Question

Discuss the increase in income inequality seen in the U.S. over the last 30 years. Analyze the potential causes of this increase.

Answer 1

It shall be noted that Income inequality in the United States is the extent to which income is distributed in an uneven manner among the American population.

In 2016, the average market income was $15,600 for the lowest quintile and $280,300 for the highest quintile. The degree of inequality accelerated within the top quintile, with the top 1% at $1.8 million, approximately 30 times the $59,300 income of the middle quintile.

The top 1% share of market income rose from 9.6% in 1979 to a peak of 20.7% in 2007, before falling to 17.5% by 2016. After taxes and transfers, these figures were 7.4%, 16.6%, and 12.5%, respectively.

Americans have the highest income inequality in the rich world and over the past 20–30 years Americans have also experienced the greatest increase in income inequality among rich nations.

The Gini first rose above 40 in 1983.

Inequality rose almost continuously, with inconsequential dips during the economic recessions in 1990–91 (Gini 42.0), 2001 (Gini 44.6), and 2007.

The lowest top 1% pre-tax income share measured between 1913 and 2016 was 10.9%, achieved in 1975, 1976, and 1980. By 1989, this figure was 14.4%, by 1999 it was 17.5% and by 2007 it was 19.6%.

A CEO pay expanded from around 30 times the typical worker pay in 1980 to nearly 350 times by 2007. From 1978 to 2018, CEO compensation grew 940% adjusted for inflation, versus 12% for the typical worker.

CBO reported that for the 1979–2007 period, after-tax income (adjusted for inflation) of households in the top 1 percent of earners grew by 275%, compared to 65% for the next 19%, just under 40% for the next 60% and 18% for the bottom fifth. The share of after-tax income received by the top 1% more than doubled from about 8% in 1979 to over 17% in 2007. The share received by the other 19 percent of households in the highest quintile edged up from 35% to 36%.

CBO reported that for the 1979-2016 period, after-tax income (adjusted for inflation) of households in the top 1 percent of earners grew by 226%, compared to 65% for the 81st to 90th percentile, 47% for the 20th to 80th percentile, and 85% for the bottom fifth.

The potential causes for increase in income inequality in US are as follows:

1) The major cause was an increase in investment income. Capital gains accounted for 80% of the increase in market income for households in the top 20% (2000–2007). Over the 1991–2000 period capital gains accounted for 45% of market income for the top 20%.

2) CBO reported that less progressive tax and transfer policies contributed to an increase in after-tax/transfer inequality between 1979 and 2007.

3) The decline of labor unions – Unions weakened in part due to globalization and automation may account for one-third to more than one-half of the rise of inequality among men.

4) The globalization – Low skilled American workers lost ground in the face of competition from low-wage workers in Asia and other "emerging" economies

5) The skill-based technological change -  Rapid progress in information technology increased the demand for skilled and educated workers

6)Modern communication technologies often turn competition into a tournament in which the winner is richly rewarded, while the runners-up get far less

7) The relatively high levels of immigration of low skilled workers since 1965 may have reduced wages for American-born high school dropouts