income inequality in the united states essay

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The U.S. Inequality Debate

• Income and wealth inequality is higher in the United States than in almost any other developed country, and it is rising. 
• There are large wealth and income gaps across racial groups, which many experts attribute to the country’s legacy of slavery and racist economic policies. 
• Proposals to reduce inequality include a more progressive income tax, a higher minimum wage, and expanded educational opportunities.

Introduction

Income and wealth inequality in the United States is substantially higher than in almost any other developed nation, and it is on the rise, sparking an intensifying national debate. The 2008 global financial crisis, the slow and uneven recovery, and the economic shock caused by the COVID-19 pandemic have deepened these trends and challenged policymakers to respond.

Economists say the causes of worsening inequality are complex and include a failure to adapt to globalization and technological change, shifting tax policy, reduced bargaining power among workers, and long-standing racial and gender discrimination. The effects of inequality are similarly varied, and they have exacerbated crises such as the pandemic and deepened societal divisions. Inequality can also weaken democracy and give rise to authoritarian movements. President Joe Biden has pledged to reduce economic inequality with new social spending financed by higher taxes on the wealthy and corporations, but he faces opposition from those who say his plans go too far.

How unequal is the United States?

• U.S. Economy
• Globalization

According to the nonpartisan Congressional Budget Office [PDF], income inequality in the United States has been rising for decades, with the incomes of the highest echelon of earners rapidly outpacing the rest of the population. Even among high earners, income gains have been heavily skewed toward the top of that bracket. 

The growth of CEO pay is illustrative of this trend. In 1965, a typical corporate CEO earned about twenty times that earned by a typical worker; by 2018, the ratio was 278:1, according to the Economic Policy Institute , a progressive think tank. Between 1978 and 2018, CEO compensation increased by more than 900 percent while worker compensation increased by just 11.9 percent. 

The picture is much the same when looking at wealth—that is, total net worth rather than yearly income. In 2021, the top 10 percent of Americans held nearly 70 percent of U.S. wealth, up from about 61 percent at the end of 1989. The share held by the next 40 percent fell correspondingly over that period. The bottom 50 percent (roughly sixty-three million families) owned about 2.5 percent of wealth in 2021. 

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Moreover, inequality in the United States outpaces that of other rich nations. This is captured by the steady rise in the U.S. Gini coefficient, a measure of a country’s economic inequality that ranges from zero (completely equal) to one hundred (completely unequal). The United States’ Gini coefficient was forty in 2019—the same as Bulgaria’s and Turkey’s, and significantly higher than that of Canada, France, and Germany—according to the Organization for Economic Cooperation and Development (OECD), a group of advanced economies. 

Recent economic shocks have deepened these trends. The so-called Great Recession from 2007 to 2009 caused incomes to fall, and even when they recovered to pre-recession levels in 2015, the median income was the same as it was in 2000: $70,200. The recovery was also unequal: by 2016, the top 10 percent had more wealth than they did in 2007 while the bottom 90 percent had less. 

Experts say the economic turmoil caused by the COVID-19 pandemic, including the largest spike in unemployment in modern history, will similarly exacerbate inequality. Low-wage workers were far more likely to be laid off and less likely to be rehired, though massive government stimulus helped blunt the impact. Meanwhile, a boom in stock and home prices primarily benefited wealthy Americans, who own more of these assets. Though wages rose at the fastest pace in decades, so did prices , and this inflation effectively canceled out wage gains.  

Why does inequality matter?

Inequality is a drag on economic growth and fosters political dysfunction, experts say. Concentrated income and wealth reduces the level of demand in the economy because rich households tend to spend less of their income than poorer ones. Reduced opportunities for low-income households can also hurt the economy. “When those at the bottom of the income distribution are at great risk of not living up to their potential, the economy pays a price not only with weaker demand today, but also with lower growth in the future,” economist Joseph Stiglitz writes [PDF].

Recent years have seen the election of populist leaders around the world , which some researchers have linked to insecurity caused by economic inequality. Wealthy people can exert outsize influence on the government by financing political campaigns, further entrenching their power. A 2020 United Nations report warned that rising inequality is eroding trust in democratic societies and fostering the spread of authoritarian and nativist movements.

However, some experts say that the harms from inequality are overstated. Analysts at the libertarian Cato Institute, for instance, argue that it makes more sense to focus on poverty because inequality does not matter so long as everyone is doing better. Also, entrepreneurship benefits society as a whole, even as it makes some individuals wealthy, they argue. The overall poverty rate in the United States fell sharply, by more than 10 percentage points, between 1959 and 1969, but it has since fluctuated around 12.5 percent. 

“We should want to live in a society with a reasonable degree of mobility rather than one where people are born into relative economic positions they can never leave,” conservative analyst Ramesh Ponnuru wrote in 2015. “But so long as those conditions are met, the ratio of the incomes of the top 1 percent to the median worker should be fairly low on our list of concerns.”

What is the state of U.S. economic mobility?

Americans have long prided themselves on the ability to move up the income ladder, but there are signs that U.S. economic mobility is disappearing. The fraction of Americans who earn more than their parents has shrunk from more than 90 percent of those born in the 1940s to 50 percent of those born in the 1980s.

Harvard University economist Raj Chetty, who has studied social mobility extensively, found that mobility in the United States varies widely across the country [PDF]. Some wealthy cities have high mobility, on par with countries such as Denmark and Canada, while children in some lower-income areas have less than a 5 percent chance of reaching the top fifth of the income distribution when starting from the bottom fifth.

Overall economic mobility is lower in the United States than in many other developed countries, which some experts argue hampers U.S. economic growth. In a 2016 Stanford University study [PDF], the United States ranked behind several other wealthy countries, including Australia, Canada, France, Germany, and Japan. 

How do race, ethnicity, and gender factor in?

The relationship between race, ethnicity, and inequality has been well-documented. Since 1960, the median wealth of white households has tripled while the wealth of Black households has barely increased . For decades, the unemployment rate among Black Americans has been roughly twice that of white Americans. Black Americans are also underrepresented in high-paying professions, including corporate leadership. As of 2020, only four of the CEOs of Fortune 500 companies are Black. Black and American Indian children have far lower economic mobility compared to white, Asian, and children of Hispanic ethnicity, according to Chetty’s research.

U.S. inequality today is rooted in systemic racism and the legacy of slavery. Through a policy known as redlining that resulted from a New Deal program in the 1930s, Black Americans were systematically denied mortgages, leading to housing segregation and a disparity in home ownership, which is a major source of wealth. Though racial discrimination in housing was banned by the Fair Housing Act of 1968, the effects persist. Black Americans were similarly excluded from the benefits of the G.I. Bill after World War II, which is widely credited with helping to grow the middle class.

Black Americans also face discrimination in the labor market, because hiring is often done internally via networks that exclude them, says William E. Spriggs, an economics professor at Howard University and the chief economist at the American Federation of Labor and Congress of Industrial Organizations (AFL-CIO).

The COVID-19 pandemic laid bare many of these disparities. American Indian, Black, and Latinx Americans were more likely to be hospitalized with and die from COVID-19 than white Americans—an inequity that CFR’s Catherine Powell calls the “ color of COVID .” People of color were more likely to be laid off; and they were more likely to be considered essential workers, performing jobs that typically came with greater exposure to the virus, such as cashiering and package delivery.

The existence of a gender pay gap is also well-founded, though there is a debate over its causes. The pay gap has narrowed over the past forty years as women have obtained more education, but it has not shrunk as much since 2000, according to the Economic Policy Institute’s Elise Gould. Gould attributes this in part to discrimination and the underrepresentation of women in high-paying jobs.

What role does education play?

Most high wages come from jobs that require a high level of education. In 2016, U.S. families headed by someone with a bachelor's degree earned double that of those headed by someone without, and families with a postgraduate degree holder earned nearly three times as much, according to a 2019 study [PDF] by economists at the Federal Reserve Bank of St. Louis. The share of the nation’s income earned by families with at least one bachelor’s degree increased from 45 percent to 63 percent between 1989 and 2016.

The difference is even starker for net worth. In 2016, families headed by a postgraduate degree holder had nearly eight times more wealth than families without a college degree. In 2015, nearly 25 percent of people without a high school diploma were living in poverty, compared to just 5 percent of those with a college degree, according to the U.S. Census Bureau. The percentage of Americans with a bachelor’s degree has steadily increased since the end of World War II, reaching around 38 percent in 2021. The United States is above the OECD average in attainment of higher education but is behind several other wealthy countries, including Canada, Japan, and South Korea. 

However, college degrees do not guarantee good jobs. Though the college wage premium (the percentage by which the wages of college graduates exceed those of high school graduates) grew rapidly from 1979 to 2000, it has since fallen off , and there is significant income inequality even among college graduates. The Federal Reserve study found that the college wealth premium (the increase in net worth from having a degree) has declined significantly for white Americans born in the 1980s and has disappeared entirely for Black Americans born that decade. According to the study, these diminishing returns could be due to the surging cost of college—which has risen by almost triple the rate of consumer price increases since 1978.

What about tax rates?

The top U.S. income tax rates have been repeatedly cut over the past half century, which some experts say has contributed to growing inequality. When President John F. Kennedy entered the White House in 1961, the top tax rate was more than 90 percent. Today, the top rate stands at 37 percent. The top 1 percent’s share of income dramatically increased after President Ronald Reagan slashed taxes in the early 1980s.

Likewise, the corporate income tax has declined steadily as a share of corporate profits and as a percentage of gross domestic product over the past half century. The Tax Cuts and Jobs Act of 2017 dramatically lowered the corporate rate from 35 percent to 21 percent.

The capital gains tax , a tax on the sale of assets including stocks, land, and art, has also declined over time, though the rate was increased in 2013 to 20 percent. The wealthy generally benefit more from capital gains than from regular employment income, leading some experts to argue that the gap between the capital gains tax and the income tax contributes to inequality.

What are some other drivers of growing inequality? 

Long-term economic forces play a role, both by boosting rewards to high earners and undermining wages for low- and medium-skill jobs. Those forces, experts say, include waning worker power, increased monopolization of the economy, and globalization. Some Americans have greatly benefited from a globalized world, whereby they can reach more consumers and manufacture products at lower costs. But globalization has also introduced tough competition for American workers, as some jobs were moved overseas and wages stagnated. 

The decline of unions is another contributing factor: the average union member earns roughly 25 percent more than their non-union counterpart. In 1983, about 20 percent of all workers were represented by unions. By 2019, that number had dropped to just 6.2 percent. This has disproportionately affected Black workers, who historically have been more likely to unionize. However, union power is on the rise , as the rapid economic recovery from the pandemic has created a tight labor market in which workers have greater leverage.

Then there is trade policy, a perennial controversy that was supercharged by President Donald Trump’s election in 2016. Trump has long been critical of U.S. trade deals, claiming that other countries, particularly China , have taken advantage of the United States to the detriment of U.S. workers. Many economists have disputed the role of trade in manufacturing job losses, arguing that such losses were offset by gains in other sectors [PDF] and that wages have increased as a result of trade.

Still others say that technological change, including automation, is primarily responsible for job losses, not trade. In Foreign Affairs , former U.S. Trade Representative Robert Lighthizer writes that even though trade is not the sole reason jobs have disappeared, “it cannot be denied that the outsourcing of jobs from high- to low-wage places has devastated communities in the American Rust Belt and elsewhere.”

What are some policy proposals to address inequality?

Proposals put forward in recent years to address income and wealth inequality have included supporting unionization and raising the minimum wage; making the tax code more progressive, as well as taxing wealth alongside income; and increasing access to education, including early education and college.

One tool for addressing income inequality that has received significant attention is a more progressive tax code , meaning that higher incomes are taxed at a higher rate than lower ones. Some experts and politicians argue that shifting more money from the rich to the poor would reduce inequality and benefit society overall. But others say that higher taxes would stifle economic growth and innovation. Democrats generally subscribe to the former view and Republicans to the latter, though some Democratic presidents have cut taxes and some Republican presidents have raised them. The parties’ positions on taxes have calcified in recent years.

Proposed taxes on wealth, rather than income, have become increasingly popular among Democrats and were championed by Senators Bernie Sanders and Elizabeth Warren in the 2020 presidential primary. In March 2022, for the first time as president, Biden called for a wealth tax, proposing a “billionaire minimum income tax” in his annual budget request. Households worth more than $100 million would have to pay a tax of at least 20 percent of their income, including on so-called unrealized gains from assets such as stocks that have increased in value but have not been sold. Critics challenge the merits of such redistribution, arguing that such a tax would be bad for the economy, difficult to implement, and even unconstitutional. 

Biden has also proposed increasing the tax on inherited wealth , which is known as the estate tax or, to critics, as the death tax. While proponents say such a tax would dramatically reduce inequality, others argue that it could lead to more tax evasion and discourage investment and entrepreneurship. Biden has also called for raising the corporate tax rate, the top income tax rate, and the capital gains tax.

To address the rising cost of college and increase access to higher education, some policymakers, including Sanders and Warren, have proposed tuition-free public college and the elimination of student loan debt . Some Republicans, including Trump, meanwhile, have pushed to allocate more federal money toward teaching skills and trades as an alternative.

To help close the Black employment gap, Howard University’s Spriggs suggests making all job postings publicly available, using computer algorithms to better match job seekers with job openings, and encouraging companies—particularly Silicon Valley firms—to recruit more Black students. Spriggs also argues for stronger monitoring and enforcement of antidiscrimination laws.

Some experts, including CFR’s Edward Alden, say the pandemic should compel Washington to retool the U.S. economy. A stronger social safety net, including better unemployment benefits, robust sick leave policies, and more job retraining programs, could help workers manage shocks and make the economy more resilient. “What the country needs is not a series of short-term bailouts, but long-term plans to ensure that most Americans are protected against such crises in the future,” writes Alden.

Recommended Resources

Economists Jason Furman and Valerie Wilson discuss inequality at this September 2021 CFR event .

In the Atlantic , author Matthew Stewart argues that inequality has created a new American aristocracy . 

Opportunity Insights, a nonprofit based at Harvard University, researches economic mobility in the United States .

Trymaine Lee examines the U.S. racial wealth gap as part of the New York Times ’ “1619 Project.”

Explore these charts from the Urban Institute about income and wealth inequality.

Steven J. Markovich contributed to this report. Will Merrow helped create the graphics.

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• Most Americans Say There Is Too Much Economic Inequality in the U.S., but Fewer Than Half Call It a Top Priority
• 1. Trends in income and wealth inequality

Table of Contents

• 2. Views of economic inequality
• 3. What Americans see as contributors to economic inequality
• 4. Views on reducing economic inequality
• Acknowledgments
• Methodology

Barely 10 years past the end of the Great Recession in 2009, the U.S. economy is doing well on several fronts . The labor market is on a job-creating streak that has rung up more than 110 months straight of employment growth, a record for the post-World War II era. The unemployment rate in November 2019 was 3.5%, a level not seen since the 1960s. Gains on the jobs front are also reflected in household incomes, which have rebounded in recent years.

But not all economic indicators appear promising. Household incomes have grown only modestly in this century, and household wealth has not returned to its pre-recession level. Economic inequality, whether measured through the gaps in income or wealth between richer and poorer households, continues to widen.

Household incomes are growing again after a lengthy period of stagnation

With periodic interruptions due to business cycle peaks and troughs, the incomes of American households overall have trended up since 1970. In 2018, the median income of U.S. households stood at $74,600. 5 This was 49% higher than its level in 1970, when the median income was $50,200. 6 (Incomes are expressed in 2018 dollars.)

But the overall trend masks two distinct episodes in the evolution of household incomes (the first lasting from 1970 to 2000 and the second from 2000 to 2018) and in how the gains were distributed.

Most of the increase in household income was achieved in the period from 1970 to 2000. In these three decades, the median income increased by 41%, to $70,800, at an annual average rate of 1.2%. From 2000 to 2018, the growth in household income slowed to an annual average rate of only 0.3%. If there had been no such slowdown and incomes had continued to increase in this century at the same rate as from 1970 to 2000, the current median U.S. household income would be about $87,000, considerably higher than its actual level of $74,600.

The shortfall in household income is attributable in part to two recessions since 2000. The first recession, lasting from March 2001 to November 2001, was relatively short-lived. 7  Yet household incomes were slow to recover from the 2001 recession and it was not until 2007 that the median income was restored to about its level in 2000.

But 2007 also marked the onset of the Great Recession, and that delivered another blow to household incomes. This time it took until 2015 for incomes to approach their pre-recession level. Indeed, the median household income in 2015 – $70,200 – was no higher than its level in 2000, marking a 15-year period of stagnation, an episode of unprecedented duration in the past five decades. 8

More recent trends in household income suggest that the effects of the Great Recession may finally be in the past. From 2015 to 2018, the median U.S. household income increased from $70,200 to $74,600, at an annual average rate of 2.1%. This is substantially greater than the average rate of growth from 1970 to 2000 and more in line with the economic expansion in the 1980s and the dot-com bubble era of the late 1990s.

Why economic inequality matters

The rise in economic inequality in the U.S. is tied to several factors. These include , in no particular order, technological change, globalization, the decline of unions and the eroding value of the minimum wage. Whatever the causes, the uninterrupted increase in inequality since 1980 has caused concern among members of the public , researchers , policymakers and politicians .

One reason for the concern is that people in the lower rungs of the economic ladder may experience diminished economic opportunity and mobility in the face of rising inequality, a phenomenon referred to as The Great Gatsby Curve . Others have highlighted inequality’s negative impact on the political influence of the disadvantaged, on geographic segregation by income, and on economic growth itself. The matter may not be entirely settled, however, as an opposing viewpoint suggests that income inequality does not harm economic opportunity.

Alternative estimates of economic inequality

This report presents estimates of income inequality based on household income as estimated in the Current Population Survey (CPS), a survey of households conducted by the U.S. Census Bureau in partnership with the Bureau of Labor Statistics. These estimates refer to gross (pretax) income and encompass most sources of income. A key omission is the value of in-kind services received from government sources. Because income taxes are progressive and in-kind services also serve to boost the economic wellbeing of (poorer) recipients, not accounting for these two factors could overstate the true gap in the financial resources of poorer and richer households.

The Congressional Budget Office (CBO) offers an alternative estimate of income inequality that accounts for federal taxes and a more comprehensive array of cash transfers and in-kind services than is possible with Current Population Survey data. The CBO finds that the Gini coefficient in the U.S. in 2016 ranged from 0.595, before accounting for any forms of taxes and transfers, to 0.423, after a full accounting of taxes and transfers. These estimates bracket the Census Bureau’s estimate of 0.481 for the Gini coefficient in 2016. By either estimate, income inequality in the U.S. is found to have increased by about 20% from 1980 to 2016 (The Gini coefficient ranges from 0 to 1, or from perfect equality to complete inequality). Findings from other researchers show the same general rise in inequality over this period regardless of accounting for in-kind transfers.

Yet another alternative is to focus on inequality in consumption, which implicitly accounts for all forms and sources of incomes, taxes and transfers. Some estimates based on consumption show that inequality in the U.S. increased by less than implied by estimates based on income, but other estimates suggest the trends based on consumption and income are similar. Empirically, consumption can be harder to measure than income.

Upper-income households have seen more rapid growth in income in recent decades

The growth in income in recent decades has tilted to upper-income households. At the same time, the U.S. middle class , which once comprised the clear majority of Americans, is shrinking. Thus, a greater share of the nation’s aggregate income is now going to upper-income households and the share going to middle- and lower-income households is falling. 9

The share of American adults who live in middle-income households has decreased from 61% in 1971 to 51% in 2019. This downsizing has proceeded slowly but surely since 1971, with each decade thereafter typically ending with a smaller share of adults living in middle-income households than at the beginning of the decade.

The decline in the middle-class share is not a total sign of regression. From 1971 to 2019, the share of adults in the upper-income tier increased from 14% to 20%. Meanwhile, the share in the lower-income tier increased from 25% to 29%. On balance, there was more movement up the income ladder than down the income ladder.

But middle-class incomes have not grown at the rate of upper-tier incomes. From 1970 to 2018, the median middle-class income increased from $58,100 to $86,600, a gain of 49%. 10  This was considerably less than the 64% increase for upper-income households, whose median income increased from $126,100 in 1970 to $207,400 in 2018. Households in the lower-income tier experienced a gain of 43%, from $20,000 in 1970 to $28,700 in 2018. (Incomes are expressed in 2018 dollars.)

More tepid growth in the income of middle-class households and the reduction in the share of households in the middle-income tier led to a steep fall in the share of U.S. aggregate income held by the middle class. From 1970 to 2018, the share of aggregate income going to middle-class households fell from 62% to 43%. Over the same period, the share held by upper-income households increased from 29% to 48%. The share flowing to lower-income households inched down from 10% in 1970 to 9% in 2018.

These trends in income reflect the growth in economic inequality overall in the U.S. in the decades since 1980.

Income growth has been most rapid for the top 5% of families

Even among higher-income families, the growth in income has favored those at the top. Since 1980, incomes have increased faster for the most affluent families – those in the top 5% – than for families in the income strata below them. This disparity in outcomes is less pronounced in the wake of the Great Recession but shows no signs of reversing.

From 1981 to 1990, the change in mean family income ranged from a loss of 0.1% annually for families in the lowest quintile (the bottom 20% of earners) to a gain of 2.1% annually for families in the highest quintile (the top 20%). The top 5% of families, who are part of the highest quintile, fared even better – their income increased at the rate of 3.2% annually from 1981 to 1990. Thus, the 1980s marked the beginning of a long and steady rise in income inequality.

A similar pattern prevailed in the 1990s, with even sharper growth in income at the top. From 1991 to 2000, the mean income of the top 5% of families grew at an annual average rate of 4.1%, compared with 2.7% for families in the highest quintile overall, and about 1% or barely more for other families.

The period from 2001 to 2010 is unique in the post-WWII era. Families in all strata experienced a loss in income in this decade, with those in the poorer strata experiencing more pronounced losses. The pattern in income growth from 2011 to 2018 is more balanced than the previous three decades, with gains more broadly shared across poorer and better-off families. Nonetheless, income growth remains tilted to the top, with families in the top 5% experiencing greater gains than other families since 2011.

The wealth of American families is currently no higher than its level two decades ago

Other than income, the wealth of a family is a key indicator of its financial security. Wealth, or net worth, is the value of assets owned by a family, such as a home or a savings account, minus outstanding debt, such as a mortgage or student loan. Accumulated over time, wealth is a source of retirement income, protects against short-term economic shocks, and provides security and social status for future generations.

The period from the mid-1990s to the mid-2000s was beneficial for the wealth portfolios of American families overall. Housing prices more than doubled in this period, and stock values tripled. 11 As a result, the median net worth of American families climbed from $94,700 in 1995 to $146,600 in 2007, a gain of 55%. 12  (Figures are expressed in 2018 dollars.)

But the run up in housing prices proved to be a bubble that burst in 2006. Home prices plunged starting in 2006, triggering the Great Recession in 2007 and dragging stock prices into a steep fall as well. Consequently, the median net worth of families fell to $87,800 by 2013, a loss of 40% from the peak in 2007. As of 2016, the latest year for which data are available, the typical American family had a net worth of $101,800, still less than what it held in 1998.

The wealth divide among upper-income families and middle- and lower-income families is sharp and rising

The wealth gap among upper-income families and middle- and lower-income families is sharper than the income gap and is growing more rapidly.

The period from 1983 to 2001 was relatively prosperous for families in all income tiers, but one of rising inequality. The median wealth of middle-income families increased from $102,000 in 1983 to $144,600 in 2001, a gain of 42%. The net worth of lower-income families increased from $12,3oo in 1983 to $20,600 in 2001, up 67%. Even so, the gains for both lower- and middle-income families were outdistanced by upper-income families, whose median wealth increased by 85% over the same period, from $344,100 in 1983 to $636,000 in 2001. (Figures are expressed in 2018 dollars.)

The wealth gap between upper-income and lower- and middle-income families has grown wider this century. Upper-income families were the only income tier able to build on their wealth from 2001 to 2016, adding 33% at the median. On the other hand, middle-income families saw their median net worth shrink by 20% and lower-income families experienced a loss of 45%. As of 2016, upper-income families had 7.4 times as much wealth as middle-income families and 75 times as much wealth as lower-income families. These ratios are up from 3.4 and 28 in 1983, respectively.

The reason for this is that middle-income families are more dependent on home equity as a source of wealth than upper-income families, and the bursting of the housing bubble in 2006 had more of an impact on their net worth. Upper-income families, who derive a larger share of their wealth from financial market assets and business equity, were in a better position to benefit from a relatively quick recovery in the stock market once the recession ended.

As with the distribution of aggregate income, the share of U.S. aggregate wealth held by upper-income families is on the rise. From 1983 to 2016, the share of aggregate wealth going to upper-income families increased from 60% to 79%. Meanwhile, the share held by middle-income families has been cut nearly in half, falling from 32% to 17%. Lower-income families had only 4% of aggregate wealth in 2016, down from 7% in 1983.

The richest are getting richer faster

The richest families in the U.S. have experienced greater gains in wealth than other families in recent decades, a trend that reinforces the growing concentration of financial resources at the top.

The tilt to the top was most acute in the period from 1998 to 2007. In that period, the median net worth of the richest 5% of U.S. families increased from $2.5 million to $4.6 million, a gain of 88%.

This was nearly double the 45% increase in the wealth of the top 20% of families overall, a group that includes the richest 5%. Meanwhile, the net worth of families in the second quintile, one tier above the poorest 20%, increased by only 16%, from $27,700 in 1998 to $32,100 in 2007. (Figures are expressed in 2018 dollars.)

The wealthiest families are also the only ones to have experienced gains in wealth in the years after the start of the Great Recession in 2007. From 2007 to 2016, the median net worth of the richest 20% increased 13%, to $1.2 million. For the top 5%, it increased by 4%, to $4.8 million. In contrast, the net worth of families in lower tiers of wealth decreased by at least 20% from 2007 to 2016. The greatest loss – 39% – was experienced by the families in the second quintile of wealth, whose wealth fell from $32,100 in 2007 to $19,500 in 2016.

As a result, the wealth gap between America’s richest and poorer families more than doubled from 1989 to 2016. In 1989, the richest 5% of families had 114 times as much wealth as families in the second quintile, $2.3 million compared with $20,300. By 2016, this ratio had increased to 248, a much sharper rise than the widening gap in income. 13

Income inequality in the U.S has increased since 1980 and is greater than in peer countries

Income inequality may be measured in a number of ways , but no matter the measure , economic inequality in the U.S. is seen to be on the rise.

One widely used measure – the 90/10 ratio – takes the ratio of the income needed to rank among the top 10% of earners in the U.S. (the 90th percentile) to the income at the threshold of the bottom 10% of earners (the 10th percentile). In 1980, the 90/10 ratio in the U.S. stood at 9.1, meaning that households at the top had incomes about nine times the incomes of households at the bottom. The ratio increased in every decade since 1980, reaching 12.6 in 2018, an increase of 39%. 14

Not only is income inequality rising in the U.S., it is higher than in other advanced economies. Comparisons of income inequality across countries are often based on the Gini coefficient , another commonly used measure of inequality. 15 Ranging from 0 to 1, or from perfect equality to complete inequality, the Gini coefficient in the U.S. stood at 0.434 in 2017, according to the Organization for Economic Cooperation and Development (OECD). 16  This was higher than in any other of the G-7 countries , in which the Gini ranged from 0.326 in France to 0.392 in the UK, and inching closer to the level of inequality observed in India (0.495). More globally, the Gini coefficient of inequality ranges from lows of about 0.25 in Eastern European countries to highs in the range of 0.5 to 0.6 in countries in southern Africa, according to World Bank estimates .

• The median income splits the income distribution into two halves – half the households earn less than the median and half the households earn more. Incomes are adjusted for household size and scaled to represent a household size of three. See methodology for details. ↩
• Percentage changes are estimated, and other calculations are made, before numbers are rounded. ↩
• The recession dates are as designated by the National Bureau of Economic Research . ↩
• It is likely that household incomes did not return to their 2000 level till 2016 or later. A redesign of income questions by the Census Bureau in 2014 is estimated to have given a boost of about 3% to median household income in the U.S. at the time of the redesign. ↩
• Middle-income” Americans are adults whose annual household income is two-thirds to double the national median, after incomes have been adjusted for household size. Lower-income households have incomes less than 67% of the median and upper-income households have incomes that are more than double the median. See methodology for details. Previous Pew Research Center reports have examined the state of the American middle class in greater detail, including trends within U.S. metropolitan areas. ↩
• The data source for these estimates is the Current Population Survey, Annual Social and Economic Supplement for 1971 to 2019. In the survey, respondents provide household income data for the previous calendar year. Thus, income data in this section refer to the 1970-2018 period and the counts of people from the same survey refer to the 1971-2019 period. ↩
• The S&P/Case-Shiller U.S. National Home Price Index increased from 80 in January 1995 to 185 in June 2006 (January 2000=100). It fell to 134 in February 2012 and climbed thereafter, reaching 212 in August 2019. At the start of the Great Recession in December 2007, the S&P 500 index stood at about 1,500, three times its level of about 500 in 1995. After the peak in 2007, the S&P 500 fell below 1,000 in 2009. As of November 2019, the index had reached a level of about 3,000. (S&P 500 historical values downloaded from Yahoo! on Nov. 21, 2019.) ↩
• Estimates of wealth are from the Survey of Consumer Finances (SCF). The SCF is conducted triennially by the Federal Reserve Board of Governors. It was first fielded in 1983 and the latest survey for which data are available was in 2016. ↩
• It is not possible to compute the ratio of the wealth of the top 5% of families to the wealth of the poorest 20% because the median wealth of the poorest families is either zero or negative in most years examined. ↩
• Per the U.S. Census Bureau , the source of these estimates, the 90th percentile household income in 2018 was $184,292 and the 10th percentile household income was $14,629 (incomes not adjusted for household size). ↩
• The Gini coefficient encapsulates the share of aggregate income held by each person or household. If everyone has the same income, or the same share of aggregate income, the Gini coefficient equals zero. If the income distribution is perfectly unequal, a single person or household holds all aggregate income, the Gini coefficient is equal to one. ↩
• The OECD is a group of 36 countries, including many of the world’s advanced economies. The OECD’s estimates of the Gini coefficient are for the following years: U.S. – 2017, UK – 2017, Italy – 2016, Japan – 2015, Canada – 2017, Germany – 2016, France – 2016, and India – 2011. ↩

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Income Inequality in the United States

Gaps in earnings between America's most affluent and the rest of the country continue to grow year after year.

In the United States, the income gap between the rich and everyone else has been growing markedly, by every major statistical measure, for more than 30 years.

Wage Inequality

Racial income inequality, ceo-worker pay gaps.

Income includes the revenue streams from wages, salaries, interest on a savings account, dividends from shares of stock, rent, and profits from selling something for more than you paid for it. Unlike wealth statistics, income figures do not include the value of homes, stock, or other possessions. Income inequality refers to the extent to which income is distributed in an uneven manner among a population.

Over the past four decades, the richest 1 percent of Americans have enjoyed by far the fastest income growth. The most rapid increase has occurred at the tippy top of the economic ladder. Between 1979 and 2020, the average income of the richest 0.01 percent of households, a group that today represents about 12,000 households , grew 17 times as fast as the income of the bottom 20 percent of earners. These Congressional Budget Office figures include income from labor and investments. They do not account for taxes and means-tested public assistance, such as food stamps and Medicaid.

Income disparities are now so pronounced that America’s richest 1 percent of households averaged 104 times as much income as the bottom 20 percent in 2020, according to the  Congressional Budget Office .

The U.S. income divide has not always been as vast as it is today. In response to the staggering inequality of the Gilded Age in the early 1900s, social movements and progressive policymakers fought successfully to level down the top through fair taxation and level up the bottom through increased unionization and other reforms. But beginning in the 1970s, these levelers started to erode and the country returned to extreme levels of inequality. According to  data analyzed by UC Berkeley economist Emmanuel Saez, the ratio between the average income of the top 0.1 percent and the bottom 90 percent reached Gilded Age levels in the years preceding the 2008 financial crisis.

Over the past five decades, the top 1 percent of American earners have nearly doubled their share of national income, according to figures in the World Inequality Database . Meanwhile, the Census Bureau’s “official” poverty rate for all U.S. families has merely inched up and down. In 2011, the Census Bureau began publishing a “supplemental” poverty measure that is more accurate but still likely understates the number of people in the world’s richest country who have to struggle to make ends meet. Federal pandemic relief legislation significantly reduced child poverty rates , but those programs were temporary.

The nation’s highest 0.01 percent and 0.1 percent of income-earners have seen their incomes rise much faster than the rest of the top 1 percent in recent decades. Both of these ultra-rich groups saw their incomes drop immediately after the financial crashes of 1929 and 2008, but they had a much swifter recovery after the more recent crisis. Income concentration today is as extreme as it was during the “Roaring Twenties.”

Congressional Budget Office data show that taxes and means-tested public assistance narrow the income divide somewhat, but the gaps remain staggering. Between 1979 and 2020, the richest 0.01 percent of households had a cumulative income growth rate of 648 percent after accounting for taxes and aid transfers. That’s more than five times the 126 percent growth rate for the bottom 20 percent of households. Tax cuts for the rich are a key driver of this rising inequality. The top U.S. marginal tax rate in 1979 was 70 percent , compared to just 37 percent today.

The rich also benefit immensely from the tax code’s preferential treatment of income from investments. Americans who are not among the ultra-rich get the vast majority of their income from wages and salaries. But the higher the U.S. income group, IRS data show, the larger the share of income derived from investment profits. The top tax rate for long-term capital gains is just 20 percent, compared to the top marginal tax rate on ordinary income of 37 percent.

Between 1979 and 2007, according to Economic Policy Institute research , paycheck income for those in the richest 1 percent and 0.1 percent exploded. The wage and salary income for these elite groups dipped after the 2008 financial crisis but recovered relatively quickly. Between 2009 and 2019, the bottom 90 percent had wage growth of just 8.7 percent, compared to 20.4 percent for the top 1 percent and 30.2 percent for the top 0.1 percent.

Productivity has increased at a relatively consistent rate since 1948. But the wages of American workers have not, since the 1970s, kept up with this rising productivity. Worker hourly compensation has essentially flat-lined, increasing just 17.3 percent from 1979 to 2021 (after adjusting for inflation). Over this same time period, worker productivity has increased 64.6 percent, according to the Economic Policy Institute . In other words, productivity grew at a rate 3.7 times as fast as worker pay. 

One factor in the widening income divide is the decline of U.S. labor unions. The share of the workforce represented by a union has declined to just 10.1 percent in 2022, down from over 30 percent in the 1940s and 1950s. Meanwhile, those at the top of the income scale have increased their power to rig economic rules in their favor, further increasing income inequality. In 2018, the richest 1% earned over 20 percent of all national income.

U.S. workers who are unionized continue to earn significantly higher wages than their non-unionized counterparts, according to Bureau of Labor Statistics data , The gap is particularly wide among women. In 2022, median weekly wages for full-time unionized women amounted to $1,146 – $214 more than non-unionized women’s earnings.

Men make up an overwhelming majority of top earners across the U.S. economy, even though women now represent almost half of the country’s workforce. According to analysis by Thomas Piketty, Emmanuel Saez, and Gabriel Zucman, women comprise just 27 percent of the top 10 percent, and their share of higher income groups runs even smaller. Among the top 1 percent, women make up slightly less than 17 percent of workers, while at the top 0.1 percent level, they make up only 11 percent.

Since 1985, the average Wall Street bonus has increased 1,743 percent, from $13,970 to $257,500 in 2021 (not adjusted for inflation). According to Institute for Policy Studies analysis , if the minimum wage had increased at that rate, it would be worth $61.75 today, instead of $7.25. The total 2021 bonus pool for 180,000 New York City-based Wall Street employees was $45 billion — enough to pay for more than 1 million jobs paying $15 per hour for a year. Because the very rich can squirrel away much of their income, huge Wall Street bonuses don’t have nearly the stimulus effect as raising pay for low-wage workers who have to spend nearly every dollar they make. The sharp rise in Wall Street bonuses has also contributed to race and gender inequality, as detailed in our facts sections on those issues.

In 2021, Fortune 500 CEOs, who earned $18.3 million on average, included just four Black and 17 Latino people — just 4 percent of the total. By contrast, these groups made up 43 percent of the U.S. workers who would benefit from a raise in the federal minimum wage to $15 per hour by 2025, according to Institute for Policy Studies analysis of Economic Policy Institute data. Black and Latino people comprise 31 percent of the entire U.S. labor force.

The world’s wealthiest country is home to numerous communities that have been poor for generations: think parts of Appalachia, the Mississippi Delta, the southern border, and Chicago’s South Side. An Economic Innovation Group report finds that people of color are far more likely to live in “persistently poor” communities – defined as those with poverty rates of 20 percent or higher for at least 30 years – than white Americans.

Racial discrimination in many forms, including in education, hiring, and pay practices, contributes to persistent earnings gaps. As of the third quarter of 2023, the median white worker made 24 percent more than the typical Black worker and around 28 percent more than the median Latino worker, according to  BLS data .

The Black unemployment rate has persistently run about twice as high as for white workers. These rates only count those who are actively seeking work, leaving out those who have given up finding a job. While racial gaps have narrowed somewhat in recent years, the divides remain wide. In November 2022, Black unemployment stood at 5.7 percent, compared to 3.2 percent for white workers, according to BLS data .

CEO pay has been a key driver of rising U.S. income inequality for decades, and the gap between CEO and worker pay only widened during the pandemic.

In 2021, corporate CEOs were quick to blame worker wages for causing inflation. But an AFL-CIO analysis reveals that workers’ real wages actually fell 2.4 percent in 2021 after adjusting for inflation. Meanwhile, S&P 500 companies increased their CEO pay by an average of 18.2 percent while enjoying record profits and spending a record $882 billion on stock buybacks.

Corporate boards lavish wildly complex compensation packages on their top executives, mostly in various forms of stock-based pay. The objective? To give the impression of a “pay for performance” system that aligns the interests of CEOs and shareholders. By contrast, ordinary American workers receive nearly all of their compensation in the form of cash salary or wages. In the chart above, we’ve added to the BLS median annual wage a bonus worth 2.3 percent and an employer 401(k) contribution worth 3 percent of base pay.

In reality, the notion that Corporate America has a CEO “pay for performance” system is a myth . One common ploy for inflating CEO pay? Stock buybacks. This financial maneuver siphons funds from worker wages while artificially pumping up the value of CEO stock-based pay. The Institute for Policy Studies Executive Excess 2023 report examines buyback activity among the 100 S&P 500 corporations with the lowest median wages. Between January 1, 2020, and May 31, 2023, fully 90 percent of these firms spent company resources on buybacks, for a total expenditure of $341 billion. During their stock buyback spree, the value of CEOs’ personal stock holdings at these “Low-Wage 100” firms increased more than three times as fast as their median worker pay.

During the pandemic, corporate boards took explicit actions to shield their CEOs’ massive paychecks while workers were suffering. An Institute for Policy Studies analysis found that more than half of the 100 S&P 500 companies with the lowest median worker pay moved bonus goalposts or otherwise rigged rules to inflate CEO pay in 2020. Among these rule-rigging corporations, CEO compensation averaged $15.3 million, up 29 percent from 2019. Median worker pay ran $28,187 on average, 2 percent lower than the 2019 worker pay rate. The ratio between CEO and median worker pay at these 51 firms averaged 830 to 1.

With U.S. unions playing a smaller economic role, the gap between worker and CEO pay has exploded since the early 1990s. In 1980, the average big company CEO earned just 42 times as much as the average U.S. worker. In 2021, the CEO-worker pay gap was nearly eight times larger than in 1980. According to  the AFL-CIO , S&P 500 firm CEOs were paid 324 times as much as average U.S. workers in 2021. CEO pay averaged $18.3 million, compared to average worker pay of $58,260. During the 21st century, the annual gap between CEO pay and typical worker pay has averaged about 350 to 1.

The CEO pay explosion, as shown in AFL-CIO analysis , contrasts sharply with trends at the bottom end of the U.S. wage scale. Average CEO pay at S&P 500 corporations is up 642 percent since 1991, while Congress has not passed a minimum wage increase for more than a decade. The federal minimum wage for restaurant servers and other tipped workers has been frozen at just $2.13 per hour since 1991. According to the Labor Department , 27 states have raised their tipped minimum, while retaining this two-tier system. Seven states and the District of Columbia have eliminated or are phasing out the subminimum tipped wage altogether, while in Michigan the issue was tied up in the courts as of December 2022. In six states, the tipped minimum is still $2.13. While employers are technically supposed to make up the difference if workers don’t earn enough in tips to reach the $7.25 federal minimum, this rule is largely unenforced.

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Six policies to reduce economic inequality

• September 10, 2014
• By john a. powell

Almost three years to the date since Occupy Wall Street first raised the consciousness of Americans about the wide economic disparities between the richest one percent versus the 99 percent of U.S. earners,  new Federal Reserve data confirms that wealth and income inequality in the U.S. is accelerating.

Results from the Fed's 2013 Survey of Consumer Finances show that the top 3 percent own 54.4 percent of America's wealth, an increase of almost 45 percent since 1989 and the bottom 90 percent own only 24.7 percent of wealth, a drop of 33.2 percent over the same time period. Similarly, the share of total income for the top 3 percent of families rose when compared to 2010 but the bottom 90 percent of families saw their share of total income declinePerhaps not surprisingly, the survey found significant disparities by race, class, homeownership status and education; with income and wealth increasing for non-Hispanic whites, the rich, homeowners and those with more education while it decreased for blacks, lower income households, renters and those with less than a college education.

While discouraging, it is important for Americans to understand that inequality is not the inevitable side effect of capitalism. Public policy can help to reduce inequality and address poverty without slowing U.S. economic growth.

Toward this goal, researchers from the  Haas Institute for a Fair and Inclusive Society at UC Berkeley  point to the following six evidence-based policy solutions that can have a positive effect on reversing rising inequality, closing economic disparities among subgroups and enhancing economic mobility for all:

1. Increase the minimum wage.

Research shows that higher wages for the lowest-paid workers has the potential to help nearly 4.6 million people out of poverty and add approximately $2 billion to the nation's overall real income. Additionally, increasing the minimum wage does not hurt employment nor does it retard economic growth.

2. Expand the Earned Income Tax.

In recent years, the EITC has been shown to have a positive impact on families, lifting roughly 4.7 million children above the poverty line on an annual basis. Increases in the EITC can pull more children out of poverty while providing more economic support for the working poor, especially single parents entering the workforce.

3. Build assets for working families.

Policies that encourage higher savings rates and lower the cost of building assets for working and middle class households can provide better economic security for struggling families. New programs that automatically enroll workers in retirement plans and provide a savings credit or a federal match for retirement savings accounts could help lower-income households build wealth. Access to fair, low-cost financial services and home ownership are also important pathways to wealth.

4. Invest in education.

Differences in early education and school quality are the most important components contributing to persistent inequality across generations. Investments in education, beginning in early childhood with programs like Head Start and Universal Pre-K, can increase economic mobility, contribute to increased productivity and decrease inequality.

5. Make the tax code more progressive.

It is a great irony that tax rates for those at the top have been declining even as their share of income and wealth has increased dramatically. The data show we have created bad tax policy by giving capital gains -- profits from the sale of property or investments -- special privileges in our country's tax code; privileges that give investment income more value than actual work. Capital gains tax rates must be adjusted so that they are in line with income tax rates. Savings incentives structured as refundable tax credits, which treat every dollar saved equally, can provide equal benefits for lower-income families.

6. End residential segregation.

Higher levels of racial residential segregation within a metropolitan region are strongly correlated with significantly reduced levels of intergenerational upward mobility for all residents of that area. Segregation by income, particularly the isolation of low-income households, also correlates with significantly reduced levels of upward mobility. Eliminating residential segregation by income and race can boost economic mobility for all.

But getting policymakers to prioritize these policies will depend on the actions of advocates, voters and other supporters with a vision for a fair and inclusive society so strong that they overwhelm powerful forces that seek to maintain the status quo. 

Each of these policies, if carefully implemented, has the potential to lift working families out of poverty, support greater economic mobility and/or reduce the growth of inequality. All of these policies could be enacted at the local, state and federal levels if there is political will. While there is still some disagreements of the best way to reduce inequality, there is a growing consensus that inequality should be reduce.

Recently the  IMF joined this consensus in finding  that inequality reduces overall economy growth as well as challenges basic democratic principle and fairness. But getting policymakers to prioritize these policies will depend on the actions of advocates, voters and other supporters with a vision for a fair and inclusive society so strong that they overwhelm powerful forces that seek to maintain the status quo.

This article originally appeared on the Huffington Post .

The ideas expressed on the Haas Institute blog are not necessarily those of UC Berkeley or the Division of Equity & Inclusion, where the Haas Institute website is hosted. They are not official and not of one mind. Thoughts here are those of individual authors. We are committed to academic freedom, free speech and civil liberties. 

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Is Economic Inequality Really a Problem?

Yes, but the answer is less obvious than you might think.

By Samuel Scheffler

Dr. Scheffler is a professor of philosophy.

It is impossible to ignore the stark disparities of income and wealth that prevail in this country, and a great many of us are troubled by this state of affairs.

But is economic inequality really what bothers us? An influential essay published in 1987 by the philosopher Harry Frankfurt suggests that we have misidentified the problem. Professor Frankfurt argued that it does not matter whether some people have less than others. What matters is that some people do not have enough. They lack adequate income, have little or no wealth and do not enjoy decent housing, health care or education. If even the worst-off people had enough resources to lead good and fulfilling lives, then the fact that others had still greater resources would not be troubling.

When some people don’t have enough and others have vastly more than they need, it is easy to conclude that the problem is one of inequality. But this, according to Professor Frankfurt, is a mistake. The problem isn’t inequality as such. It’s the poverty and deprivation suffered by those who have least.

Professor Frankfurt’s essay didn’t persuade all his fellow philosophers, many of whom remained egalitarians. But his challenge continued to resonate and, in 2015, even as concerns about economic inequality were growing in many corners of society, he published a short book in which he reaffirmed his position.

And Professor Frankfurt, it seems, has a point. Those in the top 10 percent of America’s economic distribution are in a very comfortable position. Those in the top 1 percent are in an even more comfortable position than those in the other 9 percent. But few people find this kind of inequality troubling. Inequality bothers us most, it seems, only when some are very rich and others are very poor.

Even when the worst-off people are very poor, moreover, it wouldn’t be an improvement to reduce everyone else to their level. Equality would then prevail, but equal misery is hardly an ideal worth striving for.

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Income Inequality in America, Essay Example

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Income Inequality in America. Is it a problem and how can it be fixed?

The fact that income inequality is a problem in the United States is undeniable. Claims of the widened income gap between rich Americans and poor Americans, in addition to the diminishing middle class, is a cause for concern (Yates 1). The income inequality is one of the worse political and economic problems the United States faces (Piketty and Saez 1-3). It causes significant problems to social and political stability. It is also an indicator of national decline. Indeed, it is based on this premise that, this essay examines whether income inequality in America is a problem, as well as how it can be fixed.

Income inequality leads to political change. As Saez and Zucman (1-6) explain, loss of income by the middle class compared to the top-earners leads to political change. During the 2000s, many businesses emerged seeking political offices, as they catered for nearly 30 times more employees than the trade unions. Between the year 2000 and 2010, business interest groups spent $492 million on labor, and nearly $28.6 billion on sponsoring activism. This led to the rise of political setting the business groups dominated (Smith 3-5).

Income inequality has adverse effects on democracy. Some scholars have considered that income inequality is not compatible with real democracy (Milanovic 1). This is since creating a disparity between wealthy and poor is historically the main cause of most revolution. Indeed, it is commented that the political system in the United States faces serious threats of drifting towards a kind of oligarchy by influencing the affluent, corporations, and special interest groups. Even though, income inequality may not have impact on economic growth, the action by the government may reduce the current levels. This raises tax rates on the wealthy. It may also cause political dispute or friction – between the poor and the rich.

Income inequality contributes to national poverty. Greater income inequality is likely to encourage greater rates of poverty, as under such situations, income shifts from those in the lower income bracket to those in the upper-income bracket. Saez and Zucman (1-6) argue that when wealth remains in upper income bracket, it may lead to political revolutions and policy reforms to offset the impacts that induce poverty. This has been the trend over the decade (Economist 1). The gap in earnings has also increased over the past five years. Current statistics from the U.S. Census shows that in 2010, the wealthiest 20 percent of entire households was allocated 50.2 percent of the sum household-income, compared to the poorest 20 percent, which received 3.3 percent. In the 1980s, the income shares of the richest households received 44.1 percent. The poorest got 4.2 percent. This shows rising inequality and poverty. Further statistics indicates that individuals in the least-affluent households lost nearly 21.4 percent of their income share. On the other hand, the most-affluent households witnessed an income rise of nearly 13.8 percent. Conversely, the remaining two poorest quintiles lost income (Economist 1).

Income inequality leads to political polarization. As Political Research Quarterly establishes, income inequality is connected to the current political polarization in the United States. In its 2013 study, Political Research Quarterly established that officials who were elected tended respond to the whims of the officials within the upper-income bracket, as a result ignoring the needs of people within the lower income group. The analysis provided by Martin and Harris (1) show that, income inequality is connected to the extent to which the House of Representatives polarization has always voted.

Income inequality also leads to social stratification. Martin and Harris (1) show that class divisions have mainly resulted due to income inequality. This has led to class warfare where the rich rally around the rich and the poor rally around the poor to gain political emancipation. Hence, the rich tend to create an own virtual country, which in their perception should be a self-contained world that is complete with first-rate social services, separate economy, and infrastructure. Indeed, the gap between poor and the rich is widening more in the United States than most advanced country. A growing consensus, for that reason, is that Americans have placed emphasis on pursuing economic growth instead of income redistribution. This argument is supported by current economists, such as Corak (2013) in his analysis of theorist Alan Krueger’s “Great Gatsby Curve.” In his review, Corak (2013) indicates that nations with greater income inequalities also tend to have a greater proportion of economic advantages and disadvantages. The trend is passed on from parents to their offspring.

On the other hand, some political theorists have argued that income inequality is not a problem, and that the problems have been overstated.

Indeed, Saez and Zucman (1-6) perceive that despite the existence of income inequality, economic growth and equality in terms of getting opportunities should be what matters. Some commentators have also expressed that despite being an American problem, it is also a global problem. As a result, it should not trigger significant policy reforms. Others have also expressed that income inequality has some underlying advantages, leading to a well-functioning and competition-driven economy. Additionally, significant policy reforms to cut out income inequality may lead to policies that lessen the welfare of the more affluent individuals.

A section of researchers also argues that there is no basis in the argument that income inequality slows economic and socio-political growth. Responding to claims that income inequality slows economic and socio-political growth, Petryni (1) argues that inequality is healthy within a free market economy, as it promotes greater competition for economic and political opportunities.

At the same time, wealth inequalities tend to compensate for themselves where an extensive increase in wealth occurs. This also implies that since the income inequalities do not pose significant political or economic problems, forced wealth transfers through taxation may obliterate the income pools needed to create new ventures, leading to further political discord between the poor and the wealthy in the society. Indeed, some recent studies have established a link between high marginal tax rates on high-income earners and greater growth in employment (Petryni 1).

Some political and social theorists also perceived income inequality as valuable and natural characteristic of US economy. The American Enterprise Institute sees the growth of income inequality gap as linked to the growth of opportunities—including the motivation and desire to seek political and social emancipation.

Smith (1) further contends that inequality emanates from the growth of economic prosperity and leads to an improved standard of living of the entire US population. Such incomes, Milanovic (1) argues, are a way of rewarding certain actors in the economy for their maximal investment efforts in the future. Towards this end, therefore, suppressing inequality discourages output and pursuit of political emancipation.

Conclusion and recommendations

Largely, income inequality is a problem in the United States. Income inequality contributes to national poverty. It also has adverse effects on democracy. Further, it leads to political change. Income inequality also leads to political polarization and stratification.

Hence, there is a need for more advanced tax and transfer policies that can align the United States with the other developed nations. This requires tax reforms, such as enacting tax incidence adjustments, subsidizing healthcare and increasing the social security, heavy investment in infrastructure, fortifying labor influence and providing higher education at low costs.

Making education available to more Americans through policies that subsidize cost of education will mean that more Americans have an opportunity for better income. This is since individuals with high education qualification report lower unemployment rate. However, equal job opportunities are also crucial. Public expenditure on welfare should be increased to ensure social and economic security, where the government provides subsidized healthcare. The more affluent members of the society should also be taxed higher than, the poor Americans.

Works Cited

Corak, Miles. “Income Inequality, Equality of Opportunity, and Intergenerational Mobility.” Journal of Economic Perspectives 27.3(2013): 79–102

Economist, The. “The rich, the poor and the growing gap between them,” 2006. 11 April 2015, <http://www.economist.com/node/7055911>

Kenworthy, Lane. “Does More Equality Mean Less Economic Growth?” 2007, <http://lanekenworthy.net/2007/12/03/does-more-equality-mean-less-economic-growth/>

Martin, Jonathan and Harris, John. “President Obama, Republicans fight the class war.” Politico, 2012. <http://www.politico.com/story/2013/04/barack-obama-class-warrior-90052.html>

Milanovic, Branko. “More or Less.” International Monetary Fund, 2011.

Petryni, Matt. “Advantages & Disadvantages to Income Inequality.” n.d. 11 April 2015, <http://www.ehow.com/info_11415987_advantages-disadvantages-income-inequality.html>

Piketty, Thomas and Saez, Emmanuel. “Income Inequality In The United States, 1913–1998.” The Quarterly Journal Of Economics 28.1 (2003): 1-39

Saez, Emmanuel and Zucman, Gabriel. “Wealth and Inequality in the United States Since 1913: Evidence from Capitalised Income Tax Data.” National Bureau of Economic Research: Cambridge: 2013

Smith, Hedrick. “Who Stole the American Dream.” Random House: New York, 2012. < http://newshare.com/ruleschange/book-notes.pdf>

Todd, Michael. “The Benefits of Wealth Inequality (and Why We Should Not Fear It).” Pacific Standard , 2013. <http://www.psmag.com/business-economics/benefits-wealth-inequality-now-fear-67567>

Yates, Michael. “The Great Inequality.” Monthly Review 63.10 (2012)

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Journal of Economic Perspectives

Growing income inequality in the united states and other advanced economies.

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The Causes of Income Inequality

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Causes and Consequences of Income Inequality – An Overview

Rising income inequality is one of the greatest challenges facing advanced economies today. Income inequality is multifaceted and is not the inevitable outcome of irresistible structural forces such as globalisation or technological development. Instead, this review shows that inequality has largely been driven by a multitude of political choices. The embrace of neoliberalism since the 1980s has provided the key catalyst for political and policy changes in the realms of union regulation, executive pay, the welfare state and tax progressivity, which have been the key drivers of inequality. These preventable causes have led to demonstrable harmful outcomes that are not explicable solely by material deprivation. This review also shows that inequality has been linked on the economic front with reduced growth, investment and innovation, and on the social front with reduced health and social mobility, and greater violent crime.

1 Introduction

Income inequality has recently come to be viewed as one of the greatest challenges facing the world today. In recent years, the topic has dominated the agenda of the World Economic Forum (WEF), where the world’s top political and business leaders attend. Their global risks report, drawn from over 700 experts in attendance, pronounced inequality to be the greatest threat to the world economy in 2017 ( Elliott 2017 ). Likewise, the past decade has seen leading global figures such as former American President Barack Obama, Pope Francis, Chinese President Xi Jinping, and the former head of the International Monetary Fund (IMF), Christine Lagarde, all undertake speeches on the gravity of income inequality and the need to address its rise. This is because, as this research note shows, income inequality engenders harmful consequences that are not explicable solely by material deprivation.

The general dynamics of income inequality include a tendency to rise slowly and fluctuate over time. For instance, Japan had one of the highest rates in the world prior to the Second World War and the United States (US) one of the lowest, which has since completely reversed for both. The United Kingdom (UK) was also the second most equitable large European country in the 1970s but is now the most inequitable ( Dorling 2018 : 27–28).

High rates of inequality are rarely sustained for long periods because they tend to lead to or become punctuated by man-made disasters that lead to a levelling out. Scheidel (2017) posits that there in fact exists a violent ‘Four Horseman of Leveling’ (mass mobilisation warfare, transformation revolutions, state collapse, and lethal pandemics) for inequality, which have at times dramatically reduced inequalities because they can lead to the alteration of existing power structures or wipe out the wealth of elites and redistribute their resources. For instance, the pronounced shocks of the two world wars led to the ‘Great Compression’ of income throughout the West in the post-war years. There is already some evidence that the current global pandemic caused by the novel Coronavirus, has led to greater aversion to income inequality ( Asaria, Costa-Font, and Cowell 2021 ; Wiwad et al. 2021 ).

Thus, greater aversion to inequality has been able to reduce inequality in the past, this is because, as this review also shows, income inequality does not result exclusively from efficient market forces but arises out of a set of rules that is shaped by those with political power. Inequality’s rise is not inevitable, nor beyond the control of governments and policymakers, as they can affect distributional outcomes and inequality through public policy.

It is the purpose of this review to outline the causes and consequences of income inequality. The paper begins with an analysis of the key structural and institutional determinants of inequality, followed by an examination into the harmful outcomes of inequality. It then concludes with a discussion of what policymakers can do to arrest the rise of inequality.

2 Causes of Income Inequality

Broadly speaking, explanations for the increase in income inequality have largely been classified as either structural or institutional. Historically, economists emphasised structural causes of increasing income inequality, with globalisation and technological change at the forefront. However, in recent years opinion has shifted to emphasise more institutional political factors to do with the adoption of neoliberal reforms such as privatisation, deregulation and tax and welfare reductions since the early 1980s. They were first embraced and most heavily championed by the UK and US, spreading globally later, and which provide the crucial catalysts of rising income inequality ( Atkinson 2015 ; Brown 2017 ; Piketty 2020 ; Stiglitz 2013 ). I discuss each of these key factors in turn.

2.1 Globalisation

One of the earliest, and most prominent explanations for the rise of income inequality emphasised the role of globalisation ( Borjas, Freeman, and Katz 1992 ; Revenga 1992 ). Globalisation has led to the offshoring of many goods and services that used to be produced or completed domestically in the West, which has created downward pressures on the wages of lower skilled workers. According to the ‘market forces hypothesis,’ increasing inequality is a response to the rising demand for skills at the top, in which the spread of globalisation and technological progress have been facilitated through reduced barriers to trade and movement.

Proponents of globalisation as the leading cause of inequality have argued that globalisation has constrained domestic state choices and left governments collectively powerless to address inequality. Detractors admit that globalisation has indeed had deep structural effects on Western economies but its impact on the degree of agency available to domestic governments has been mediated by individual policy choices ( Thomas 2016 : 346). A key problem with attributing the cause of inequality to globalisation, is that the extent of the inequality increase has varied considerably across countries, even though they have all been exposed to the same effects of globalisation. The US also has the highest inequality amongst rich countries, but it is less reliant on international trade than most other developed countries ( Brown 2017 : 56). Moreover, a recent meta-analysis by Heimberger (2020) found that globalisation has a “small-to-moderate” inequality-increasing effect, with financial globalisation displaying the largest impact.

2.2 Technology

A related explanation for inequality draws attention to the impact of technology specifically. The advent of the digital age has placed a higher premium on the skills needed for non-routine work and reduced the value placed on lower skilled routine work, as it has enabled machines to replace jobs that could be routinised. This skill-biased technological change (SBTC) has led to major changes in the organisation of work, as many full-time permanent jobs with benefits have given way to part-time flexible work without benefits, that are often centred around the completion of short ‘gigs’ such as a car journey or food delivery. For instance, the Organisation for Economic Co-operation and Development (OECD) estimated in 2015 that since the 1990s, roughly 60% of all job creation has been in the form of non-standard work due to technological changes and that those employed in such jobs are more likely to be poor ( Brown 2017 : 60).

Relatedly, a prevailing doctrine in economics is ‘marginal productivity theory,’ which holds that people with greater productivity levels will earn higher incomes. This is due to the belief that a person’s productivity is equated to their societal contribution ( Stiglitz 2013 : 37). Since technology is a leading determinant in the productivity of different skills and SBTC has led to increased productivity, it has also become a justification for inequality. However, it is very difficult to separate any one person’s contribution to society from that of others, as even the most successful businessperson owes their success to the rule of law, good infrastructure, and a state educated workforce ( Stiglitz 2013 : 97–98).

Further criticisms of the SBTC explanation, are that there was still substantial SBTC when inequality first fell dramatically and then stabilised in the period from 1930 to 1980, and it has failed to explain the perpetuation of both the gender and racial wage gap, “or the dramatic rise in education-related wage gaps for younger versus older workers” ( Brown 2017 : 67). Although it is difficult to decouple globalisation and technology, as they each have compounding tendencies, it is most likely that globalisation and technology are important explanatory factors for inequality, but predominantly facilitate and underlie the following more determinant institutional factors that happen to be already present, such as reduced tax progressivity, rising executive pay, and union decline. It is to these factors that I now turn.

2.3 Tax Policy

Taxes overwhelmingly comprise the primary source of revenue that governments can use for redistribution, which is fundamental to alleviating income inequality. Redistribution is defended on economic grounds because the marginal utility of money declines as income rises, meaning that the benefit derived from extra income is much higher for the poor than the rich. However, since the late 1970s, a major rethinking surrounding redistributive policy occurred. This precipitated ‘trickle-down economics’ theory achieving prominence amongst American and British policymakers, whereby the benefits from tax cuts on the wealthy would trickle-down to everyone. Subsequently, expert opinion has determined that tax cuts do not actually spur economic growth ( CBPP 2017 ).

Personal income tax progressivity has declined sharply in the West, as the average top income tax rate for OECD members fell from 62% in 1981 to 35% in 2015 ( IMF 2017 : 11). However, the decline has been most pronounced in the UK and the US, which had top rates of around 90% in the 1960s and 1970s. Corporate tax rates have also plummeted by roughly one half across the OECD since 1980 ( Shaxson 2015 : 4). Recent International Monetary Fund (IMF) research found that between 1985 and 1995, redistribution through the tax system had offset 60% of the increase in market inequality but has since failed to respond to the continuing increase in inequality ( IMF 2017 ). Moreover, in a sample of 18 OECD countries encompassing 50 years, Hope and Limberg (2020) found that tax reforms even significantly increased pre-tax income inequality, while having no significant effect on economic growth.

This decline in tax progressivity has been a leading cause of rising income inequality, which has been compounded by the growing problem of tax avoidance. A complex global web of shell corporations has been constructed by international brokers in offshore tax havens that is able to keep wealth hidden from tax collectors. The total hidden amount in tax havens is estimated to be $7.6 trillion US dollars and rising, or roughly 8% of total global household wealth ( Zucman 2015 : 36). Recent research has revealed that tax havens are overwhelmingly used by the immensely rich ( Alstadsæter, Johannesen, and Zucman 2019 ), thus taxing this wealth would substantially reduce income inequality and increase revenue available for redistribution. The massive reduction in income tax progressivity in the Anglo world, after it had been amongst its leaders in the post-war years, also “probably explains much of the increase in the very highest earned incomes” since 1980 ( Piketty 2014 : 495–496).

2.4 Executive Pay

The enormous rising pay of executives since the 1980s, has also fuelled income inequality and more specifically the gap between executives and their employees. For example, the gap between Chief Executive Officers (CEO) and their workers at the 500 leading US companies in 2016, was 335 times, which is nearly 10 times larger than in 1980. It is a similar story in the UK, with a pay ratio of 131 for large British firms, which has also risen markedly since 1980 ( Dorling 2017 ).

Piketty (2014 : 335) posits that the dramatic reduction in top income tax has had an amplifying effect on top executives pay since it provides them with much greater incentive to seek larger remuneration, as far less is then taken in tax. It is difficult to objectively measure an individual’s contribution to a company and with the onset of trickle-down economics and accompanying business-friendly climate since the 1980s, top executives have found it relatively easy to convince boards of their monetary worth ( Gabaix and Landier 2008 ).

The rise in executive pay in both the UK and US, is far larger than the rest of the OECD. This may partially be explained by the English-speaking ‘superstar’ theory, whereby the global market demand for top CEOs is much higher for native English speakers due to English being the prime language of the global economy ( Deaton 2013 : 210). Saez and Veall (2005) provide support for the theory in a study of the top 1% of earners from the Canadian province of Quebec, which showed that English speakers were able to increase their income share over twice as much as their French-speaking counterparts from 1980 to 2000. This upsurge of income at the top of the labour market has been accompanied by stagnation or diminishing returns for the middle and lower parts of the labour market, which has been affected by the dramatic decline of union influence throughout the West.

2.5 Union Decline

Trade unions have typically been viewed as an important force for moderating income inequality. They “contribute to wage compression by restricting wage decline among low-wage earners” and restrain wage surges among high-wage earners ( Checchi and Visser 2009 : 249). The mere presence of unions can also drive up the wages of non-union employees in similar industries, as employers tend to give in to wage demands to keep unions out. Union density has also been proven to be strongly associated with higher redistribution both directly and indirectly, through its influence on left party governments ( Haddow 2013 : 403).

There had broadly existed a ‘social contract’ between labour and business, whereby collective bargaining establishes a wage structure in many industries. However, this contract was abandoned by corporate America in the mid-1970s when large-scale corporate donations influenced policymakers to oppose pro-union reform of labour law, leading to political defeats for unions ( Hacker and Pierson 2010 : 58–59). The crackdown of strikes culminating in the momentous Air Traffic Controllers’ strike (1981) in the US and coal miner’s strike (1984–85) in the UK, caused labour to become de-politicised, which was self-reinforcing, because as their political power dispersed, policymakers had fewer incentives to protect or strengthen union regulations ( Rosenfeld and Western 2011 ). Consequently, US union density has plummeted from around a third of the workforce in 1960, down to 11.9% last decade, with the steepest decline occurring in the 1980s ( Stiglitz 2013 : 81).

Although the decline in union density is not as steep cross-nationally, the pattern is still similar. Baccaro and Howell (2011 : 529) found that on average the unionisation rate decreased by 0.39% a year since 1974 for the 15 OECD members they surveyed. Increasingly, the decline in the fortunes of labour is being linked with the increase in inequality and the sharpest increases in income inequality have occurred in the two countries with the largest falls in union density – the UK and US. Recent studies have found that the weakening of organised unions accounts for between a third and a fifth of the total rise in income inequality in the US ( Rosenfeld and Western 2011 ), and nearly one half of the increase in both the Gini rate and the top 10%’s income share amongst OECD members ( Jaumotte and Buitron 2015 ).

To illustrate the changing relationship between inequality and unionisation, Figure 1 displays a local polynomial smoother scatter plot of union density by income inequality, for 23 OECD countries, 1980–2018. They are negatively correlated, as countries with higher union density have much lower levels of income inequality. Figure 2 further plots the time trends of both. Income inequality (as measured via the Gini coefficient) has climbed over 0.02 percentage points on average in these countries since 1980, which is roughly a one-tenth rise. Whereas union density has fallen on average from 44 to 35 percentage points, which is over one-fifth.

Gini coefficient by union density, OECD 1980–2018. Data on Gini coefficients from SWIID ( Solt 2020 ); data on union density from ICTWSS Database ( Visser 2019 ).

Gini coefficient by union density, 1980–2018. Data on Gini coefficients from SWIID ( Solt 2020 ); data on union density from ICTWSS Database ( Visser 2019 ).

In sum, income inequality is multifaceted and is not the inevitable outcome of irresistible structural forces such as globalisation or technological development. Instead, it has largely been driven by a multitude of political choices. Tridico (2018) finds that the increases in inequality from 1990 to 2013 in 26 OECD countries, was largely owing to increased financialisation, deepening labour flexibility, the weakening of trade unions and welfare state retrenchment. While Huber, Huo, and Stephens (2019) recently reveals that top income shares are unrelated to economic growth and knowledge-intensive production but is closely related to political and policy changes surrounding union density, government partisanship, top income tax rates, and educational investment. Lastly, Hager’s (2020) recent meta-analysis concludes that the “empirical record consistently shows that government policy plays a pivotal role” in shaping income inequality.

These preventable causes that have given rise to inequality have created socio-economic challenges, due to the demonstrably negative outcomes that inequality engenders. What follows is a detailed analysis of the significant mechanisms that income inequality induces, which lead to harmful outcomes.

3 Consequences of Income Inequality

Escalating income inequality has been linked with numerous negative outcomes. On the economic front, negative results transpire beyond the obvious poverty and material deprivation that is often associated with low incomes. Income inequality has also been shown to reduce growth, innovation, and investment. On the social front, Wilkinson and Pickett’s ground-breaking The Spirit Level ( 2009 ), found that societies that are more unequal have worse social outcomes on average than more egalitarian societies. They summarised an extensive body of research from the previous 30 years to create an Index of Health and Social Problems, which revealed a host of different health and social problems (measuring life expectancy, infant mortality, obesity, trust, imprisonment, homicide, drug abuse, mental health, social mobility, childhood education, and teenage pregnancy) as being positively correlated with the level of income inequality across rich nations and across states within the US. Figure 3 displays the cross-national findings via a sample of 21 OECD countries.

Index of health and social problems by Gini coefficient. Data on health and social problems index from The Equality Trust (2018) ; data on Gini coefficients from OECD (2020) .

3.1 Economic

Income inequality is predominantly an economic subject. Therefore, it is understandable that it can engender pervasive economic outcomes. Foremost economically speaking, it has been linked with reduced growth, investment and innovation. Leading international organisations such as the IMF, World Bank and OECD, pushed for neoliberal reforms beginning in the 1980s, although they have recently started to substantially temper their views due to their own research into inequality. A 2016 study by IMF economists, noted that neoliberal policies have delivered benefits through the expansion of global trade and transfers of technology, but the resulting increases in inequality “itself undercut growth, the very thing that the neo-liberal agenda is intent on boosting” ( Ostry, Loungani, and Furceri 2016 : 41). Cingano’s (2014) OECD cross-national study, found that once a country’s income inequality reaches a certain level it reduces growth. The growth rate in these countries would have been one-fifth higher had income inequality not increased, while the greater equality of the other countries included in the study helped to increase their growth rates.

Consumer spending is good for economic growth but rising income inequality shifts more money to the top of the income distribution, where higher income individuals have a much smaller propensity to consume than lower-income individuals. The wealthy save roughly 15–25% of their income, whereas low income individuals spend their entire income on consumer goods and services ( Stiglitz 2013 : 106). Therefore, greater inequality reduces demand in an economy and is a major contributor to the ‘secular stagnation’ (persistent insufficient demand relative to aggregate private savings) that the largest Western economies have been experiencing since the financial crisis. Inequality also increases the level of debt, as lower-income individuals borrow more to maintain their standard of living, especially in a climate of low interest rates. Combined with deregulation, greater debt increases instability and “was a major contributor to, if not the underlying cause of, the 2008 financial crash” ( Brown 2017 : 35–36).

Another key economic effect of income inequality is that it leads to reduced welfare spending and public investment. Since a greater share of the income distribution is earned by the very wealthy, governments have less income available to fund education, public amenities, and other services that the poor rely heavily on. This creates social separation, whereby the wealthy opt out in publicly funding services because their private equivalents are of better quality. This causes a cycle of increasing income inequality that is likely to eventually lead to a situation of “private affluence and public squalor” ( Marmot 2015 : 39).

Lastly, it has been proven that economic instability is a by-product of increasing inequality, which harms innovation. Both countries and American states with the highest inequality have been found to be the least innovative in terms of the amount of Intellectual Property (IP) patents they produce ( Dorling 2018 : 129–130). Although income inequality is predominantly an economic subject, its effects are so pervasive that it has also been linked to a host of negative health and societal outcomes.

Wilkinson and Pickett found key associations between income inequality for both physical and mental health. For example, they discovered that on average the life expectancy gap is more than four years between the least and most equitable richest nations (Japan and the US). Since their revelations, overall life expectancy has been reported to be declining in the US ( Case and Deaton 2020 ). It has held or declined every year since 2014, which has led to a cumulative drop of 1.13 years ( Andrasfay and Goldman 2021 ). Marmot (2015) has provided evidence that there exists a social gradient whereby differences in affluence translate into increasing health inequalities, which can be shown even down to the neighbourhood level, as more affluent areas have higher life expectancy on average than deprived areas, and a clear gradient appears where life expectancy increases in line with affluence.

Moreover, Marmot’s famous Whitehall studies, which are large-scale longitudinal studies of Whitehall employees of UK central government, found an inverse-relationship between salary grade and ill-health, whereby low-grade workers were four times as likely as high-grade workers to suffer from ill-health ( 2015 : 11). Health steadily improves with rank and the correlation is little affected by lifestyle controls such as tobacco and alcohol usage. However, the leading factor that seems to make the most difference in ill-health is job stress and a person’s sense of control over their work, including the variety of work and the use and development of skills ( Schrecker and Bambra 2015 : 54–55).

‘Psychosocial stresses,’ like those appearing in the Whitehall studies, have been found to be more common and frequent amongst low-income individuals, beyond just the workplace ( Jensen and van Kersbergen 2017 : 24). Wilkinson and Pickett (2019) posit that greater income inequality engenders low self-esteem, chronic stress and depression, stemming from status anxiety. This occurs because more importance is placed on where people fit in a hierarchy with greater inequality. For evidence, they outline a clear relationship of a much higher percentage of the population suffering from mental illness in more unequal countries. Meticulous research has shown that huge inequalities in income result in the poor having feelings of shame across a range of environments. Furthermore, Dickerson and Kemeny’s (2004) meta-analysis of 208 studies found that stress-hormone (cortisol) levels were raised particularly “when people felt that others were making negative judgements about them” ( Rowlingson 2011 : 24).

These effects on both mental and physical health can be best illustrated via the ‘absolute income’ and ‘relative income’ hypotheses ( Daly, Boyce, and Wood 2015 ). The relative income hypothesis posits that when an individual’s income is held constant, the relative income of others can affect a person’s health depending on how they view themselves in comparison to those above them ( Wilkinson 1996 ). This pattern also holds when income inequality increases at the societal level, because if such changes lead to increases in chronic stress, it can increase ill-health nationally. Whereas the absolute income hypothesis predicts that health gains from an extra unit of income diminish as an individual’s income rises ( Kawachi, Adler, and Dow 2010 ). A mean preserving transfer from a richer to poorer individual raises the health of the poorer individual more than it lowers the health of the richer person. This occurs because there is an optimum threshold of income required to maintain good health. Thus, when holding total income constant, a more equal distribution of income should improve overall population health. This pattern also applies at the country-wide level, as the “effect of income on health appears substantial as countries move from about $15,000 to 25,000 US dollars per capita,” but appears non-existent beyond that point ( Leigh, Jencks, and Smeeding 2009 : 386–387).

Income inequality also impacts happiness and wellbeing, as the happiest nations are routinely the ones with low inequality, such as Denmark and Norway. Happiness has been proven to be affected by the law of diminishing returns in economics. It states that higher income incrementally improves happiness but only up to a certain point, as any individual income earned beyond roughly $70,000 US dollars, does not bring about greater happiness ( Deaton 2013 : 53). The negative physical and mental health outcomes that income inequality provoke, also impact key societal areas such as crime, social mobility and education.

Rates of violent crime are lower in more equal countries ( Hsieh and Pugh 1993 ; Whitworth 2012 ). This is largely because more equal countries have less poverty, which leads to less people being desperate about their situation, as lower-income individuals have been shown to commit more crime. Relatedly, according to strain theory, more unequal societies place higher social value in achieving economic success, while providing lower means to achieve it ( Merton 1938 ). This generates strain, which may lead more individuals to pursue crime as a means of attaining financial success. At the opposite end of the income spectrum, the wealthy in more equal countries are also less likely to exploit others and commit fraud or exhibit other anti-social behaviour, partly because they feel less of a need to cut corners to get ahead, or to make money ( Dorling 2017 : 152–153). Homicides also tend to rise with inequality. Daly (2016) reveals that inequality predicts homicide rates better than any other variable and accounts for around half of the variance in murder rates between countries and American states. Roughly 90% of American homicides are committed by men, and since the majority of homicides occur over status, inequality raises the stakes of disputes over status amongst men.

Studies have also shown that there is a marked negative relationship between income inequality and social mobility. Utilising Intergenerational Earnings Elasticity data from Blanden, Gregg, and Machin (2005) , Wilkinson and Pickett (2009) first outline this relationship cross-nationally for eight OECD countries. Corak (2013) famously expanded on this with his ‘Great Gatsby Curve’ for 22 countries using the same measure. I update and expand on these studies in Figure 4 to include all 36 OECD members, utilising the WEF’s inaugural 2020 Social Mobility Index. It clearly shows that social mobility is much lower on average in more unequal countries across the entire OECD.

Index of social mobility by Gini coefficient. Data on social mobility index from World Economic Forum (2020) ; data on Gini coefficients from SWIID ( Solt 2020 ).

A primary driver for the negative relationship between inequality and social mobility, derives from the availability of resources during early childhood. Life chances have been shown to be determined in early childhood to a disproportionately large extent ( Jensen and van Kersbergen 2017 : 29). Children in more equitable regions such as Scandinavia, have better access to resources, as they go to similar schools, receive similar educational opportunities, and have access to a wider range of career options. Whereas in the UK and US, a greater number of jobs at the top are closed off to those at the bottom and affluent parents are far more likely to send their children to private schools and fund other ‘child enrichment’ goods and services ( Dorling 2017 : 26). Therefore, as income inequality rises, there is a greater disparity in the resources that rich and poor parents can invest in their children’s education, which has been shown to substantially affect “cognitive development and school achievement” ( Brown 2017 : 33–34).

4 Conclusions

The causes and consequences of income inequality are multifaceted. Income inequality is not the inevitable outcome of irresistible structural forces such as globalisation or technological development. Instead, it has largely been driven by a multitude of institutional political choices. These preventable causes that have given rise to inequality have created socio-economic challenges, due to the demonstrably negative outcomes that inequality engenders.

The neoliberal political consensus poses challenges for policymakers to arrest the rise of income inequality. However, there are many proven solutions that policymakers can enact if the appropriate will can be summoned. Restoring higher levels of labour protections would aid in reversing the declining trend of labour wage share. Similarly, government promotion and support for new corporate governance models that give trade unions and workers a seat at the table in ownership decisions through board memberships, would somewhat redress the increasing power imbalance between capital and labour that is generating more inequality. Greater regulation aimed at limiting the now dominant shareholder principle of maximising value through share buy-backs and instead offering greater incentives to pursue maximisation of stakeholder value, long-term financial stability and investment, can reduce inequality. Most importantly, tax policy can be harnessed to redress income inequality. Such policies include restoring higher marginal income and corporate tax rates, setting higher corporate tax rates for firms with higher ratios of CEO-to-worker pay, and establishing luxury taxes on spiralling compensation packages. Finally, a move away from austerity, which has gripped the West since the financial crisis, and a move towards much greater government investment and welfare state spending, would also lift growth and low-wages.

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Social Inequality in the United States Essay

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Introduction

Inequality in america today.

Social inequality refers to the difference in the quality of life experienced by different people in the same community, usually between the rich and poor. Continued experience with this inequality leads to the establishment of class structures or social stratification. America is a prime example of such a society. Indeed, it is not hard to see that there are people who have so much wealth and receive big incomes, whereas others have too little wealth and receive close-to-non-income.

Is the U.S. truly the land of equality?

Despite the example mentioned above, it would be erroneous to classify America as a truly unequal society. This is because it has been in the American tradition to reduce the gap between its rich and poor. Indeed, American society provides equal opportunities for members of different structures to increase their wealth so they can all be better off. This scenario makes America a true land of quality; which is achieved through the provision of an enabling environment. As a result, poor people in America have a higher chance of climbing the class ladder than their counterparts in other parts of the world (The Economist, 2006).

The reason, the American society has been concentrating on increasing its economic productivity as a way of helping its poor escape poverty. Contrary other countries, including the rich ones in Europe, have concentrated on taking wealth from the rich through higher taxation as a way of helping their poor. Also, it is noticeable that American poor have been getting into better lives than their counterparts in other parts of the world; the rich have been getting richer. On the other hand, the rich in other parts of the world have seen their wealth rise slightly remain stagnant whereas the poor see their plights stay the same. This is despite the efforts made by respective governments to reduce the gap between the two groups.

Recent reports indicate that national wealth going to the richest one percent increased from eight percent in 1980 to sixteen percent in 2004, whereas the percentage of national wealth going to the poor one percent increased by a slimmer margin (NPR, 2007). This has been taken by many people to mean that America’s wealthy have been taking the entire national income home, whereas the poorer are getting even more destitute. But this is an utter exaggeration because it can easily be established that America’s poor have been experiencing better lives at a higher rate than their European counterparts; this is indicated by fact of increased home and motor vehicle ownership, education attainment, and the overall quality of life (NPR, 2007). The rising gap between the rich and poor in America is making many people claim that American inequality is increasing rapidly. However, critics are ignoring the fact the productivity of American society has resulted in rising living standards for all citizens.

The United States, therefore, serves as a society that is unequal but is applying the necessary measures to ensure that the gap between the rich and poor is bleached through methods that will leave all groups better-off. This method is none other than rooting for economic growth that provides opportunities to all in society. Other countries in the world, especially those in Europe have some lessons to learn from America, failure of which will lead to exacerbation of their inequality crisis.

The Economist (2006). America Inequality . Web.

Berliner, U. (2007). Haves and Have-Nots . Web.

• Feminization of Poverty - A Grave Social Concern
• Spare Change: Giving Money to the “Undeserving Poor”
• Chapters of “Unequal Childhoods” by Lareau
• Wealth Inequality: Ethical or Unethical?
• The Relationship Between Wealth Distribution and Crime Rates
• Poverty Level in any Country
• Theories of Fertility. Economics Aspect and Poverty.
• Evaluating the Self-Esteem of the Homeless
• The Cultural Construction of Poverty
• Poverty in the US: Causes and Measures
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Income Inequality in the United States, 1913-1998 (series updated to 2000 available)

This paper presents new homogeneous series on top shares of income and wages from 1913 to 1998 in the US using individual tax returns data. Top income and wages shares display a U-shaped pattern over the century. Our series suggest that the 'technical change' view of inequality dynamics cannot fully account for the observed facts. The large shocks that capital owners experienced during the Great Depression and World War II seem to have had a permanent effect: top capital incomes are still lower in the late 1990s than before World War I. A plausible explanation is that steep progressive taxation, by reducing drastically the rate of wealth accumulation at the top of the distribution, has prevented large fortunes to recover fully yet from these shocks. The evidence on wage inequality shows that top wage shares were flat before WWII and dropped precipitously during the war. Top wage shares have started recovering from this shock since the 1960s-1970s and are now higher than before WWII. We emphasize the role of social norms as a potential explanation for the pattern of wage shares. All the tables and figures have been updated to the year 2000, the are available in excel format in the data appendix of the paper.

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Piketty, Thomas and Emmanuel Saez. "Income Inequality In The United States, 1913-1998," Quarterly Journal of Economics, 2003, v118(1,Feb), 1-39.

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