According to an old saying, “The rich get richer and the poor get poorer.” In America, there’s a lot of truth to that. According to a 2020 report from the Pew Research Center, the top 20% of households have brought in an ever-growing share of the nation’s total income. In 1968, 43% of income went to the top earners, but by 2018 their portion was 52%.
This trend is even sharper at the very top of the income scale. Since the 1970s, the top 1% of earners have seen their share of the nation’s total earnings more than double, according to a 2020 paper by economist Emmanuel Saez of the University of California at Berkeley. During the recovery from the Great Recession, nearly 45% of the nation’s income growth went to this group.
This growing gap between the wealthiest Americans and those struggling to get by on minimum wage is called income inequality. This gap exists in nearly all countries, but in the United States, it’s substantial and growing. And according to a lot of economists, that’s bad news — not just for the poor but for all Americans.
How Unequal Are Americans?
There are many ways to measure economic inequality. You can measure it in terms of household income, annual wages, or total wealth. But by every measure, the rich in America are getting richer while the rest are falling behind.
A 2020 report from the U.S. Congressional Budget Office (CBO) divides U.S. households into quintiles, or income groups representing one-fifth of the population. Households in the top quintile earned an average of $309,400 in 2017. Those in the lowest quintile earned $21,300, less than 7% as much.
Based on Saez’s research, the numbers look even more extreme at the high end of the income spectrum. An analysis published at Inequality.org, a project of the Institute for Policy Studies, shows that the top 10% of earners make more than nine times as much on average as the bottom 90%. The top 1% earn 39 times as much, and the top 0.1% earn a whopping 196 times as much.
This income distribution makes the U.S. one of the most unequal countries in the developed world. The World Bank measures inequality using a tool called the Gini coefficient, a scale ranging from 0 (equal income for all) to 1 (all the income in the hands of one person). The U.S. has a Gini coefficient of 0.414, higher than nearly all of Europe, East Asia, and Australia.
U.S. income distribution hasn’t always been this uneven. The last time the income gap was this large was in the early 1900s, a period known as the Gilded Age. It shrank dramatically after 1929, and by 1977 the top 0.1% were earning only 35 times as much as the bottom 90%. But it began to grow again in the 1980s, soaring back to its previous heights and even beyond.
Incomes are rising especially fast at the top. The CBO report says after-tax income for the ultra-rich — the top 0.01% — has increased even faster than for the rest of the top 1%. And these figures don’t even account for the impact of the 2017 tax cuts. According to Forbes, the top 1% of earners saved 51 times as much in taxes from these cuts as the bottom 60%.
Wages only account for part of household income. The rich get a lot of their money from investments, and the poor get some from government benefits. However, even if you just look at paychecks, the most significant gains are at the top of the scale.
The Economic Policy Institute (EPI) reports that from 1979 through 2018, yearly wages for the bottom 90% of Americans rose from $30,330 to $37,574 in 2018 dollars. That’s a modest gain of around 24%.
However, paychecks for the wealthiest have climbed much more dramatically. In 1979, the top 1% made an average of $286,145 — just over nine times as much as the bottom 90%. By 2018, that had risen to $737,697, or 19.6 times as much.
And even that pales compared to the wage growth for the top 0.1%. In 1979, they earned $637,180, 21 times as much as the bottom 90%. In 2018, their wages had increased to over $2.8 million, nearly 75 times as much.
Income isn’t the only way to determine whether you’re rich or not. A better measure of wealth is net worth, the total value of everything you own minus everything you owe. But based on this scale, Americans are even more unequal.
The Forbes 400, the wealthiest 400 people in America, all have at least $2.1 billion, and their average wealth is $8 billion. By contrast, the median net worth for all Americans is just $121,700, according to CNBC. The entire Forbes list owns a combined wealth of $3.2 trillion, more than the bottom 50% of Americans put together.
Income and wealth inequality are closely linked. Naturally, the more income you have, the faster you can build wealth. But having more wealth also helps you bring in more income through investments like stock dividends. In other words, it’s easy for the rich to get richer.
Like income inequality, wealth inequality in America is growing. According to Inequality.org, it took only $200 million to make the first Forbes 400 list in 1982 (measured in 2020 dollars). The average wealth for that list was just $600 million.
But wealth didn’t increase for everyone along the same curve. According to the National Bureau of Economic Research (NBER), the bottom 40% of Americans had an average net worth of $6,900 in 1983 (in 2016 dollars). By 2016, that had risen to only $8,900, an increase of about 29%. But the top 1% saw their wealth more than double from $10.565 million to $26.401 million.
Based on the NBER’s research, in 2016, the wealthiest 5% of Americans owned about 67% of all the nation’s wealth. That number rose from around 55% in 1962. Meanwhile, the bottom 90% went from owning 33% of the wealth to just over 21%.
Inequality and Race
In America, income inequality is inextricably linked to racial inequality. The 2020 Pew report shows a longstanding income gap between Black and white Americans — and that gap is widening. In 1970, the median household income for white Americans was $23,800 more than for Black Americans (in 2018 dollars). By 2018, the gap had grown to $33,000.
This difference shows up for other ethnicities as well. According to the Bureau of Labor Statistics, Hispanic or Latino workers earned a median weekly wage of $750 in early 2021. Black workers were only a little better off at $799 per week. But white workers at the same time earned $1,006 per week, and Asian American workers earned $1,286.
This income gap translates into a wealth gap. According to the Federal Reserve’s Survey of Consumer Finances, the median household net worth in 2019 was $24,100 for Black families, $36,050 for Hispanic or Latino families, and $189,100 for white families.
The wealth gap also shows up in places besides net worth. For instance, Inequality.org reports that white American families have much higher homeownership rates than Black or Latino families. And white college graduates carry significantly less student loan debt than their Black peers.
Like income inequality in general, the racial wealth divide has grown over time. The Survey of Consumer Finances shows that in 1989, median household wealth was $143,560 for whites, $9,940 for Hispanics, and $8,550 for non-Hispanic Blacks. Black and Hispanic wealth has grown a lot since — but in absolute dollar terms, white wealth has grown much more.
Effects of Economic Inequality
Some people don’t see economic inequality as a problem. They believe as long as everyone is gradually getting wealthier, it doesn’t matter if some are gaining wealth faster than others.
However, as the statistics show, we’re not all getting wealthier. The rich are, but incomes for the middle class are hardly moving from year to year. And a 2018 report from the EPI finds that wages for low-income workers actually fell after 1979. It took them until 2015 to catch up to where they had been.
But income inequality can also create problems for society that affect all Americans regardless of wealth.
Inequality and Poverty
In general, more inequality in a society also means more poverty. A 2018 report from the London School of Economics shows that European countries with a less equal distribution of wealth tend to have a higher poverty rate.
Less equal societies also tend to have lower economic mobility. In other words, the rich tend to stay rich, and the poor tend to stay poor. The children of the rich benefit from inherited money as well as better education and health. The poor suffer from disadvantages in the same areas that keep their children poor as well.
Research from the Organisation for Economic Co-operation and Development (OECD) illustrates this point. It shows that the more unequal incomes are in a country, the less likely children are to make significantly more or less than their parents. Low economic mobility means unequal countries tend to stay unequal — and thus, poverty rates tend to stay high.
These higher poverty levels aren’t just a problem for those who are poor. Poverty has negative effects on education, crime, and health that drag down the quality of life for the whole country.
Inequality and Education
The more money people have, the more they can afford to spend on educating their children. Even in countries with free public schools, the schools in more affluent areas can pay more for good teachers and other resources. Thus, countries with more income inequality and more poverty tend to have a less educated population.
Several studies highlight this link:
- The OECD report shows that the higher a country’s Gini score is, the worse low-income children fare on tests of number skills.
- Britain’s Equality Trust points to research from the 2009 book “The Spirit Level” by Richard G. Wilkinson and Kate Pickett showing that average scores for both reading and math tend to be worse in less equal countries.
- The Seven Pillars Institute cites a 2002 paper published in the journal World Development showing that a one-point rise in the Gini coefficient between countries translates into a 10% drop in high school graduation rates and a 40% drop in college degrees earned.
This link between high inequality and worse education is self-reinforcing. Most high-paying jobs are only available to people with a college education or other special training. Low levels of education for the poor tend to keep them in poverty, so inequality persists.
Inequality and Crime
As the Roman emperor Marcus Aurelius once said, “Poverty is the mother of crime.” Lower-income people are both more likely to go to jail for a crime and more likely to be victims of crime than wealthier people. Thus, if inequality drives up poverty rates in a country, it can drive up crime rates as well.
Moreover, inequality itself can be a driver of crime. The gap between rich and poor creates a bigger incentive for theft since some people are needy and others have things worth stealing. It can also fuel resentment that leads to violent crime, especially in gentrifying neighborhoods where rich and poor live side by side.
Again, there are several studies to link high rates of inequality with different types of crime. For instance:
- A 2000 paper published in the journal The Review of Economics and Statistics found that poverty tends to increase property crime, while inequality tends to increase violent crime.
- A 2002 paper by World Bank found that countries and areas within countries have higher rates of both homicide and robbery when the Gini index is higher. According to the Equality Trust, cutting inequality from the level found in Spain to the level in Canada could reduce homicides by 20% and robberies by 23%.
- A 2011 paper published by Cambridge University Press highlights a link between inequality and five different types of crime: burglary, robbery, violence, vehicle crime, and criminal damage.
- A 2013 meta-analysis published in the journal Sociology and Criminology looked at 17 papers on inequality and crime. It found that property crime typically increases when inequality is high, though other violent crimes may not.
- A 2020 paper published in the Journal of Economic Structures shows that both higher inequality and higher unemployment increase crime rates.
But some economists argue that there is no direct link between inequality and crime. For instance, a 1984 paper published in the journal Criminology found no “independent effects” on property crime. And a 2020 paper published in the journal PLOS One found that higher homicide rates are due to poverty, not inequality. However, even if they’re right, inequality can still increase crime indirectly because it drives up poverty rates.
Inequality and Health
On average, poorer people have worse health than wealthier people. So if less equal countries and regions have higher rates of poverty, it stands to reason they will also have less healthy populations overall.
And indeed, studies show that where inequality is high, people suffer from worse health in all kinds of ways, including:
- Death Rates. A 2005 study published in the Journal of Epidemiology and Community Health found that people in areas with higher Gini coefficients have shorter lifespans. A 2009 meta-analysis published in the BMJ, a medical journal, linked higher Gini scores to higher mortality (death from all causes). According to The Equality Trust, this study found that every increase of 0.05 in the Gini coefficient raised mortality risk by 8%.
- Infant Mortality. Both “The Spirit Level” and a 1999 paper published in the journal the Lancet show a link between less equal income distribution and higher infant mortality. The Equality Trust says that the Lancet study shows reducing inequality in developed countries would have a more significant impact on infant mortality than raising average incomes.
- Obesity. According to “The Spirit Level” and a 2012 publication from Oxford University Press, more equal societies tend to have lower rates of obesity. This link is stronger for adults, but there’s also a slight correlation for children.
- Mental Illness. According to The Equality Trust, overall rates of mental illness are higher in less equal countries. U.S. states also have higher rates of depression when incomes are less equal. A 2013 study published in the International Journal of Social Psychiatry even found a link between inequality and rates of schizophrenia.
- Infectious Disease. A 2021 study published in JAMA, the Journal of the American Medical Association, looked at how U.S. counties fared during the COVID-19 pandemic. It found that counties with higher Gini scores had more COVID-19 cases and more deaths.
Inequality and Social Trust
In general, people living in less equal societies are less engaged as citizens. They’re less willing to help others, less likely to vote, and less involved in cultural activities. They have less trust in others and less confidence in their government. And they show lower levels of agreeableness, including friendliness, empathy, and kindness.
It’s not hard to see why this happens. Income inequality within a country, even a democratic one, often translates to political inequality. The wealthy have much more influence over politicians and the decisions they make. The poor can easily see that the deck is stacked against them in the political game, which gives them little incentive to play.
As with education, lack of social trust can reinforce the inequality that causes it. Swedish political scientist Bo Rothstein (via Scientific American) theorizes that when people don’t trust their fellow citizens and the government, they’re less willing to support measures that could help everyone, such as universal health care and Social Security or pensions, child care allowances, and free higher education. Lack of support for these programs translates to lack of funding, making it harder for people to escape poverty.
Inequality and Happiness
It’s been said that money can’t buy happiness. But more money can sometimes make people happier, though it’s not just a question of how much they have. It can be just as important how much they have compared to those around them.
The relationship between inequality and happiness is complicated. On average, people are less happy in developed countries that are less equal. But the correlation isn’t a straight line. According to a 2017 paper published in the journal Frontiers in Psychology, it’s more of a U-shaped curve.
Up to a certain point, inequality in a country can actually make people happier. Seeing that others are wealthier makes them think they also have a chance to move up in the world. But when inequality gets too high, people become less happy. They’re jealous of those who are richer and disillusioned about their chances of getting ahead.
Also, inequality isn’t the only factor in overall happiness. A 2017 analysis by Our World in Data found that in the U.S., more equal incomes don’t lead to more equal happiness. Instead, happiness among Americans is more evenly distributed when the economy is growing. Unfortunately, there’s some evidence inequality can hamper growth too.
Inequality and the Economy
According to the OECD, economists disagree on how inequality affects the economy. Some have argued it actually aids economic growth.
For instance, Greg Mankiw of Harvard University, in the introduction to his article “Defending the One Percent,” links inequality with innovation. People develop new products because this offers them a chance to get rich. If you deny them those financial gains, you also deny society the benefit of their new inventions.
John Maynard Keynes made a different argument for inequality in his book “The Economic Consequences of the Peace.” He pointed out that the rich don’t spend all their money on themselves. Instead, “like bees,” they invest it in ways that help build the economy. Thus, letting some people become very wealthy ends up helping society as a whole.
However, others claim inequality hampers growth. Less equal societies tend to have more poverty. That translates to less education, more crime, and more health problems, all of which can stifle growth.
There’s some evidence to support both these views. But recent studies have tilted more toward the second one. For instance, a 2015 report from the International Monetary Fund found that growth is lower in countries where more money is concentrated in the hands of the top 20%. Research by Heather Boushey of Harvard University and Joseph Stiglitz of Columbia Business School found similar results.
That makes sense. According to the EPI, the rich spend a smaller share of their income than the poor. Thus, concentrating wealth in the hands of the rich can put a damper on spending and slow growth.
But a 2014 OECD paper found that what hampers growth most is the gap between low-income households and the population as a whole. By contrast, runaway wealth growth among the rich and super-rich causes no problems. In other words, the problem isn’t the rich getting richer; it’s the poor getting poorer relative to everyone else.
Causes of Rising Inequality
In any capitalist society, some people will make more than others. The labor market determines what people earn, and at any given time, some skills will have more value than others. But that doesn’t explain why income inequality is higher in the U.S. than in most developed nations. It also doesn’t explain why it’s grown over recent decades.
Economists offer various reasons to explain the growing inequality in the U.S. Some have to do with how fast the rich get richer, while others explain why the poor are getting poorer.
Changes in Technology
Any new technology, such as the Internet, creates new jobs. But these new opportunities don’t benefit all workers equally. In a piece for the Huffington Post, economist Steven Strauss argues that new technologies have driven up demand for highly skilled workers. They have much higher incomes and lower unemployment than unskilled workers.
But as we’ve seen, the rich tend to have more education than the poor. That means that in the new high-tech economy, lower-income workers are being left behind. According to Strauss, these workers have effectively spent the past 20 years in a recession that didn’t affect more educated workers.
The COVID-19 pandemic accelerated this trend. The people most likely to be able to work from home — and therefore least likely to lose their jobs — were educated workers with high-skilled jobs. According to a 2020 paper from the University of Chicago, the lowest-income workers had the highest job loss rates in the early months of the pandemic.
Advances in technology can also affect older industries. For example, in the U.S., automation has cut the need for factory workers. Unfortunately, manufacturing jobs are some of the best jobs available for workers without a college education or special training. According to a 2010 paper published in the journal Research in Organizational Behavior, the shift has forced many less-educated workers into service-sector jobs that don’t pay as well.
Put together, these two trends tend to help the rich (and educated) stay rich. They benefit more from the growth of new fields, and they suffer less from job losses in existing ones.
Automation isn’t the only factor behind the decline of U.S. manufacturing. In some cases, companies have moved production overseas to take advantage of cheaper labor. At the same time, a flood of cheaper foreign-made goods has reduced the demand for American-made products.
Offshoring, or moving jobs overseas, isn’t just a problem in the manufacturing sector. In a 2009 paper published in the journal World Economics, economist Alan Blinder estimated that between 22% and 29% of U.S. jobs were or soon would be “offshorable.”
Jobs Blinder described as highly offshorable include both skilled jobs like computer programming and unskilled ones like telemarketing. Because many of these jobs are in lower-paying fields, offshoring them would leave still fewer jobs for low-skilled workers.
While globalization can create problems for lower-income workers, it also opens new investment opportunities. But these benefits primarily go to the wealthy, widening the income gap still more.
A 2019 McKinsey Global Institute paper measured this effect by looking at the labor share of income. That’s the percentage of a country’s income paid in wages. It finds the labor share of income has been falling in the global economy, suggesting workers benefit less and less from the economy’s gains.
Some economists argue that competition for low-wage American jobs doesn’t just come from overseas. It can also come from new, low-skilled workers entering the U.S. from other countries.
But immigration isn’t one of the biggest factors driving income inequality. A 2009 paper by the National Bureau of Economic Research found that immigration could only account for around 5% of the rise in inequality from 1980 to 2000.
In recent decades, the world population has grown both bigger and wealthier. As a result, there’s a lot more benefit to being a superstar in a field like sports or music. With more people paying to go to games or concerts, the best athletes and musicians can rake in more money. This “superstar effect” distributes a lot of money to just a few lucky individuals.
The superstar effect applies to companies too. A 2018 McKinsey Global Institute paper found that superstar firms like Apple and Google are taking in a growing share of income in the global economy. The growth of these superstar companies makes it harder for smaller companies to compete. Thus, the rich firms — and their owners and shareholders — just keep getting richer.
Decline of Labor Unions
According to Inequality.org, during the period when the share of income going to the top 1% was smallest (about 1942 through 1985), labor unions were at their strongest. Unions tamp down inequality in a couple of ways. Besides driving up wages for their own workers, they often push for higher minimum wage laws so they don’t have to compete with ultra-cheap labor.
However, since the 1970s, unions in the U.S. have been in decline. Legal changes have helped bring about this decline. According to a 2013 EPI paper, 16 states passed laws to restrict workers’ bargaining rights between 2011 and 2012. More than half of U.S. states now have “right-to-work” laws banning employers from hiring union members exclusively.
As labor unions have declined in recent decades, inequality has risen. According to a 2009 paper published in the American Sociological Review, the journal of the American Sociological Association, union membership fell by 60% to 75% between 1973 and 2007. Over the same period, inequality in hourly wages rose more than 40%. The researchers found that the decline of unions accounts for 25% to 33% of the rise in inequality.
A Stagnant Minimum Wage
The federal minimum wage hasn’t risen since 2009. During that time, inflation has cut the value of the dollar by about 20%. In other words, the purchasing power of that $7.25 hourly wage has fallen to about $5.82. That’s led to a widening gap between the median income and the bottom of the wage scale.
A 2016 paper published in the American Economic Journal refers to this gap between the low- and middle-income earners as “lower tail inequality.” It found that at least 30%, and possibly as much as 55%, of this kind of inequality is due to the declining value of the minimum wage.
Higher CEO Pay
Even as wages have fallen at the bottom, they’ve risen at the very top — especially in the financial sector. Skyrocketing pay and bonuses for executives and managers in this field have helped fuel the rise of the super-rich. A 2012 EPI paper found that this factor accounts for about 58% of income growth for the top 1% and 67% for the top 0.1%.
So just how did executive salaries get so high? A 2021 paper by the London School of Economics found that one big reason is the link between executive pay and share prices. Companies pay their executives with stock options and give them performance bonuses to give them an incentive to help the company succeed.
But according to stories from both CNBC and the BBC, this practice doesn’t always work out well for companies. It drives executives to define “success” in terms of pumping up the company’s stock price in the short term, even if it causes problems down the road. The few people with stock options benefit, but the rank-and-file workers don’t.
Other Government Policies
Other government policies have also helped drive the rise in inequality. These include:
- Tax Cuts. The 2017 Tax Cuts and Jobs Act steered more income toward the richest Americans. For instance, it lowered the top tax rate and the tax on capital gains, which is paid mostly by the wealthy. Cuts in 2001 and 2003 also provided a greater dollar benefit to those with higher incomes, according to the Tax Foundation.
- Deregulation. Since the 1970s, Congress has cut back regulations on many industries. Airlines, railroads, interstate bus lines, trucking, utilities, and telecoms were all opened up to wider competition. According to the EPI, this move reduced profits, leading firms to cut back costs. Blue-collar workers in all these industries saw their wages fall.
- Weaker Labor Standards. A 2013 EPI paper outlines how state legislatures weakened labor standards across the U.S. between 2011 and 2012. Various states stripped workers’ rights to overtime pay and sick leave and made it harder to sue employers for unpaid wages. All this contributed to falling incomes for the working class.
- A Thinner Social Safety Net. The EPI notes that the U.S. and states have cut down on various forms of government aid. Access to unemployment insurance grew tighter, and the duration of benefits grew shorter. It also became harder for the unemployed to turn down jobs that paid much less than their previous jobs. At the same time, cuts in welfare programs made it harder for low-income families to make ends meet.
Strategies to Lessen Income Inequality
Economists and politicians have proposed numerous ideas to fight inequality. Some of these suggestions, such as changes in taxes and education, could have a fairly big impact. However, smaller tweaks to the economy could also help.
More Progressive Taxation
If everyone pays the same share of their income in taxes, taxes don’t affect inequality one way or the other. However, if the government taxes the rich more heavily than the poor, that shifts income away from the highest earners. That taxation method is known as a progressive tax system.
There are several ways to make the tax system more progressive. They include:
- Raising the Top Tax Rate. A simple way to shift income away from the wealthy is to raise taxes on those with the highest incomes.
- Raising Capital Gains Taxes. Currently, capital gains are taxed at a lower rate than other income. Taxing both at an equal rate would help level the playing field between rich and poor. Saez and his colleague Gabriel Zucman have also proposed a one-time tax on “unrealized” gains, or growth in assets that haven’t been sold yet.
- Wealth Taxes. A more extreme proposal is some kind of wealth tax. This tax would be based on the assets people already have rather than their income. For example, Sen. Elizabeth Warren has proposed a 2% tax on all wealth over $50 million. Saez and Zucman have proposed a tax of 0.2% on the value of corporations’ stock shares.
- Universal Basic Income. Another fairly radical idea is universal basic income (UBI). This program would pay a certain amount to every American, regardless of income. It would help raise incomes at the bottom, but it would also give money to the wealthy, who don’t need it.
- Net Negative Income Tax. An alternative to UBI is negative income tax (NIT). It would impose a negative tax rate on Americans at the bottom of the income scale. Instead of paying taxes, they would receive regular payments from the government. This program would be more narrowly targeted (and less costly) than UBI.
Higher tax rates would reduce income growth at the top of the scale. At the same time, the money these taxes raise could be used to boost spending for programs that help the poorest Americans. Such programs include child tax credits, Medicaid, Obamacare subsidies, the Children’s Health Insurance Program (CHIP), subsidized housing, home heating aid, the Supplemental Nutrition Assistance Program (SNAP), and the Special Supplemental Nutrition Program for Women, Infants, and Children (WIC).
Many of these proposals are part of President Biden’s tax plan. He has suggested raising the top tax rate, raising capital gains taxes, and providing more funding for child care, health care, and aid for working families. But he has not embraced extreme measures like wealth taxes or UBI.
Education and Training
Education is often a key to wealth — and vice versa. The poorest Americans can’t afford the high cost of college, which cuts them off from careers that require a college degree. Thus, one way to lift people out of poverty and reduce inequality is to make higher education more affordable.
There are several ways to do so. For one, the government could increase funding for financial aid to help students pay for college. It could fund grants and scholarships and lower the interest rates on federal student loans.
Another proposal is to fully cover the cost of two years of community college for all students below a certain income level. Several states already have free college programs that provide funding for all community college costs students can’t meet through grants. President Biden’s tax plan includes a proposal to extend this benefit nationwide.
Proposals like these could at least partly pay for themselves. As more Americans got degrees and higher-paying jobs, they would pay more in taxes. A 2020 report from Georgetown University found that Biden’s free college plan would raise enough revenue to pay for itself within 10 years.
A Higher Minimum Wage
Another simple way to reduce income inequality is to raise the minimum wage. That would immediately boost income at the bottom of the scale. But it’s not clear what the new minimum wage should be. The cost of living varies widely across the U.S. The amount needed to provide a living wage for workers in Boston, Massachusetts, is very different from the amount needed in Biloxi, Mississippi.
The Seven Pillars Institute proposes addressing this problem by setting the federal minimum wage at the lowest known living wage for any U.S. city. Then each U.S. city would be required to adjust its own minimum wage upward as needed to account for differences in cost of living. Both federal and local wages would rise automatically to keep pace with inflation.
Some economists worry that raising the minimum wage would force employers to cut back staff, increasing unemployment. The CBO estimated in 2021 that an increase to $15 per hour could cost the U.S. around 1.4 million jobs. On the other hand, it would raise earnings for over 16 million people and lift around 800,000 out of poverty.
However, other studies have found that minimum wage increases don’t always lead to job loss in the real world. For instance, NPR reports that when New Jersey raised its minimum wage in 1992, the state did not lose jobs. A 2019 paper by economist Arindrajit Dube, a research associate of the National Bureau of Economic Research’s program on labor studies, found the same result on an international scale.
But there’s also some evidence that raising the minimum wage doesn’t help the poor that much. In a Freakonomics interview, economist David Neumark says much of the benefit goes to students from middle-class or wealthy families, not low-income households. He claims there’s no convincing evidence that raising the minimum wage will reduce poverty.
The decline in unions has been a major factor in rising U.S. inequality. Thus, restoring the strength of unions could help reverse the trend.
One way to bring this about would be to eliminate the laws that have restricted union activities. These include right-to-work laws and other restrictions on the powers of unions. But these changes would have to take place on a state-by-state basis.
Regulating the Financial Sector
A significant share of the gains made by the top 1% has come from the explosive growth in pay and benefits for CEOs and executives, especially in finance. Tying CEO pay to stock prices has made many of them very rich, but it isn’t always good for the companies involved. And it certainly hasn’t provided any benefit to the workers at the bottom of the income ladder.
The government could rein in CEO pay and bonuses through new regulations or by enforcing old ones. For instance, a provision of the 2010 Dodd-Frank Act that has never been enforced before would allow regulators to put limits on Wall Street salaries.
Changing Immigration Policy
Immigration isn’t a major cause of rising inequality, but it’s definitely a factor. However, not all immigration is the same.
The biggest problem for low-wage workers is low-skilled immigrants competing with them for low-skill jobs. If the U.S. shifted its immigration policies to focus more on high-skilled workers instead, it could ease the downward pressure on wages at the low end of the scale.
Shifts in Monetary Policy
A final tool for fighting inequality is monetary policy — the levers the Federal Reserve uses to fine-tune the economy. The Fed can increase or decrease the available supply of cash by lowering or raising interest rates or buying or selling government debt.
When the Fed tweaks these levers, it has two goals in mind. It wants to keep a check on inflation and prevent recessions and the high unemployment levels they bring. Both these goals are essential. But if the Fed wants to help fight income inequality, it could do so by shifting its focus more toward maintaining full employment.
Increasing the number of available jobs would force businesses to compete for workers. That would give them an incentive to offer higher wages. Since wages are a bigger source of income at the bottom of the scale rather than the top, that would help reduce both poverty and inequality.
The U.S. has higher income inequality than most countries, and the income gap has widened in recent decades. That’s bad news for the country as a whole.
Too much inequality is harmful to all of society. It drives up poverty and crime while hampering health, social trust, happiness, and economic growth. And it limits tax revenues for the government, forcing it to either cut back on programs or raise taxes for everyone.
All Americans, rich and poor alike, have an interest in reducing inequality. We don’t necessarily need big changes like UBI or wealth taxes to achieve it. Through smaller shifts like more progressive taxation, more funding for education, and possibly a rise in the minimum wage, we can make America more equal and more prosperous at the same time.