U.S. Income Inequality: Causes and Consequences

Introduction

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 the early 1990s, lower unemployment rates, and inflation near zero. As a result of these indicators, the chair of the Federal Reserve Board declared that the performance of the country's economy was as impressive as it had been at any point in the past 50 years. While the benefits of overall economic growth should not be overlooked, broad indicators of prosperity have revealed a less encouraging economic trend over the past 25 years with regard to income distribution (Sundstrom, par. 2). During this period, there has been a significant increase in income inequality, as standard measures of real income and wages show that the poorest and least educated Americans have experienced a declining standard of living since 1975. Therefore, the central concerns for many economists are the causes and consequences of the increase in U.S. income inequality.

Background on U.S. Labor Market Changes

Since the beginning of the 1970s, the American labor market has undergone tremendous changes that have occurred in three distinct ways. First, it has become much more unequal between more skilled and less skilled workers. Second, it has been characterized by slow growth in average real earnings. Third, inequality has developed not only between workers of different skill levels but also among employees within the same skill level (Blanchflower & Slaughter, p. 72). As a result of these changes, the largest share of income gains has gone to workers in the top income and wealth brackets, while those in lower brackets continue to suffer.

In the early 1980s, economists and other observers began to notice the widening income gap between rich and poor. However, at the outset, there were significant controversies about the data and how to interpret the emerging trend. For a time, there were indications that the rise in income inequality would be transitory, given the deep recession of that 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 recognized that these expectations were mistaken, as the weight of evidence showed that the emerging trend was unambiguous. Furthermore, economists and other observers noticed that economic expansion — even during a decade of growth — would not reduce income inequality (Sundstrom, par. 5).

In order to assess the United States' distribution of income, high-income families are typically compared with low-income families. These findings have led to the conclusion that the increase in income inequality among families reflects the rising inequality in wages, which is the most significant source of income for most Americans (Sundstrom, par. 7). Wage inequality increased substantially for both men and women between 1979 and 1987.

In addition, it is evident that most of the lowest-paid workers are poorly educated and low-skilled. Therefore, the ever-increasing wage gap can be considered the largest single contributing factor to income inequality in the United States (Sundstrom, par. 8). However, other factors also contribute to this trend. As noted, the most affected group is poorly educated and low-skilled workers.

Causes of Increased Income Inequality

Levels of income inequality in the United States have continued to rise to record levels in recent years. This trend has become a matter of increasing concern for policymakers, activists, and the general public. For instance, activists from the Occupy Movement have ranked income inequality as one of the major issues on the national agenda (Babones, par. 1). The issue has also attracted broad media attention. Assessments of U.S. income inequality frequently include a comparison of the country's Gini coefficient with that of other developed nations.

Wage Gap

The emergence of income inequality in the United States was first identified through examining the wage gap between men and women. Wages play an important role in determining income inequality because they are the most important source of income for most Americans (Sundstrom, par. 11). As the wage gap increases for both men and women, there is a proportional increase in income inequality across the country. Notably, the wage gap is also a major contributing factor to income inequality when examined across groups such as high-income and low-income families, as well as between highly educated and low-skilled workers.

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

Another major factor in rising income inequality in the United States is attributed to three key dimensions of labor markets: shifts in relative labor supply, changes in relative labor demand, and shifts in labor market institutions (Blanchflower & Slaughter, p. 74). With regard to relative labor supply, income inequality has been significantly influenced by changes in the supply of educated workers. The labor market has generally shifted toward increased demand for more educated workers in order to keep pace with the technological changes that characterize the modern economy.

Technological advancements have contributed to demand for skill-biased technological change workers. The impact of technology on the labor market has been to reduce demand for low-skilled employees, as firms economize on low-skilled labor while increasing demand for more educated workers (Blanchflower & Slaughter, p. 78). While these changes have been driven by the growing importance of automation and computers in the economy, they have had a significant effect on income distribution. As employers increasingly economize on low-skilled labor, the wages of these workers continue to decline while the wages of their highly skilled counterparts rise dramatically.

In addition to labor supply and demand, labor market institutions have played an important role in the increase in income inequality. These institutions have interacted with and reacted to supply and demand dynamics in the sector (Blanchflower & Slaughter, p. 82). The primary mechanisms through which labor market institutions interact with supply and demand are trade unions and minimum wage policies. The significant decline in trade union membership across the labor market has contributed to rising income inequality.

Unions generally reduce inequality in income distribution by standardizing pay rates among workers within an establishment or across multiple establishments. Conversely, unions can also influence income inequality in the opposite direction, since the threat of unionization may compel non-union employers to raise pay or benefits in order to avoid unionization. Therefore, unions play a significant role in shaping income inequality, both through the direct standardization of wages and through the indirect effect of the unionization threat (Blanchflower & Slaughter, p. 82).

Conclusion

Since the early 1970s, inequalities in the distribution of income across the United States have grown steadily as the rich continue to accumulate more wealth while the poor fall further behind. This rising inequality is broadly caused by factors tied to economic globalization, which in turn produces significant consequences for the country's economic growth and social well-being.

Works Cited

Babones, Salvatore. "U.S. Income Distribution: Just How Unequal?" Inequality.org. Program on Inequality and the Common Good, 14 Feb. 2012. Web. 08 Dec. 2012.

Blanchflower, David G., and Matthew J. Slaughter. "The Causes and Consequences of Changing Income Inequality." N.p., n.d. Web. 8 Dec. 2012.

Gudrais, Elizabeth. "Unequal America." Harvard Magazine. Harvard Magazine Inc., July–Aug. 2008. Web. 08 Dec. 2012.

Lynch, David J. "Growing Income Gap May Leave U.S. Vulnerable." Bloomberg. Bloomberg L.P., 13 Oct. 2011. Web. 08 Dec. 2012.

Sundstrom, William A. "The Income Gap." Markkula Center for Applied Ethics, n.d. Web. 08 Dec. 2012.