YOU DECIDE: Why has economic inequality increased?

Media Contact: Dr. Mike Walden, 919.515.4671 or michael_walden@ncsu.edu

By Dr. Mike Walden
North Carolina Cooperative Extension

One of the issues driving the protesters on Wall Street and in other cities is a perceived increase in economic inequality in the country. They see a growing gap between those with more income and wealth and those with less income and wealth.

Actually, the protesters are correct in their perception. In the last several decades, incomes of households in the upper end of the income strata have increased faster than incomes of middle-income and lower-income households. Wealth — which is the value of household investments less household debts — has also become more concentrated among higher income households.

These trends create three questions: what’s behind the trends, what are their impacts on the economy, and what can be done about them? I will try to present the facts and the alternatives, and let you draw your own conclusions.

First, here are a few facts. Incomes of those with top earnings have clearly risen faster than incomes for everyone else. For example, U.S. Census data show that since 1980 and after adjusting for inflation, average annual incomes of the richest 10 percent of households rose 35 percent, the average income of all households increased 11 percent, and incomes of the poorest 10 percent of households trended upward by 5 percent.

Wealth also became more concentrated, with the wealthiest 1 percent of households increasing their share of total wealth from 20 percent to 27 percent over the last 20 years.

It is important to realize two qualifications for these numbers. First, they are averages. Some households’ incomes and wealth have increased more, risen less or even declined. Second, the numbers aren’t necessarily tracking the same households. Over time, people can both move up and down in income categories.

What’s behind these trends in income and wealth? Obviously, this has been the subject of much thinking by economists and others, and there’s no shortage of ideas.

At the top of most lists is globalization and education. Globalization has resulted in more U.S. workers — especially middle- and lower-skilled workers — being subject to competition from similar workers in foreign countries who are often paid much less. Consequently, a sizable number of these jobs have moved out of the country, often resulting in more limited economic opportunities for the remaining domestic workers.

At the same time, the economic benefit to education, particularly a college education, has increased. More and more employers now prefer the training, knowledge and reasoning that goes along with a college degree, and they are willing to pay more for those kinds of workers. This means the pay gap between workers with and without a college education has widened in recent decades. In many ways, the widening income and wealth gaps is really an education gap.

Some researchers focus on what they call the “superstar” effect to explain widening economic inequality. People who are really good at what they do and are at the top of their fields — in areas like entertainment, professional sports, management, medicine and law — can now use modern communication and transportation technologies to reach bigger audiences and more buyers than even before. This has resulted in salary gains that easily outpace those for the average worker.

Finally, taxes — specifically federal income taxes — may have played a role. The federal income tax is a layered system of rates in which higher ranges, or slices, of taxable income are taxed at higher rates. In the last 30 years, the tax rate that applies to the highest slice of income has been almost cut in half. Research shows that higher income households subject to this highest rate have responded to its reduction by working and earning more.

So what should be done about widening economic inequality? On one side are those who say, “nothing.” They say the bigger income and wealth gaps are due to changed economic conditions, which are sending clear signals to people — such as, “get a college education” – in how to cope with the current economy.

But at the other end of the spectrum are calls to increase taxation on high incomes and large amounts of wealth and use the revenues to try to level the playing field between those with more and those with less.

Then there’s the middle ground solution of making higher education more affordable and of making the U.S. more competitive in industries that traditionally hired non-college workers and paid a good middle-income salary, like manufacturing.

Economic inequality has always existed and has long been a source of controversy. How you view it depends on how you evaluate its causes and what actions, if any, you think are needed to address it. So I’ve left this hot potato in your lap to decide!

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Dr. Mike Walden is a William Neal Reynolds Professor and North Carolina Cooperative Extension economist in the Department of Agricultural and Resource Economics of N.C. State University’s College of Agriculture and Life Sciences. He teaches and writes on personal finance, economic outlook and public policy. The College of Agriculture and Life Sciences communications unit provides his You Decide column every two weeks. Previous columns are available at http://www.cals.ncsu.edu/agcomm/news-center/tag/you-decide

Related audio files are at http://www.cals.ncsu.edu/agcomm/news-center/category/economic-perspective/