An Introduction to the Issue of Economic Inequality in the United States

The United States is currently experiencing it's highest level of income disparity since the years of the Great Depression, with the richest 20 percent of Americans earning approximately 50 percent of total income in 2008. In addition, the richest fifth own about 84 percent of all "wealth" in America according to a study done by two Harvard Business School Professors, Michael I. Norton and Dan Ariel. Increasing income inequality has been the result of numerous economic factors, the most contributive being globalization, technological advancement, individual education levels, and the decline of labor unions.

Although these factors have lead to the rapidly rising levels of economic inequality, there are both positive and negative implications of income disparity. Fortunately, government policies such as social insurance programs and public assistance programs have been imposed in order to counterattack the destructive causes of income inequality.

Technological advancements are arguable the most contributive forces leading to the increasing gap between America's rich and poor. Technological progress can cause an increase in the demand for labor, for instance if a firm needs more skilled workers who can operate new machines, this shifts the demand curve to the right and therefore increases the quantity of workers and raises their wages. On the other hand technological advances could replace workers, for instance if the new machines were now autonomous, this would shift the labor demand curve to the left meaning the quantity of labor and the wage would both decrease. This would then lead to an increase in supply of unskilled workers due to the drop in wages. In both cases, where either more skilled workers are demanded or more unskilled workers are attracted, technological advancements can be seen negatively widening the wage gap in the United States.

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Globalization is another highly contributive cause of income inequality. With foreign labor often cheaper than domestic labor, firms have started to outsource for jobs by hiring in other counties at massive wage pay discounts. Consequentially, the decreased demand for unskilled American workers shifts the demand curve inward causing a drop in both quantity of labor and price of wage. Due to the increase in the importation of unskilled products the demand for skilled workers will increase, shifting the demand curve outward, which increases both the quantity of skilled workers and the wage they will earn. As can be seen, the decrease in wages for unskilled workers and increase in wages for skilled workers causes the American wage gap to grow even larger.

Another important factor in the growing level of wage differentials is education level, which can also be interpreted as a workers skill level. According to the United States Bureau of the Census, in 1980 male college graduates earned 44 percent more than males who only graduated from high school, but in 2008 this difference rose to 88 percent.

From these statistics, it can be concluded that, "College graduates have always earned more than workers without the benefit of college, but the salary gap has grown even larger over the past few decades."3 Along with this, a recent increase in immigration has caused a rise in the quantity of workers in the job market ultimately leading to an increase in competition between unskilled workers. This phenomenon has shifted the supply curve to the right thus increasing quantity of labor but at a lower wage price, unskilled workers are now earning even less while the wages of skilled workers are unchanged.

The fourth most effective cause of income inequality is the decline of labor unions. Unionized workers earn more at the expense of corporate profits due to the monopolistic characteristics of labor unions. When firms agree to establish unionized wages, the labor supply curve shifts to the left because only union workers can be employed, therefore wage pay goes up. Although this causes a small amount of unemployment, it raises the wages of the remaining workers thus successfully decreasing the American wage gap. Without labor unions this positive effect on income equality cannot be achieved and wages remain below the unionized equilibrium stuck at the competitive market equilibrium.

Globalization, technological advancements, American education levels, and the decline of unions primarily have adverse effects on income inequality, however some positive implications are also apparent. When firms outsource jobs in order to save money they can spend the extra savings on hiring more domestic workers or by contributing more money to the economy than they would have without outsourcing. Additionally, when firms use more efficient automated machines they are increasing their total economic output, which leads to an increase in competition, domestic and international trade, and economic growth. Lastly, the abolishment of unions would allow for an equal labor market where efficiency is maximized and where the gain of low-skilled workers is greater than the loss of higher-skilled workers, thus increasing marginal utility.

Wage differentials can also be disadvantageous for a number of reasons. When unskilled workers are earning significantly less than skilled workers they are discouraged, this could potentially lead to a future of decreased or even negative economic growth. Additionally, when a tax and transfer system is imposed due to income inequality it rewards low-income citizens for working less and creates less of an incentive for them to work. Higher-income workers are also encouraged to work less because the more they earn means the more they will be taxed through this system. Consequentially, labor supply would dramatically drop resulting in a decrease of economic output.

It is important to take these detrimental effects into consideration as some believe that economic disparity was the main cause of the 2008 financial crisis. In September of 2010 a study by the U.S. Congress Joint Economic Committee reported that, "Stagnant incomes for all but the wealthiest Americans meant an increased demand for credit, fueling the growth of an unsustainable credit bubble. Bank deregulation allowed financial institutions to create new exotic products in which the ever-richer rich could invest. The result was a bubble-based economy that came crashing down in late 2007.'

The government has imposed many effective programs in order to fight the aforementioned negative effects of income inequality. The main ones are social insurance programs such as social security and Medicare, as well as public assistance programs such as supplemental security income and Medicaid. With improvements on rules and regulations regarding these programs, the government has been able to impose them without creating an incentive for citizens to work less.

Unfortunately this problem is not completely alleviated, for instance many workers choose to retire at the minimum age for social security returns. Setbacks like this mean that the U.S. government must continue to improve current programs and create new ones for the country's uncertain future. The government and the citizens of the United States should both strive to regain financial efficiency and stability, and attempt to achieve maximum economic output.

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