Question

Clearly explain why there is such a vast level of income inequality in the U.S. in comparison to other developed nations of the world? Provide two clear examples to illustrate your position.

Answer 1

• Income inequality has increased in the United States over the past 30 years, as income has flowed unequally to those at the very top of the income spectrum. Current economic literature largely points to three explanatory causes of falling wages and rising income inequality: technology, trade, and institutions.
• Part of this difficulty is rooted in the complexity inherent in larger labor market inequalities. Falling labor force participation, stagnating median wages, and declining share of labor income, for example, are all part of current U.S. labor market trends.
• The technology-and -education argument is the most prominent. This hypothesis focuses on the large wage premiums for workers with high levels of education and skills. According to Massachusetts Institute of Technology professor David Autor, demand for skills has consistently increased across developed countries. The skill premium, then, is a result of skills not being supplied at a rate to keep up with demand. The proposed solution to inequality driven by these trends is increasing education and job training opportunities for workers so they can get better paying jobs.
• A second explanation is trade and globalization.Increases in trade and offshoring is a cause of income inequality. According to this hypothesis, growing trade between the United States and the rest of the world, especially China, has increased the number of imports in the U.S. economy, which has led to job loss in industries that originally produced these goods in the United States. Offshoring has also affected jobs and wages. Both these trade phenomena lead to declining employment, falling labor force participation, and weak inflation-adjusted wage growth.
• Income inequality is blamed on cheap labor in China, unfair exchange rates, and jobs outsourcing. Corporations are often blamed for putting profits ahead of workers. But they must to remain competitive. U.S. companies must compete with lower-priced Chinese and Indian companies who pay their workers much less. As a result, many companies have outsourced their high-tech and manufacturing jobs overseas. The U.S. has lost 20 percent of its factory jobs since 2000.
• The last explanation suggests that U.S. government policies created an institutional framework that led to increasing inequality. Since the late 1970s, deregulation, de-unionization, tax changes, federal monetary policies, “the shareholder revolution,” and other policies reduced wages and employment. This explanation would seem to call for policy changes such as increasing unionization, better supervision of Wall Street, raising the minimum wage, and maintaining a full-employment focus in monetary policy, to address inequality and declining wages.
• The U.S. minimum wage remained at $5.15 an hour until 2007. Ten years later, it only rose to $7 an hour.
• In recent years, the Federal Reserve deserves some of the blame. Record-low interest rates were supposed to spur the housing market, making homes more affordable. While that is the case, housing prices have leveled off in recent years. The average American still doesn't have enough income to buy a home. This is especially true for younger people who typically form new households.
• Many of the causes of U.S. income inequality can be traced to an underlying shift in the global economy. Emerging markets incomes are increasing. Countries such as China, Brazil, and India, are becoming more competitive in the global marketplace. That's because their workforces are becoming more skilled. Also, their leaders are becoming more sophisticated in managing their economies. As a result, wealth is shifting to them from the United States and other developed countries.