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You Decide: What Should Be Done About Income Inequality?

Downtown Raleigh, east of campus.
Downtown Raleigh, east of campus.

By Dr. Mike Walden

Income inequality is one of those terms that receives different reactions from people. Some view it as a natural result of our economic system. Others view it as the rich robbing the poor. Still, others ignore it by focusing on their own lives and whether they are making progress.

But first, what is the issue with income inequality? The issue actually is not with income inequality specifically. Most people realize and expect everyone won’t earn the same income in such a large, diverse and competitive economy as ours.

Instead, the issue is really with increasing income inequality – the fact that the difference in incomes of richer households and poorer households has widened in recent decades. Each year the U.S. Census Bureau divides households into five equal groups based on their average income. In 1967, the average income of the richest 20 percent was 11 times higher than the average income of the poorest 20 percent. In 2016 (latest year available), the difference had grown to 17 times higher.  And this is after adjusting the dollar values in different years by inflation.

The growing income gap is even more startling if the average income of the richest one percent of households is compared to the average income of the poorest 20 percent – again, after adjusting for inflation. In 1967 the richest one percent average income was 18 times higher; by 2016 it had grown to 30 times larger.  

Now, the growing income gap does not imply that the old adage – the rich get richer and the poor get poorer – has happened. Over the almost half century from 1967 to 2016, the average incomes of all income groups rose. It’s just that the incomes of higher income households rose much, much more!

So what happened? Economists attribute the increasing dollar distance between the rich and the poor to many factors, chief among them a shift in what companies want from workers, globalization and the relative decline of middle-class jobs.

Machinery and technology have changed the kinds of skills businesses need from their workforce. Physical skills using strength and dexterity – while still around – are being done in many areas by machines and computers. Futurists think dexterous machines – robots – and “thinking” machines – AI (artificial intelligence) – are just around the corner. This means companies increasingly want workers with advanced cognitive skills, the ability to solve complex problems, and the training and personality to identify markets, engage groups and lead.  

Usually these are skills acquired in post-secondary education, in both 2-year and 4-year colleges and universities. So a big part of increasing income inequality is related to the differing employment opportunities of those with advanced education and those without.

Globalization – or the opening of international markets and trading – has further limited the earning opportunities of less skilled workers by making it easier for their jobs to be performed in foreign countries where labor costs are cheaper. This is particularly true for manufacturing jobs, where traditionally a worker without a college education could ultimately earn a middle-paying salary.

The result has been a “hollowing-out” of the workforce, with significant declines in middle-class jobs in manufacturing, transportation and construction. Large percentages of these displaced workers have slid down the economic ladder to take lower-paying service jobs, thereby deepening the divide between them and those at the top.

What can we do, if anything? Actually, there already is much the federal government automatically does to address income inequality. The federal income tax code is “progressive” – meaning the incomes of richer households are taxed at higher rates. There are also a host of federal programs, like food stamps and Medicaid, which are targeted to assist lower income households. Studies have found that over $2 trillion annually is redistributed from higher income to lower income households through these tax and spending policies, resulting in income inequality being reduced by 40 percent.

But some have called for more direct measures, such as increasing the minimum wage, instituting a maximum wage and rebuilding labor unions. These are all controversial measures that have both upsides and downsides.  

Higher minimum wages would directly help very low paid workers, but the concern is businesses would be motivated to substitute machines and technology for at least some of those workers.  There’s a worry that labor unions would prompt businesses like manufacturers to consider moving to foreign countries without unions.

The maximum wage has been touted as a logical match to the minimum wage, but several questions would have to be answered. What level would be set, and would it be the same for all occupations? Would the value of benefits and other job perks be included, and how? And what would be the impact on motivating work and taking risks?

Perhaps less controversial is the recommendation that widening income inequality ultimately be addressed through education. Making sure individuals have access to training programs for skills businesses want – and are willing to pay well for – may be the key.

Increasing income inequality – can it at least be contained? You decide!

Walden is a William Neal Reynolds Distinguished Professor and Extension Economist in the Department of Agricultural and Resource Economics at North Carolina State University who teaches and writes on personal finance, economic outlook and public policy.