Question

How would you define income inequality? How is income inequality measured? What has happened to income inequality in the United States since the end of the Second World War in 1945? What evidence can you provide to support your answer? What are the reasons for the changes in income inequality since 1945.

Suggestion: Click here to visit the Web site for the documentary film Inequality for All. The site enables you to rent or purchase the film, if you choose. Or you can click on “Graphics Package” to download a free copy of informative graphics from the film. Take a look at those. Summarize what you learn, and share your thoughts.

Answer 1

Income inequality refers to the unequal distribution of wealth in the nation's population. An economy with high income inequality would have a smaller number of people in possession of a disproportionately larger chunk of the economic pie.

There are different ways of measuring income inequality. A popular method is the gini coefficient which lies between 0 and 1. A gini coefficient of 1 implies maximum inequality. Another method is the lorenz curve- a graphical representation of a nation's income inequality. It shows the proportion of income appropriated by the bottom and top percentage of a nation.

Income inequality has steadily increased in the US after the 1970s and this can be broadly attributed to three reasons- technology, trade and institutions. With the technological revolution, productivity increased manifold but the wages have not, since the 1970s, kept up with this rising productivity. Hourly compensation of workers has stayed constant since the mid-1970s, increasing just 23 percent from 1979 to 2017, while productivity skyrocketed to 138 percent over the same time period.

The higher income groups derive most of their incomes from investment profits. However, the vast majority of the American masses get their income from wages and salaries. The preferential tax treatment of long-term capital gains has thus managed to contribute significantly in widening the gap between these two groups- the top marginal tax rate for the richest is 37 percent, while the top rate for long-term capital gains is just 20 percent. Also, the average income of the bottom 90 percent has seen little change in their paychecks with just a 22 percent increase from 1979 to 2017 while incomes to the top 1% (the CEOs and other elitist groups) have exploded and are still on the rise.

Another big change is institutions- the US labour unions have weakened with only 11% of the workforce being represented by unions since their peak in the 1940s and 1950s. Therefore, the top earners have tremendously increased their power to make rules that favour their own interests by either exploiting or suppressing the majority of the population, further increasing income inequality.