Income inequality, economic growth, and American wealth distribution

Income Inequality in American Society, Is a Fact or a Myth

Income Inequality in the American Economy

The United States economy is the second largest on the globe, seconded only by the European Union. Praised for numerous achievements, the current economic background is lacking in several areas. Two severe critics stand out: a tremendous national debt of the Bush administration spent on national security and the continuous income inequality. Income inequality is a long debated force which still stirs waters. Disclaimers state that income inequality generates mass dissatisfactions and social problems; whereas advocates state that income inequality is itself the force that differentiates and motivates the working class.

Forces that influence income inequality

Income inequality is generated and influenced by a series of both national and international factors, along side with micro and macroeconomic forces. Also, the inequality is affected by a series of social factors.

Privatization

The number of private firms has grown significantly during the recent years and they are expected to continue their ascendant trend. A main reason for this is the belief that private companies are primarily motivated by increased profits and do not come under the public's attentions as much as state companies do. As such, companies activating in the private domain are prone to offer increased wages than state companies, generating as such the widening of the income gap. The inequality is increased relative to state employees and retires (Larden and Collins, 2007).

Unemployment rates

The unemployment rate is also another important factor which affects income inequality and the desire is to maintain a low level of unemployment. "When the unemployment rate is too high, the fruits of economic growth tend to be distributed much less evenly throughout the workforce and tend to be distributed upward." (Bernstein, 2003)

Trade policies

Market liberalization brought to America similar products but at lower prices which only emphasized the uneven distribution of income. U.S. factories were forced to reduce their prices (and consequently the personnel expenditures), therefore widening the income gap. Government policies to make the U.S. currency a strong one on the international market only increased the prices of the national products, leading to uncompetitive prices within international trades. (Bernstein, 2003)

Shift from manufacturing to services

Directly linked to trade policies and globalization, manufacturing facilities in U.S. began to be closed down. In exchange, services occupied a large portion of working activities. The service sector "includes professional people earning lots of money and people earning very little, so it is a sector that inherently has more inequality built into it. If the economy grows and there's more employment in that sector and less employment in a sector where blue collar workers were making relatively high wages, you're definitely going to have more inequality." (Bernstein, 2003)

Black and white

However the American nation is not proud of it, nor does it openly admit it, income inequality is quite strong between white and black workers. The difference has always been present and the attempts to eliminate it have yet to retrieve the desired results. The only thing achieved was a reduction of the gap, but even this present reduction is quite insignificant and extremely close to the gap of thirty years ago. "For every dollar of per capita income among white Americans, the average African-American had made about 55 cents in 1968; more than thirty years later, it was 57 cents! At that rate, it would take another 581 years to achieve income equality." (Larden and Collins, 2007)

Education

The role education plays within the income realized is crucial as the general rule is that people with superior education register superior incomes. During the past years however, the inequality has begun to become more and more obvious between same education groups (Bernstein, 2003) Take for instance the it graduates, which register high incomes, and the agriculture graduates, who register lower wages - and the inequality is obvious.

3. Income inequality metrics

There are numerous indices to be calculated when identifying the income distribution. Among the most common ones, one could identify:

The poverty line

The poverty index

The Gini coefficient

Robin Hood index

Atkinson's index

Theil's entropy measure

The poverty line

The poverty line is calculated by the U.S. government and it identifies the income level at which households will allocate two thirds of the income to primary subsidies. The measurement identifies the minimum income to sustain a society. (Income Inequality Metrics, 2007)

The poverty index

The poverty index considers the poor population and the level of poverty each population category faces. Its calculation is based on the number of people below the poverty line (P), the total number of people within the society (N), the poverty line income (B) and the average income of the population below the poverty line (a) and its formula is: I = (P/N)(B-a)/a (Income Inequality Metrics, 2007)

Gini coefficient

It is the most commonly used measurement for income equality and it varies between 0 - absolute equality and 1 - absolute inequality. Graphically, it is represented by the area between the Lorenz curve and the line of equality (Measuring Inequality, 2007).

Source: John, D., MacArthur, C.T., 2000

The formula for calculating the Gini coefficient is, reordered as (Damgaard and Weiner, 2000)

Robin Hood index

The Robin Hood index, is equivalent to the maximum vertical distance between the Lorenz curve and the line of equal incomes. The value of the index approximates the share of total income that has to be transferred from households above the mean to those below the mean to achieve equality in the distribution of incomes" (John, D., MacArthur, C.T., 2000)

Atkinson's index

The Atkinson index I is based on the equity sensitive average income, ye, or the level of income per capita which if enjoyed by everybody would generate perfect distribution. The equity sensitivity average income is calculated with the formula:

The Atkinson index can be calculated as follows:

where ? represents the mean income. (John, D., MacArthur, C.T., 2000)

Theil's entropy measure

Theil's calculation of the income inequality considers the share of the group in total income (si) and the total number of groups (n) and it is calculated based on the formula: (John, D., MacArthur, C.T., 2000)

Decile dispersion ratio

The ratio is calculated by diving the mean incomes of the ten wealthiest individuals by the average incomes of the ten poorest individuals. "This ratio is readily interpretable, by expressing the income of the rich as multiples of that of the poor" (Measuring Inequality, 2007)

4. Conclusions

Modern economies strive to reach a perfectly even distribution of incomes, but encounter difficulties due to the numerous forces that generate and affect an unequal income distribution. There are several indices which calculate the income inequality, but in order to retrieve the most relevant results, these indices have to simultaneously calculated and correlated.

Various factors are taken into consideration when calculating the income distribution, out of which the nominal income is most common. Aside form this, attention should be given to consumption levels of both subsidy products (food, clothing, housing) as well as to luxury products and services. In addition, several social and demographic criteria of the population must be considered, such as the level of education, housing facilities (personal property or rental), industry in which the population activates (manufacturing, services, Information Technology or agriculture) and working and social conditions, such as access to housing or education. Also, political and economical factors must be taken into consideration, including international trade policies, governmental regulations, competition on the market or unemployment rate.

All statistical observations and analyses point out the sad fact that the American incomes are extremely unevenly distributed. "A statistical summary of U.S. family income distribution since World War II shows the following:

1. The U.S. family income distribution is highly unequal.

2. The degree of income inequality is not much greater today than it was at the end of World War II.

3. Family income inequality declined slowly from 1946 through 1969, increased slowly from 1970 through 1979, and has increased somewhat faster since then." (Levy, 2002)