Income inequality within a country is usually measured using the so-called Gini-index (see also here). When we look at the Gini indices for the U.S. at various times, we see an increase in inequality (a higher value means more inequality):
- 1967: 39.7 (first year reported)
- 1968: 38.6 (lowest index reported)
- 1970: 39.4
- 1980: 40.3
- 1990: 42.8
- 2000: 46.2
- 2005: 46.9
- 2006: 47.0 (highest index reported)
- 2007: 46.3
These data show an increasing gap between rich and poor over the period between 1970 and 2000 (no significant evolution since 2000). As a result, inequality in the U.S. is now higher than in other developed countries:
Before the 1960s, the U.S. became progressively more egalitarian. From the 1970s onward, average income continued to increase, but mainly thanks to large increases in the top incomes, which caused a change in the trend and an increase in inequality.
This trend of rising inequality since the 1970s in the U.S. and some other advanced industrial societies (especially the U.K.) goes against traditional wisdom.
Simon Kuznets argued that levels of economic inequality are in large part the result of stages of development. Kuznets saw a curve-like relationship between level of income and inequality, now known as Kuznets curve. According to Kuznets, countries with low levels of development have relatively equal distributions of wealth. As a country develops, it acquires more capital, which leads to the owners of this capital having more wealth and income and introducing inequality. Eventually, through various possible redistribution mechanisms such as social welfare programs, more developed countries move back to lower levels of inequality. Kuznets demonstrated this relationship using cross-sectional data. However, more recent testing of this theory with superior panel data has shown it to be very weak. (source)
The trend of rising inequality has been called “The Great U-Turn“, a phrase coined by Harrison and Bluestone. When we focus on the U.S., we can identify the following causes of this u-turn:
- Globalization and trade liberalization depressing the wages of the less skilled or threatening their jobs.
- Rising number of single parent families.
- Influx of women and immigrants in the low-end job-market has also depressed wages.
- Lower taxes for high incomes by the Reagan administration.
- The weakness of the labor movement in the U.S.
- A relatively large wage premium for a college education in the U.S.
- The work ethic in the U.S. typically favors large rewards for success.
- Increasing reliance on technology causing increased demand (and higher returns) for education and cognitive skills.
What can be done about it?
- Offer better education.
- Renewed public support for the right of unorganized workers to be represented by unions.
- Strengthen the social safety net, including universal coverage for health care.
- Vote for Obama. A study by the independent Tax Policy Centre found that the tax policies proposed McCain would widen the gap in after-tax income of rich and poor even more, and that the policies proposed by Obama would reverse the trend:
More on income inequality.