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The Poor Get Poorer: Economic Inequality and the Invisible Hand

Difference in income unequal in salary Two business men on piles of coins form discrimination.illustration vector.

Economic Inequality is the unequal distribution of income or wealth, especially among population groups. Income disparity can be measured on various scales.

The scale on which the disparity is measured appears to correlate with where aspects of inequality are reported in terms of economic policy.

The UN Human Development Reports (HDR) State of the World’s Children focuses on health and education, measuring disparities in terms of gender. The HDI measures other aspects of disparity in social welfare domains and the Human Poverty Index report. Since 2008, the Center for Global Development has published a series of annual reports on “CGD Working Paper(s)” that focus on income or consumption disparity between citizens living within countries rather than geographical regions.

Gini coefficient is one measure of income inequality

The Gini index is most often used for single distributions, where just two wealth classes are relevant. For example, with personal income in an economy with two categories (e.g., labor and capital), the share of income is typically presented.

A Gini index of zero expresses perfect equality, where all values are the same (for example, where everyone has the same income). An index of 100 expresses maximal inequality among values (e.g., for many people, where only two incomes are present, one person receives all income, and others receive none). Therefore, a lower Gini index indicates equal distribution—i.e., less income disparity. However, some scholars argue that due to shortcomings in the Gini coefficient calculation method, welfare analysis should be done with other inequality measures such as Theil’s Inequality Coefficient or Atkinson’s Index.

There are many different ways to measure income disparity because several types of financial disparity are typical of interest.

Disparities of income within countries may be viewed as having both an “individual” aspect or a more macroscopic “territorial” aspect. Income disparities among individuals might be due to gender, race, family structure, occupation, social status, and education. On the other hand, income differences between countries illustrate this territorial approach on a macro scale. The Gini index is widely used for individual-level income distributions.

A country’s overall Gini coefficient is derived by measuring the area between the Lorenz curve of that country’s income distribution and the 45-degree line of equality (G=0), expressed as a percentage of its maximum area. Countries with low Gini coefficients have less income disparity than those with high Gini coefficients.

The UN Human Development Reports use the Gini index to measure income disparities on a territorial rather than individual level. The United States Central Intelligence Agency uses this Gini index alongside other measures to rank countries into four tiers of human development.

The World Bank also used the Gini coefficient to measure territorial inequality. On their calculation, Hong Kong had the lowest Gini coefficient among its regions (the second was South Korea). Japan had both the highest gross national income per capita and the lowest regional Gini coefficient for 2007/2008.

As part of mainland China, Tibet has the lowest Gini coefficient amongst all its administrative at 0.235 as of 2011. The State of Utah in the United States had the lowest Gini coefficient for 2006 at 0.416, followed by New Hampshire (0.423) and Alaska (0.423).

What follows are US income inequality statistics.

The main source is the Census Bureau’s 2011 Statistical Abstract, available online through USA-stats on this page below. Government printing office, Washington DC, but the data may be freely downloaded for use in any statistical program requiring that level of accuracy without paying a license fee or royalties to artistes or songwriters if appropriate attribution is given with citation including the title of publication where the information was obtained from government agencies whose primary purpose is to provide evidence about the socioeconomic status of working Americans who can be counted rather than guessed at (suspected) but not known to be deceased.

The Census Bureau’s 2011 Annual Social and Economic Supplement (ASEC) supports the Gini coefficient shown in the table below, which is important because it comes directly from household income surveys.

Their report for 2008 (latest available) shows additional statistics, including median earnings of full-time, year-round male wage earners by race/ethnicity ($52,000), sex ($44,000), number of children ($45,000). It also reports that personal income ranged from $4,300 for males 15+ with no occupation reported down to $2300 for females 15+.

The highest-earning 10% were making about twice this much per hour on average ($31.25), with the lowest-earning 50% making $14-15 per hour on average, whereas self-employed people could make 1.5 times this much ($22.25). The bottom ten percent earned less than that ($12).

By race/ethnicity (all races combined, non-Asian/Pacific Islanders), median income was highest for Asians ($66,000), followed by Whites ($51,000), then Hispanics ($37,000), Blacks ($32,000), and American Indian or Alaska Natives ($27,000). Within each group, women made about 80% as much as male counterparts except within ethnicities where they typically made slightly more: 83%-84% of White men’s earnings but only 67%-69% of White women’s earnings.

Gender salary gap. Business man and woman standing on unequal money stacks. Female discrimination. Inequality in job payment vector concept. Illustration finance rights unequal, economic inequality

By sex (all races combined, non-Asian/Pacific Islanders), median income was highest for year-round, full-time workers ages 35–64 ($55,000) and lowest for females 15+ with no occupation reported ($2300). The latter is likely due to high rates of poverty among single mothers born out of wedlock who must support their children without the benefit of child support from absent fathers or government assistance such as welfare or food stamps.

It makes sense that those who are married into families with higher incomes would not be counted in the former group, so it might only reflect married couples and thus more closely match figures released by the Census Bureau on income distribution:

For 2010: “the share of aggregate household income received by the 20% of the … population with the highest income (top fifth) increased to 49.4 percent, while the share received by the other four-fifths of households declined.”

“The top 20 percent of families in 2010 (those earning $100,000 or more) received 48.2% of aggregate income; this group had incomes that were almost twelve times as high as those in middle fifth ($43,203). Families at the very bottom of the distribution (the bottom 5%, which had annual family incomes below $20,262) received 3.3% of all income. The relative position of both groups has changed since 2007 when these shares were 47.6% and 4.8%, respectively.”

The same report showed median family incomes for each quintile. In constant dollars they were $53,600 for the top 20%, $67,200 for the next highest 20% ($80,000-$100,000), $52,700 for middle-income ($50,000-$70,000) and $45,800 for poorest 20% ($35k to 50k). Average family income was about 5.4 times as large as that of the lowest quintile ($75k vs. $15k) and about 16 times as large as that of the lowest quintile ($55k vs. $3k)

The U.S. Census’ Statistical Abstract of the United States reports median individual income by sex for 2009 at $28,000 for men and $20,000 for women (both in 2009 dollars). It states further that men are more likely to work full-time year-round than are women, 77% vs. 65%. For the years 2010 through 2012, it reported median income ranges rather than specific figures, making comparisons with other data difficult. Still, it appeared to be trending upwards over time, given how much inflation occurred during those years.:

The College Board’s Trends in College Pricing report shows that tuition was about 3 times higher in 2010–11 than in 1980 and twice as high in inflation-adjusted dollars. This has resulted in students borrowing more and graduates having higher debt:

“In the past decade, the average student loan debt for graduating seniors who financed their education with loans rose by 59%. The average amount of debt incurred for a bachelor’s degree was $23,800 in 2008, while it was $17,400 ten years earlier.” More than half (58%) of those receiving bachelor’s degrees from four-year universities graduated with college debt in 2011, and their average debt load was $26,500 vs. only 24% of such grads’ parents.

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The Federal Reserve reports that household income peaked in 2007 at just over $57 trillion but declined 3% by 2011 to $54.6 trillion partly because of unemployment which discourages people from working even part-time or seeking work that doesn’t pay enough to live on. The Fed also reported that real median household income was only slightly higher in 2012 than it was in 1989 after being adjusted for inflation:

The Congressional Budget Office estimated that between 1979 and 2007, the average pre-tax national income per person rose by 63%, but the average federal tax rate declined by 8%. The bulk of this decrease occurred because marginal rates were cut sharply for almost all taxpayers, with larger decreases at higher incomes compared to lower ones. As a result, tax revenues dropped from 19.0% of GDP in 1981 to 16.2 in 1983 vs. a historical average of 18.4%. This led to a federal budget deficit and increased national debt:

The Congressional Budget Office estimates that Social Security and Medicare spending will rise from 9% of GDP in 2010 to 12.8% in 2030, 16.6% in 2040, and 19.3% in 2050. Between 2010 and 2030, this represents an average annual increase of 0.4%; between 2030 and 2040, this would be 1%; and between 2040 and 2050, it would be 2%. Over the entire 50-year period, these expenditures would represent about one-third more as a proportion of GDP than Social Security, Medicare, Medicaid, CHIP (Children’s Health Insurance Program), Obamacare subsidies/mandate penalties, etc., combined as % of GDP in 2013.

A 2011 study by the Census Bureau reported that nearly half (48%) of all Americans had less than $25,400 per capita income adjusted for inflation for all income earned from work and capital investment, while the top 10% of Americans were in households with incomes over $190,500:

The same report also showed median household income (half make more and half make less) by quintile:

The US Census reports that “In 2012, real median household income was 8.3 percent lower than in 2007”. Other sources such as CNNMoney report a decline of 5%. Data shows declines in GDP and decreases in personal income:

“Gross domestic product (GDP)—the broadest measure of economic activity—fell at an annual rate of 1.3 percent in the fourth quarter of 2012 (that is, from the third quarter to the fourth quarter), according to the “advance” estimate released by the Bureau of Economic Analysis. In the third quarter, real GDP increased 0.1 percent.”

However, some reports say GDP growth is not included in measuring unemployment:

“The Bureau of Labor Statistics calculates six measures of labor underutilization, U-1 through U-6… The broadest of these is U-6, which includes short-term discouraged and other marginally attached workers … as well as those forced to work part-time because they cannot find full-time employment. This measure was 13.8% for 2012.”

The U.S. Census Bureau reported the following: “In 2012, real median household income was 8.3% lower than in 2007” The following article points out that this is because GDP figures do not include the $1 trillion in annual losses from business startups and small business activity such as self-employment: “If we add back to GDP “missing” labor income received by non-wage earners (e.g., profits and productivity), then U.S. economic growth will be shown to have been positive or flat rather than negative for all but one year since 2009”.

From 2000-2005, US personal savings were near zero which would indicate a credit boom:

“From 2005 until mid-2008, household debt rose by $30 billion per year. Household deleveraging since then has proceeded at a pace of about $5 billion to $6 billion per year.”

“U.S. trade deficit in goods and services for September 2012”

Data shows declines in exports (down 41%) and imports (down 8%):

The US Census reported that “In 2011, 49 percent of households received government benefits” including programs such as Social Security, Medicare, Medicaid/CHIP, etc.:

What is in the ‘other’ category? The wiki includes Unemployment insurance based on the self-employed; veterans pensions; public employee pension schemes; social security or veteran’s allowances; public (welfare); housing subsidies or food stamps; and a few miscellaneous others.

Data shows that the US welfare state has been expanding more than GDP:

“Half of all Americans have less than $10,000 in their savings account(s).”

Data shows over half of people over age 24 are not married (53%):

“The number of marriages per 1,000 people in the United States has been declining since at least 1920.”

Data shows that marriage is increasingly becoming obsolete, at least for blacks where half now cohabit (live together) without getting married:

Report also showed data on life expectancy by quintile across gender lines:

People in lower-income groups died much younger than those in higher-income groups. For men in the lowest income group, the average age of death was 72.3 years, while for men in the highest quintile, it was 80.1 years. For women, life expectancy at birth was 78.4 years for those in the lowest income group compared with 85.1 for those in the highest quintile. This is quite striking when you consider that regardless of race/ethnicity, people who completed at least some college have an average life expectancy 7.5 years longer than people who did not complete high school:

Data shows that infants are more likely to die if their mother had less than a high school education (10 per 1,000 live births) vs. 6 per 1,000 live births if their mother has at least a college education.

“In 2009, 16% of all children under age 18 in the United States were living in poverty.”

“An estimated 39 percent of persons aged 65 and over are in danger of falling into poverty due to inadequate financial resources.”

Report shows that Americans’ income is not keeping up with inflation:

Data for this report was collected before the 2008 recession, which would have exacerbated these numbers significantly. According to data reported by USA Today in October 2011, one-third of adults have struggled with joblessness, near-poverty, or reliance on welfare for at least parts of their lives since 1989.

This is very consistent with the above chart showing declines in median household incomes when you consider various government benefits such as food stamps, housing subsidies, etc. Data for the above chart comes from the US Census Bureau via Pew Research Center.

“According to a 2012 study by The Urban Institute, approximately 38 percent of households currently have insufficient savings to maintain their current standard of living at least through an average length unemployment spell.”

John Boehner claimed, “Nearly half of American households are on some form of government assistance.” Politifact found some truth in this statement, but it’s not accurate according to the official data. 25% is closer to the mark than 47%. However, this number would be significantly higher if you included various government benefits such as food stamps which 33% of Americans receive.

“A study by the US Census Bureau found that approximately one third of adults will experience poverty during their lives.”

According to OECD data, America spends much less on social protection than most developed countries. The chart below ranks developed countries according to social spending as a percentage of GDP (measures in purchasing power parity dollars):

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Gender gap and inequality in salary. Woman discrimination, sexism and injustice. Diverse female employees having lower position and money pile. Man business workers having bigger salary vector

Data shows that government spending for welfare has risen substantially over the years:

The same source reports “that for every $1 spent on public benefits, roughly $3 are returned in economic growth”. This is very consistent with the above figure showing an increasing share of GDP going towards social protection. However, this may be somewhat misleading because several forms of ‘social protection go into that figure, including health, education, unemployment assistance, etc.

“Europeans get at least five weeks a year of paid vacation and a month off to boot. Americans get zero.” “As to time off from work, the United States is on par with Papua New Guinea.”

Data shows that people who have been unemployed for only six months were only 1/3 as likely to be hired relative to those who hadn’t been unemployed for 6 months:

From the same source, “experts say that someone who has been out of work for at least six months can consider themselves unemployable.” This is consistent with the above figure showing longer-term unemployment rates are much higher in Europe than America even though they spend more on social protection. If you look at Americans’ benefits relative to the average of OECD countries on social spending (see above), America spends much less than others.

“In addition, according to a global Gallup poll, 29 percent of American workers reported that they were “actively disengaged” from their jobs in 2012.”

The US labor force participation rate is declining:

The labor force participation rate peaked at 67.3% and has been steadily decreasing since then. Robert Reich attributes this decline to several causes: automation and technology replacing many jobs; globalization making it easier for companies to move jobs abroad; downsizing during the 2008 recession; lack of sufficient demand in the economy, leading employers not to add new positions. All these are consistent with lower American job security.

“Our studies show that perceived job insecurity is associated with poorer mental health, higher rates of psycho-social disorders, and increased use of antidepressants.”

This is consistent with the above article showing people who have been unemployed for at least six months are almost 3 times more likely to be depressed than those who haven’t. The figure below shows this relationship between unemployment duration and the likelihood of depression:

Robert Reich claims most people think globalization is a good thing that helps bring greater prosperity, but many others disagree (see anti-globalization movement).  A recent Gallup poll found Americans favor protectionism over globalism by a margin of 52% vs. 40%:  

This majority may not necessarily support “closed borders” or “exclusion” but may favor raising trade barriers to protect American jobs.

“The United States leads the world in the percentage of low-wage workers.”

According to OECD data, minimum wages in America are lower than in many other developed countries (including the UK, France, Australia, etc.). The chart below shows minimum wages across different countries. This may partly explain why America has a higher share of low-income earners relative to other OECD countries:

Robert Reich claims there are at least seven ways technology is impacting the labor market adversely, including replacing humans with robots leading to increased unemployment. But he also adds, ‘it’s also true that good-paying jobs have disappeared’ because technological change has allowed companies to downsize and outsource.

“In the first two months of 2014, according to a survey by Express Employment Professionals, about four million Americans were ‘currently looking for work’ or had ‘searched for work in the last year but not in the last month.’ That’s enough people to fill up every seat at Fenway Park.” According to official unemployment figures, roughly 2.8 million people were unemployed and actively searching for jobs in January 2014.

In addition, there are 1.4 million discouraged workers who aren’t looking for jobs because they don’t think any exist, which is why they’re not counted as unemployed. That’s around 4 million unemployed people – almost twice as many as Robert Reich’s figure of 2.5million! Perhaps even more concerning, the number of working-age people in America who have given up looking for jobs is at a historic high.

“There are now six million ‘discouraged workers’ in the U.S.” Yes, 6 million people are discouraged, which means they don’t think there are any jobs out there even though many are willing to work. This is another way of counting long-term unemployed who aren’t included in official unemployment figures. “These include 1.4 million workers who are marginally attached to the labor force, and 2.2 million workers who are considered ‘part time for economic reasons.'”

Marginally attached doesn’t count these individuals as part of the labor force, although they may give their household’s financial situation a negative or positive spin. The Bureau of Labor Statistics (BLS) defines marginally attached workers as:- “Persons not in the labor force who want and are available for work, and who have looked for a job sometime in the prior 12 months (or since the end of their last job if they held one within the past 12 months), but were not counted as unemployed because they had not searched for work in the 4 weeks preceding the survey.”  

In layman’s terms, this means those unemployed people are discouraged from searching for new jobs by lengthy gaps between employment or struggling to find suitable employment due to lack of skills or geographic location.

“More than 40 percent of college graduates under 25 are now working at jobs that don’t require college degrees, up from just over 30 percent in 2000.”

“Many believe that globalization and technological progress have increased the demand for skills relative to unskilled workers.” This statement has been echoed by various mainstream economists, including Paul Krugman, who suggests ‘job polarization’ through new technology is responsible for lower-paid unskilled workers unable to find new jobs.

“Income inequality has been growing for three decades, and the trend is accelerating. In 2012, according to an analysis of tax returns by Emmanuel Saez and Thomas Piketty, the richest 1 percent took home 22 percent of total income — more than twice their share thirty years ago.” Saez (UC Berkeley) and Piketty (Paris School of Economics) are two of the most prominent economists studying inequality in recent years. Nobel prize-winning economist Paul Krugman heavily drew upon their work on income distributions in his book “The Conscience of a Liberal.” Other independent studies have drawn similar conclusions – that between 1979-2007/8, the top 10% increased their share of income more than the bottom 90% combined.

“What’s happening, in short, is that good jobs are disappearing while increasingly only bad jobs are stepping into their place.” This statement is also true (even though some journalists/economists don’t like it) – see this report by UC Berkley. The same paper notes how “bad jobs” typically pay less than they did 30 years ago compared to the cost of living and fewer benefits.

“Many…are forced to settle for part-time work when they want a full-time job… As a result, one in five families with a member working part time has difficulty affording life’s necessities.”

Conclusion

As economic inequality in the United States grows, it becomes increasingly difficult for people on the lower end of the economic spectrum to improve their economic standing. This is not an issue that can be solved by simply providing more economic assistance programs. Still, there are ways we can help create a better economic situation for all Americans. The best way to do this is through investment in education and job training programs to provide low-income families with the skills they need to obtain higher-paying jobs.

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