September 30, 2019
Last week, the Census Bureau reported that the gap between the richest and the poorest American households is now larger than it has been in the past 50 years. While we have seen the gap between low income and high-income households grow in recent decades, based on the results of the American Community Survey the Bureau conducts every year, U.S. income inequality saw a "significant" increase last year compared to 2017. Increasing income inequality can have ramifications for all Americans, Tom, so this morning I want to talk about what those may be.
The Census Bureau measures income inequality using the Gini index. It is a way of comparing income distribution in reality with a hypothetical society in which everyone earned exactly the same amount. Inequality on the Gini scale is measured between 0, where everybody is equal, and 1, where all the country's income is earned by a single person. In the U.S., the Gini index figure has been steady in recent years, but last year the Census Bureau reported a statistically significant rise.
This is really a story of the divide in the labor market, and how it has evolved. In the U.S., white-collar, college-educated workers have reaped much of the benefits of the country’s economic growth over the past 50 years. However, blue-collar workers have suffered as many of those jobs have moved overseas. We have also seen the power of labor unions have been on the decline over the past 30 years. Throw in tax policies that have reduced the tax burden on the top earners and businesses and you have a recipe for higher income inequality.
Academic studies suggest there are a number of negative consequence that come with increasing income inequality in a society. Perhaps the most interesting, and problematic, is that inequality dampens economic growth, meaning that everyone in the society gets less, as the overall pie is smaller. Why is that? Because higher inequality tends to short-change children from poor socio-economic backgrounds, reducing their social mobility, according to the Organization for Economic Cooperation and Development. Children from the bottom 40 percent of households lack the same educational opportunities, and as a result, they earn less and reap fewer benefits from their participation in the economy as a whole. But it is not just the bottom that is affected. Lower incomes mean lower consumer spending, which is the bedrock of almost every modern economy, so everyone suffers. As a Washington Post article from last year pointed out, Henry Ford offered his workers high wages not out of any altruistic impulse but because he wanted them to buy his cars.
In addition to the economic component, there is a social component. Studies also show that societies with higher income inequality are less stable. They tend to have higher crime rates. People in these societies have lower trust in public institutions. In general, income inequality makes societies more volatile.
This is also where it gets interesting, Tom. Americans as a whole have benefitted from the recent economic growth. The same Census report showed the median income in the U.S. hit a new record last year. The report also showed the poverty rate fell in 14 states and Puerto Rico and stayed stable or improved in all of the country’s 25 largest U.S. cities. Put simply, the economic expansion of the past 11 years has been good for most people. The income inequality gap just tells that upper-income Americans increasingly reap most of the rewards.
One of the most straightforward ways to address income inequality is through minimum wage increases. In fact, one of the reasons why many cities have seen reductions in the poverty rate is because they have raised the minimum wage. Another way to close the gap is to increase access to education at all levels for low and middle-income families. As I mentioned, education is the pathway to a successful career for most people. Finding ways to open doors to learning for more people is critical. Finally, implementing policies that make it easier for people to save – for a rainy day, for a home, and for retirement – would go a long way towards helping people at the bottom of the ladder build wealth.
The information on this page is provided for educational purposes only and is not tax, legal, financial planning or investment advice. You should consult a tax professional. Neither the information nor any opinion expressed in this section constitutes an offer to buy or sell any securities or advisory products. The information provided is general and is not information reasonably sufficient upon which to base an investment decision and should not be considered a recommendation to purchase or sell any particular security. You should not regard this information as a substitute for the exercise of your own judgment. Investing involves risk.