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Income Inequality: What It Is, Why It’s Important, and What We Can Do About It

For a country that prides itself on equality of opportunity, the US needs to step up its game. Although the United States was the seventh-richest country on Earth based on its 2015 gross domestic product (GDP) per capita, it has the highest level of income inequality among the 20 highest-ranking countries listed in the United Nations Human Development Index.

According to an analysis of US Census Bureau data by Pew Research Center, the gap in the standard of living between Asians in the top and the bottom of the income ladder nearly doubled from 1970 to 2016; despite starting as one of the most economically equal ethnic groups, they soon replaced African-Americans as America’s most economically-divided ethnic group, with the upper 10% of Asians earning on average $120,000 more than the lower 10%. As for the rest of America, the study shows that “the income gap between Americans at the top and the bottom of the income distribution widened 27% from 1970 to 2016. Those near the top of the income ladder had 8.7 times as much income as those near the bottom, $109,578 compared with $12,523. In 1970, Americans near the top had 6.9 times as much income as those near the bottom, $63,512 compared with $9,212. (All income estimates are adjusted for household size and expressed in 2016 dollars.)” This drastic divide in wealth is indicative of income inequality.

So what is income inequality? Income inequality is defined by Britannica Encyclopedia as the economic gap between the wealthy and the poor. The greater the income inequality in a certain region, the less socioeconomic mobility there is. Income inequality has implications for levels of well-being in different regions, depending on whether basic needs (food, water, housing, etc) are market-based (privatized) or government-provided (publicized) and the level of access to basic needs for regular people.

Most people are quick to blame laziness or a lack of motivation for the extreme wealth gaps between the wealthy and the poor, but Pew Research Center’s analysis points to segmented labor markets, discrimination, institutionalized racism/sexism, gender roles, family responsibilities, and minimum wage/labor laws as the main causes. Additionally, the loss of manufacturing jobs/unionized jobs with benefits, inflation, the growth of low-paying service-sector jobs, and tax cuts disproportionately benefiting affluent taxpayers. People also seem to skip over the fact that lower- and middle- class workers earn most of their money from wages and salaries, while the more affluent gain wealth from capital assets. Since blue-collar jobs are much more unstable than income from capital assets (since there are fewer qualifications than a white-collar job), the income flow for wealthy families is much more stable and predictable than it is for poorer families.

Global income inequality is extreme by any measure, with the top 1 percent of people in the world receiving as much as the bottom 56 percent in the early 21st century. What does that look like? The richest 1 percent of the world’s population owns more wealth than the rest of the world combined, and the assets of the 10 richest billionaires are greater than the GDPs of most countries, including Norway, Austria, and Belgium. On the flip side, the World Bank estimated that nearly 13 percent of the world’s population received less than $1.90 per day, and some 2.1 billion people, about 35 percent, lived on less than $3.10 per day in 2012. The results of such extreme poverty include low levels of education, sanitation, nourishment, and medical care, with high rates of child labor, child exploitation, and child mortality.

The fact that income inequality within the United States is even worse than in most developed countries is quite alarming. From 1979 to 2007, average after-tax income increased by 18% for the bottom fifth of the population and by 275% for the top 1 percent. During that period, the share of total after-tax income received by the top fifth of the population increased by 10 percent (most of that amount went to the top 1 percent), while the share received by the bottom four-fifths decreased by 2 to 3 percent. There are also sharp income disparities by race, age, and sex. While the male-female wage gap in the United States has been decreasing, in part because of declining wages for men, disparities persist: black/Hispanic families and female-headed households are more likely to be poor or near-poor than other households.

You may be asking yourself this question: So what? A lot of people are poor. How does it affect me? Well, for one thing, greater disparities in income lead to diminished equality of opportunity. A study by researchers from Harvard and UC Berkeley shows that a 10% increase in parents’ income rank is associated with a 3.41 percentile increase in their child’s income rank, a 6.7% increase in college attendance rates, and a 3% reduction in teenage birth rates for women. Therefore, decreasing income inequality would not only improve life for lower-earning individuals but improve the standard of living in society as a whole. There is evidence that cites income inequality to reduced consumption levels, excessive borrowing by lower- to middle-income families, and limiting investment in education: all of which hinder overall economic growth.

On a global scale, the continued global instability and environmental degradation associated with the wealth gap makes averting a race to the bottom critical: not just for ethical reasons, but also for the sake of national security and global survival.

Solutions for income inequality mostly focus on wealth redistribution, whether it be direct or indirect. Some measures, like steeper inheritance taxes, enforcement of nondiscrimination policies, government-subsidized child care, and the promotion of broader ownership (e.g., greater worker ownership), focus on reducing inequality indirectly by equalizing the unearned income that derives from ownership of wealth and facilitating greater access to higher-income jobs.

More direct solutions focus on decreasing the incomes of the richest or increasing the incomes of the poorest, but these measures must be taken with caution to prevent excessive inflation. The best ways to do this would be to strengthen collective-bargaining rights/full-employment-schemes and renew interest in unconditional transfers such as a negative income tax and non-means-tested income.

Global inequality reduction policies include global taxes on resource use (used for direct income transfers as well as other forms of poverty reduction), debt forgiveness, and reform of trade agreements so that they do more to benefit the least advantaged in each country.

Unfortunately, there is not much we can do on an individual scale to combat income inequality. But we can start by being kind to our neighbors: donating to charity, volunteering at soup kitchens, and de-stigmatizing poverty. Raising awareness for economic disparities will no doubt encourage politicians to incite social change.


Himani Mehta

Writer

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