Economic Inequality in the U.S.

4019 words (16 pages) Essay in Economics

08/02/20 Economics Reference this

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Abstract

The level of income inequality in the United States today does not fit with our national vision of American as the “land of opportunity.” For many people, the American Dream, in the economic sense, is just a utopian idea from the past. Public policy to date has been unable to stop the trend of increasing inequality caused by low wages, unemployment, high health care costs, and an uneven playing field. The average income in the bottom 90% of the U.S. population was just $34,074 in 2015, while the other 10% had an average income of $312, 536. But it is the income of the top 0.1% that is astonishing at an average of $6,747, 439. Income inequality in the United States has been problematic since the nation’s beginning, but inequality today has risen to a level not seen since the Great Depression. Inequality is not just a problem for individuals and families; when carried to its full extremes it can result in a boom/bust cycle that ends in a general recession. The public policy solutions for inequality must incorporate methods of turning around the complex causes. Solutions can be categorized as redistribution of wealth, provision of basic needs, and improving access to economic growth. Current measures have had some success but must be increased and diversified.

Economic Inequality in the U.S.

 The level of income inequality in the United States today does not fit with our national vision of American as the “land of opportunity.” For many people, the American Dream, in the economic sense, is just a utopian idea from the past. Public policy to date has been unable to stop the trend of increasing inequality caused by low wages, unemployment, high health care costs, and an uneven playing field. Solutions fall into three categories: redistribution of wealth via taxes and social programs, provision of basic needs, and access to economic growth (Salhotra, 2018). Public policy must begin changing immediately or the gap between rich and poor in the U.S. will continue to grow, perhaps to the point where the tide cannot be turned.

Evidence of Inequality

 Figure 1 provides evidence of the income inequality present in the U.S. today.

Figure 1. U.S. average household income in 2015.

The average income at the bottom 90% of the U.S. population was just $34,074 in 2015, while the other 10% had an average income of $312, 536. But it is the income of the top 0.1% that is astonishing at an average of $6,747, 439. Figure 2 is even more striking. Although the growth in income for the top 1% has fluctuated much more widely than the relatively stable growth of the bottom 20%, it is the difference between the two that shows the extremes of inequality (Inequality.org, 2018). Another measure of inequality that is used to compare nations is the

Figure 2. Growth in U.S. before-tax income. Top 1% vs bottom 20%.

Gini index, which quantifies the statistical dispersion of income or wealth (Pope, 2009). Since 1990, the U.S. Gini coefficient has risen from 0.43 to 0.48, revealing an increase in inequality (Statista.com, 2018).

 Children are particularly vulnerable to economic extremes because they are dependent on others for their welfare and security. According to the National Center for Children in Poverty (2018), nearly 30 million American children – more than 40% — were living in or on the edge of poverty as defined by the federal government. One-sixth of these are children under three years of age. In 2016, the federal poverty threshold for a family of four with two children was $24,339. As a side note, this is only about $10,000 in difference than the average household income for the bottom 90% of Americans (NCCP, 2018). The statistics on inequality in America are appalling and a forceful illustration of why America is no longer the land of opportunity. Action must be taken to reverse this process, but first the causes of this inequality must be considered.

Causes of Inequality

 The causes of inequality in the United States are complex and some of them are difficult to analyze because they are systemic factors associated with American society as a whole. For example, discrimination in education and employment based on race, ethnicity, gender, age, sexual orientation, or other characteristics are an indirect cause of income inequality. Other causes are direct and related to individuals such as low wages. The causes of income inequality include the difference between labor and capital, low wages, unemployment and underemployment, lack of education, high costs of health care, lack of affordable housing, and discrimination in education and employment.

Labor vs Capital

 A fundamental difference between the rich and the lower and middle classes is source of income. Individuals in the top 1% usually receive most of their incomes as returns on capital – i.e. investments (Levin-Waldman & Lerman, 2017). These include revenue from business ownership, stocks, bonds, and other financial instruments. Although all of these sources carry risk, there are many ways to avoid or minimize that risk because the individual has control over buying, and selling, and they are able to manipulate their capital. On the other hand, receiving income via labor can be much riskier in that the person can be fired at any time. This has been especially true since the decline in unions and the rise of “right to work” laws (Salhotra, 2018).

Low wages

 The U.S. Department of Labor currently states that  the current federal minimum wage is $7.25. The real value of the minimum wage – the purchasing power – has gone down in past decades and in many places, it has not risen with the cost of living. However, state and local governments can set higher minimum wages, and in fact more than half the states have done so (Levin-Waldman & Lerman, 2017). The highest state minimum wage is in Washington at $11.50/hour. Many of the states with the highest minimum wages, including Alaska, Hawaii, California, Oregon, and Washington also have high costs of living. Therefore, the higher wage may be just enough to account for these higher costs or, in some cases, may still fail to meet those costs. For example, the extremely high cost of housing in California is forcing even middle to upper-middle class families to consider leaving the state. It is worth noting also that many southern states like Mississippi, Alabama, and Kentucky, where poverty rates are the highest, have only the federal minimum wage of $7.25 (DOL, 2018).

Unemployment and Underemployment

 Both unemployment, when an individual cannot find a job, and underemployment, in which the person has a job that is much below their skill or education level, have a sharp impact on income inequality. Even with unemployment insurance, the amount is often too low to cover normal expenses for food, housing, etc. Underemployment may also fail to meet the needs of families plus it is less likely to provide benefits, thus exposing people to higher health care costs. For example, someone who is employed as a seasonal call center worker probably receives a lower wage than a permanent employee and does not have benefits. Even so, that type of job is often better than restaurant, retail, and other service positions because it pays more. One reason for underemployment is technological change that results in a mismatch between the skills and experience needed for a given job and the skills of potential workers. There is a “demand gap” between skilled and unskilled workers (Deskoska, & Vlckova, 2018). Thus, improvements in technology make society overall richer, via increased standard of living, but individual workers poorer.

Lack of Education

 A related cause of inequality is the wide range of educational attainment in the work force. In most developed countries, receiving a college education boosts an individual’s income by a substantial amount, but the United States has one of the highest premiums on higher education among OECD countries. According to Corak (2013), the ratio of earnings by a person with a college degree versus one with a high school diploma is about 0.70 compared to 0.30 in Canada. However, this is only an average; on further examination, the college premium has a wide range so that many young people today with college degrees cannot find a job at all, much less get a higher wage than their high school fellows (Corak, 2013). If they do get jobs, they may be underemployed (see above) if their educations does not match with the knowledge and skill requirements of higher-paying jobs. But inequality doesn’t just begin with higher education – it comes into play early in life when children whose families are economically advantaged go to pre-K at four and poor children do not (Salhotra, 2018). It is easy to discount the importance of one extra year of schooling, but this year comes at a crucial time for development of school-related skills. Programs such as Head Start have shown the value of this extra year, since children who attend are able to begin kindergarten on at the same time with other children. Also, many school districts now offer free pre-K to all children, but this benefit is not yet available everywhere. Currently, Georgia, Florida, and Oklahoma are the only states that offer free pre-K for all children.

High Costs of Health Care

 Health care costs serve to reduce income both before and after paychecks are deposited. It is common knowledge that health care costs in the United States are the highest in the world, even though there are large numbers of people who are uninsured and are not engaging the health care system except in emergencies (Dieleman et al., 2016). Official government figures indicate that in 2014, spending on health care was 17% of the economy — $2.9 trillion or $9110 per person annually. When common diseases were considered separately, diabetes was the most expensive, followed by heart disease and low back/neck pain. Personal health care spending increased for 92% of the diseases studied (Dieleman et al., 2016). Studies of this problem have shown that higher prices are charged for services in the US, possibly because there is no universal health care which would provide government limits on how much doctors and hospitals could charge. Squires and Anderson (2015) noted in a cross-national study that Americans have poorer health outcomes because of the excessive spending.

Lack of Affordable Housing

 Similar to health care costs, housing and related services reduce the amount of usable income when prices are too high. The problem of affordable housing is especially acute in cities and other densely populated areas. Benner and Karner (2016) examined the fit between local job quality and housing prices in the San Francisco Bay Area which is in the heart of Silicon Valley as well as in the state of California which is currently experiencing extremely high housing costs. They found many locations in this census area which had very high ratios of low-wage jobs to less-expensive housing, indicating a shortage of affordable housing for individuals working those jobs. These locations were identified as “pockets of poverty” (Benner & Karner, 2016). The same ratios were calculated for neighborhoods which gave a more detailed view of exactly where additional inexpensive housing should be built. However, this study did not address the complex causes of the current affordable housing shortage in California.

Discrimination in Education and Employment

 Patterns of discrimination against minorities and other groups in education and employment are indirect and complicated causes of inequality. Despite desegregation beginning in the 1950s, schools are still unequal today, a problem which may be related to funding as much as a desire to directly discriminate. However regardless of these issues, all children should have access to high-quality education. In the last 40 years several methods have been tried to correct this problem including redistribution of funds, standardized testing and mandatory curricula, school vouchers, and charter schools.

Public Policy Solutions

 Public policy solutions to the problem of income inequality should address all the causes discussed above. Politically, however, there is considerable disagreement about the role of the government in resolving issues such as inequality. Some believe that government has a responsibility to improve the economic security of its citizens while others believe that the government does not have this obligation; instead, it is duty of individuals and families to manage their own economic situations. Since most of the causes of inequality above do not results from choices made by individuals, it seems logical that they cannot be changed by those individuals. Rather, society is accountable when its dysfunction causes inequality (Kaufman, 2018) and it is then up to the government to make changes in the workings of society to correct the problem. Solutions to inequality can be categorized as redistribution of wealth, provision of basic needs, and improving access to economic growth (Salhotra, 2018).

Redistribution of Wealth

 Given the identity of America as an individualistic country, many people resist this concept regardless of their political preferences. For example, the rich may say “I earned this money, so I should be able to keep it.” But did they really earn it themselves? Most rich people come from rich families whose wealth is based on capital investments, not labor. One could suggest that the real earners of the money are the people who work for the companies in which rich people invest. Also, the top 1% of Americans make so much money that they cannot return it to the economy via purchasing goods and services, whereas the bottom 10% must use their incomes for daily living. They find it difficult to save any money that would allow them to participate in capital gains. Redistribution of wealth could change this scenario.

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 This solution occurs in two parts: first, higher taxation rates for the rich, especially capital gains and estate taxes, and second, social programs. Both currently exist but would have to be significantly expanded in order to change U.S. inequality. Other OECD countries have been able to achieve lower levels of inequality through this process – three-fourths have a Gini coefficient of 0.35 or less (OECD, 2018). Social programs can include direct payments such as pensions or stipends as well as indirect methods such as using tax revenue to improve infrastructure (which in turn creates more jobs) or giving loans or grants to unemployed persons as capital to help them start small businesses (Iglesias, 2010).

Provision of Basic Needs

 It is sad to see that in a country as wealthy as the United States there are children who go to bed hungry and have nowhere to live. Despite programs such as food stamps, public housing projects, the Affordable Care Act, and Medicaid, many individuals are not able to eat a healthy diet, live in a secure setting, or receive regular medical attention. Food, housing, and health care are basic needs, and failure to provide a social safety net for people who can’t afford them is morally reprehensible.

 A possible model that could address both food and housing needs is the cooperative living model. There are many forms of cooperative housing, but the most useful in terms of reducing inequality also increases social capital by requiring residents to share living spaces, participate in food preparation and property maintenance, and in some cases, join support groups (for example, persons with substance abuse issues). A co-op model allows different age groups to interact – for example, seniors and children – as well as diverse racial and ethnic groups. In some cases, primary care services may be provided through the co-op. Educational services such as tutoring for children and ESL classes and art and music enrichment may also be offered. In the United States, this type of model is most commonly seen in senior communities, but there is no reason it could not be used in other settings (Reynolds, 2018).

 Universal health care continues to be highly controversial in the United States, with politicians highly polarized on the issue. Although there is also polarization of the public, polls suggest that most people favor universal health care, often referred to as “Medicare for all” (Jensen & Petersen, 2017). One reason is that individuals who are sick are thought of as “deserving” of help whereas individuals who receive welfare benefits may not be. This “deservingness” concept is fundamental to American identity and strongly affects attitudes towards social programs. Therefore, provision of health services for everyone should be one of the first measures adopted to reduce inequality (Jensen & Petersen, 2017).

Increasing access to economic growth

 Figure 2 shows that the bottom 20% experiences slow, if any, growth in income while the top 1%, although there is considerable variance, consistently accesses much higher percentages of growth (Inequality.org, 2018). One of the reasons for this difference is capital vs labor. The top 1% receives considerable income from capital investments which may have very large returns, where the bottom 20% receives income from wages which do not grow at the same pace as capital. Therefore, one way to increase access to economic growth is to raise the minimum wage, particularly for individuals employed by large corporations. One caveat is that small retail businesses often operate at a very low profit margin. For example, fast food restaurants may price food almost at cost to entice customers. An increase in the minimum wage could be devastating for these businesses.

 A related method to increase access to growth is to repeal right-to-work laws, thereby allowing unions to regain bargaining power for workers. This is especially crucial for minimum wage workers, many of who are eligible for social programs such as food stamps and even TANF payments because their minimum wage jobs cannot support them. It is not surprising when one realizes that the minimum wage only results in an annual income of $13,920, just over the federal poverty line for an individual. People living on fixed incomes such as Social Security are likely to be under the FPL.

 Finally, access to a quality education is a prerequisite for obtaining a good job. As suggested above, children and young adults should receive free education from pre-K through college. Also, when the person finishes education, assistance with obtaining the most beneficial job would be useful. Job placement offices as well as Internet resources do exist, but a young person just out of college may end up submitting 30 or 40 applications because he or she does not know exactly which jobs match their education and experience.

Conclusion

 Income inequality in the United States has been problematic since the nation’s beginning, but inequality today has risen to a level not seen since the Great Depression (Corvak, 2016). Today this issue has changed America from being a land of opportunity into a land of poverty and frustration. However, inequality is not just a problem for individuals and families; when carried to its full extremes it can result in a boom/bust cycle that ends in a general recession (Standard & Poor’s, 2014). The causes of income inequality discussed here included the difference between obtaining income from labor or from capital, low wages, unemployment and underemployment, lack of education, high costs of health care, lack of affordable housing, and discrimination in education and employment. The public policy solutions for inequality must incorporate methods of turning around these factors. Solutions can be categorized as redistribution of wealth, provision of basic needs, and improving access to economic growth. Redistribution involves increased taxation of the wealthy and corporations along with revenue transfer to social programs. Provision of basic needs includes supplying health care and affordable housing. Improving access to economic growth means a) giving lower-income children and young adults access to free pre-K, K-12, and college educations that are high-quality; b) higher wages, and c) union activity. Although the task is complicated and difficult, and faces many political and financial hurdles, reducing inequality in the United States is essential if the nation is to regain its appearance as a land of opportunity (Chetty et al., 2014).

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