The increasing gap in US income distribution: causes and consequences

¶ … U.S. Distribution of Income:

In the past several decades, the United States has continued to experience periods of extraordinary economic growth. This period has been characterized by steady and robust economic growth since early 1990s, lower unemployment rates, and inflation near zero. As a result of these statistics, the chair of Federal Reserve Board has declared that the performance of the country's economy is as impressive at it has always been at any period in the past 50 years. While the benefits of overall economic growth should not be overlooked, the broad indicators of prosperity have shown that there is less encouraging economic trend in the past 25 years with regards to income distribution (Sundstrom, par, 2). During this period, there has been a huge increase in income inequality as the standards measures of real income and wages shows that the poorest and least educated Americans have continued to experience a failing standard of living since 1975. Therefore, the main concerns for many economists are the causes and consequences of the increase in U.S. distribution of income that contribute to income inequality.

Background:

Since the beginning of the 1970s, the American labor market has experienced tremendous changes that have occurred in three unique ways. First, the United States labor market has become much more unequal between the more skilled and less skilled workers. Secondly, this market has been characterized by the slow rate of growth in the average real earnings. The third change that has taken place in the American labor market is rise of inequality that has developed not only between workers of distinct skill levels but also among employees within a similar skill level (Blanchflower & Slaughter, p. 72). As a result of these changes, the largest proportion of income gains have occurred to workers within the top income and wealth brackets as those in the lower brackets continue to suffer.

In the beginning of the 1980s, economists and other observers started to notice the huge changes in the income gap between the rich and poor people. However, at the beginning of the income inequality, these economists and observers experienced significant controversies on the numbers and how to interpret the emerging trend. However, for some of time, there were indications that the increase in income inequality would become transitory because of the deep recession during this period (Sundstrom, par, 4). This was accompanied by expectations that the increasing income inequality could be reversed during the subsequent economic recovery.

Nonetheless, it was soon realized that these expectation were faulty because of the weight of evidence, which showed that the emerging trend was unambiguous. Furthermore, economists and other observers noticed that economic expansion even in the decade of growth would not help in reducing income inequality (Sundstrom, par, 5).

In order to determine the United States distribution of income, high-income families are usually compared with low-income families. As a result of these findings, it has been concluded that the increase in income inequality among families is a reflection of the rising inequality in wages, which is the most significant source of income for many Americans (Sundstrom par, 7). The inequality in wages increased tremendously for both men and women during the period between 1979 and 1987.

In addition to this, it's evident that most of the lowest-paid workers are poorly educated and less skilled. Therefore, the largest contributing factor to the increase in inequality in the United States distribution of income can be considered as the ever-increasing wage gap (Sundstrom par, 8). However, there are other factors that contribute to the increased inequality in America's distribution of income. As previously mentioned, the most affected group of people by this trend is the poorly educated and low-skilled workers.

Causes of Increased Income Inequality:

The levels of distribution of income in the United States have continued to increase to record levels in the recent past. As a result, this inequality in income distribution has been an issue of increased concerns for policymakers, activists, and the entire public. For instance, activists from the Occupy Movement recently ranked income inequality as one of the major issues in the national agenda (Babones par, 1). Consequently, the increase in inequality in distribution of income in America has become an issue that is news-worthy. The determination of income inequality in the United States has also included comparison of the country's Gini coefficient with that of other developed countries.

As previously mentioned, there are various factors attributed to increase in inequality in the United States distribution of income including & #8230;

Wage Gap:

The emergence of income inequality in the United States was identified through examining the wage gap between men and women. Wages have played an important role in determining income inequality because they are the most important source of income for many Americans (Sundstrom par, 11). As the wage gap increases dramatically for both men and women, there is a proportional increase in the distribution of income in the country. Notably, wage gap is also the major contributing factor to income inequality since it's examined between various groups like the high-income families and low-income families as well as the poorly educated and low-skilled workers.

Changes in Labor Demand, Labor Market Institutions, and Labor Supply:

The other major factor in the increasing income inequality in the United States is attributed to three major aspects in the labor markets. These three elements are shifts in relative labor supply, changes in relative labor demand, and shifts in the country's labor market institutions (Blanchflower & Slaughter, p. 74). With regards to the relative labor supply, income inequality has mainly been brought by changes in the supply of educated workers, which has been emphasized as a significant factor. The labor market has generally leaned towards increased demand of more educated workers in order to cope with the technological changes that have characterized the modern business world.

Actually, technological advancements have contributed to the demand of skill-biased technological change workers. The impact of technology on the labor market is that it has contributed to declining demand for low-skilled employees as firms economize on low-skilled labor while increasing the demand for more educated workers (Blanchflower & Slaughter, p. 78). While the changes have been brought by the increased significance of automation and computers in the economy, they have had a significant effect on the distribution of income. As employers increasingly economize on low-skilled employees, minimum wage of these workers continues to decline while the wages of their highly-skilled counterparts increases dramatically.

In addition to the labor supply and labor demand, labor market institutions have played an important aspect in the increase in income inequality. The labor market institutions have interacted and reacted to supply and demand in this sector (Blanchflower & Slaughter, p. 82). The main way with which the labor market institutions have interacted with supply and demand is through union and minimum wages. With regards to unions, there has been a huge decline in trade unions across the labor market institutions, which result in rising income inequality.

Unions generally reduce inequality in the distribution of income through standardizing the pay rates among workers within an establishment or across several establishments. On the contrary, unions also have an effect in the increase in income inequality since the threat of unionization forces non-union employers to increase pay or benefits in order to keep the unions out. Therefore, unions play a significant role in increase in income inequality either through standardizing pay or through the threat of unionization (Blanchflower & Slaughter, p. 82).

Consequences of Increased Income Inequality:

The main causes of increased inequality in the distribution of income in the United States are mainly associated with the globalization of the economy (Sundstrom par, 14). This is regardless of the fact that globalization continues to play an important role in the modern business world. Nonetheless, the significance effects of globalization on the economy cannot be undermined. Notably, there is need to address the rising inequality in the U.S. distribution of income because of the potential consequences of this trend. Some of the major consequences of increased income inequality include & #8230;

Economic Effects:

The widening gap between the rich and poor people in the United States has a tremendous effect on the country's economy. Generally, the increase in inequality in America's distribution of income is reshaping the nation's economy by leaving it more susceptible to recurring financial crises. As a result, the United States economy is becoming less likely to create enduring expansions as the problem continues to escalate.

There are numerous concerns among financial-industry executives and economists that if the gap is left unchecked in the future, it may condemn Wall Street to a period of average returns and even shake the social stability (Lynch, par, 2). This is primarily because increase in inequality in the distribution of income is not a recipe for steady economic growth since the rich continue to become wealthier while the poor are left behind. The increase in the trend will continue to undermine economic growth both directly and indirectly (Lynch par, 13). This is mainly through lessening the marginal propensity to consume and through magnifying the political polarization that has already resulted in poor economic policing within the country.