020/02/07/6-facts-about-economic-inequality-in-the-u-s/

Solt, F. (2016). The standardized world income inequality database*. Social Science Quarterly, 97(5), 1267–1281. https://doi.org/10.1111/ssqu.12295