Trends in Income Distribution in the United States - Essay Example

Running Head: Trends in US Income Distribution Trends in Income Distribution: Understanding Income Inequality in the United s Introduction Amongthe factors that affect the socio-economic stance of people in a society is Income Distribution. Income Distribution is defined as the way in which the wealth and income of a country are divided among its population, or the way in which the wealth and income of the world are divided among nations. These patterns of distribution are studied by various statistical means which are based on different data (Britannica, 2009). Hence as stated by Levy (2008), it is a statistical concept as no one is distributing income but rather it arises from individuals’ decisions about work, savings and investments as they interact through markets and are affected by the tax system of the country. The higher concentration wealth to the a few people will reflect a hierarchical structured society. Moreover, a relatively sprite distribution of income among people will reflect a bigger middle class. Either two of the circumstances has an impact on the situation, conditions and perceptions of people. The first situation implies a better situation for those who are more affluent or those who are in the upper strata of society. This can also dictate an unfair playing ground between the have’s and the have not’s. The second situation entails more social equity. This means that opportunities are fair to all people regardless of their class. This will also reflect the government’s structure and the degree of welfare it provide to its citizens. It may be noted that the gap in income distribution may be a major cause of negative perceptions among Americans, which divides the country into economic lines (Allen, 2007). Scholars have studied trends in the income distribution in various industrialized countries including the United States. In the said studies, the scholars have identified a pattern in the income distribution of industrialized countries particularly in the trajectories of income distribution. The common features suggest a systematic pattern in which inequality at first increased, reached a peak, and later declined in the course of industrial development. This creates an inverted U shape figure. Further studies reflect that after the 1970s, a reversal of the first study occured (Allen, 2007). Income Distribution in the United States Income distribution can be gleaned through various measures such as data on household income, individual income or tax accrued to the government. Income distribution can also be studied vis-à-vis other factors such as gender, regional distribution, race, etc. Each year, the U.S. Census Bureau releases data on the income levels of US’s households. A comparison of these annual data over time reveals that the income for wealthier households has been growing faster than the income for poorer households. On the other hand, real income for the wealthiest 5 percent of households rose by 14 percent between 1996 and 2006, while the income for the poorest 20 percent of households rose by 6 percent. As a result of these differences in income growth, the income of the wealthiest 5 percent of households was 8.1 times that of the income of the poorest 20 percent of households in 1996 and increased to 8.7 times by 2006. These figures, give a common conclusion is that income inequality in the United States has increased. This means that income for the wealthier households has been growing faster than the income for poorer households, thus giving the impression of an “increasing income gap” or “shrinking middle class” (Garett, 2008). However the said increasing gap can be attributed to a period three decades ago. Digging to a more data will reflect that in fact there is a reverse situation which happened if one will track back to a few more decades. In fact there is a narrow gap in income during the 1970s and going to the 1940s the gap increases again. Hence, the said trend as illustrated in the graph below (Alderson, Beckfield & Nielsen, 2005) shows a U-shaped income distribution throughout the years. Looking through the data on income distribution as provided by the graph below, trends in income distribution in the United States after the end of World War II can be divided into two distinct long periods. There is a decline of the inequality gap after World War II. The decline of inequality is what most scholars call as the great compression. While the slight increase in the 1970s and a strong steady rise of income inequality by the early 1980s which is a reversal of the first period (Volscho & Wallace, 2004). Investigating the Trend in US Income Distribution It is not uncommon that there are variations on the accuracy of the trending happen as they were based on different data regarding income, such as data from income tax, family income etc. Also, there is non consensus on which data should be appropriate in measuring income distribution. There is also seem inadequacies of the data available, for the postwar income distribution data which makes the true postwar trend in the distribution of income is a mystery (Danziger, 1997) Methodology also affects such variations. This also comprehends statistical factors. It may be noted that most of the data are different in its own aspect. For instance, household incomes are not yet available in the 1950s and thus, what is used for data on the gap is the income tax or individual income. It may however be further noted that regardless of the form of data, the studies show that the said two periods in income distribution in the United States is prevalent. From 1947 until about 1968, one observes a steady decline in the degree of family income inequality. In the 1970s, there is the beginning of an increasing trend in income inequality, with a strong increase in the early 1980s and a leveling off in the early 1990s. Looking in the trend above, from the end of World War II to 1970 the United States enjoyed widespread prosperity. Not only did the national economy grow rapidly, driven by robust productivity growth, but all parts of the income distribution expanded at fairly similar rates. Hence, America was growing together. However, in the mid-1970s economic growth slowed. By the early 1980s the wage structure had begun a period of widening that has lasted until the present day. Even though productivity growth surged again starting in the mid-1990s, the benefits of economic growth have been concentrated at the top end of the distribution. This means that the United States has been growing apart (Goldin and Katz, 2007). Today, the gap in income distribution continues to increase recent statistics show that the richest 1 percent of all Americans, about 2.5 million people, now receive nearly as much income after taxes as the bottom 40 percent, about 100 million people. Indeed, the wealthiest 13,000 families in the USA have more income than the bottom 20 million families. A decade ago, in 1980, the top 1 percent received half as much after-tax income as the bottom 40 percent. The wealthiest one percent of the population owns more wealth than the bottom 95 percent (U.S. Income Distribution & Class, 2009). Also, a problem the use of the census income statistics to infer income inequality is that these statistics only provide a snapshot of the income distribution at a single point in time. The statistics do not consider the reality that the income for many households changes over time. The income of most people increases over time as they move from their first low-paying job in high school to a better paying job later in their lives. Garett (2008) argues that the trend in income distribution may not really show the reality of the gaps between those people who belong in the upper economic strata and those who do not in the United States. A significant number of households move to higher positions along the income distribution and a significant number move to lower positions along the income distribution. Common reference to classes of people such as the lowest 20 percent or the richest 10 percent is very misleading because income classes do not contain the same households and people over time. Another problem with the inequality statistics is that they do not consider the non cash resources received by lower income households and the tax payments made by wealthier households to fund these transfers. Lower income households annually receive tens of billions of dollars in subsidies for housing, food and medical care (Garett, 2008). Garett (2008) also states that it is important to understand that income inequality is a byproduct of a well-functioning capitalist economy. Individuals’ earnings are directly related to their productivity. Wealthy people are not wealthy because they have more money; it is because they have greater productivity. Different incomes, thus, reflect different productivity levels. The unconstrained opportunity for individuals to create value for society, which is reflected by their income, encourages innovation and entrepreneurship. Economic research has documented a positive correlation between entrepreneurship/innovation and overall economic growth. The degree of income inequality is also less if one considers the purchasing power of different income groups. Factors Affecting Income Distribution After observing the trends and investigating the said results, it is significant to understand the causes of the different gaps in the inequality in income distribution. The outcome of income distribution is due to different causes. Alderson & Nielsen (2000) divided the factors contributing to rising inequality in the United States into three groups which are: (1) trends related to the distribution of wages and earnings; (2) trends affecting the distribution of incomes of households and families, independent of factors affecting individual earnings; and (3) compositional effects by which changes in the proportions of various social groups affect the level of inequality in the overall distribution of income. Institutional changes, changes affecting the supply and demand for labor, the stability of earnings, and changes in household and family structure and composition have all been invoked to explain the increase in inequality in the U.S. Trends related to the distribution of wages and earnings includes (a) Institutional Mechanisms such as unionization or de-unionization, rate of minimum wage, and changes in tax law deregulation; (b) Changes Affecting Labor Supply such as population growth, trends in education, skills of laborers, immigration, female labor force participation, and government transfers; (c) Changes Affecting Labor Demand such as inequality and the business cycle, industrialization or de-industrialization, globalization, technological changes, “cognitive partitioning” and the value of cognitive skills, and unequal returns to factors; and (d) Changes Affecting the Stability of Earnings: rise of part-time labor, contingent labor, and turnover. Trends related to the distribution of income of households and families on the other hand refers to the (a) Changing living arrangements such as female-headed households, (b) female labor-force participation, in which incomes of female workers remain to be lower than that of male workers and (c) income distribution and situation of the retired. As state by Brauer (1998) changes on composition of social groups may be attributed to changes in the status of an individual. Educated laborers will shift the demand of laborers. The average earnings in 2002 for the population 18 years and over were higher at each progressively higher level of education. This relationship holds true not only for the entire population but also across most subgroups. Within each specific educational level, earnings differed by sex and race. This variation may result from a variety of factors, such as occupation, working full- or part-time, age, or labor force experience (Stoops, 2004). Technological changes and the impact they bring into the business may affect income. The effect can be positive to skilled workers adopting the technology and negative to those who may be replaced or removed from work due to the adoption of new technologies by businesses. Piketty and Saez (2003) cite that top income and wages shares display a U-shaped pattern over the century and suggest that the large shocks that capital owners experienced during the Great Depression and World War II have had a permanent effect on top capital incomes. The steep progressive income and estate taxation may have prevented large fortunes from fully recovering from these shocks. Top wage shares were flat before World War II, dropped precipitously during the war, and did not start to recover before the late 1960s but are now higher than before World War II. As a result, the working rich have replaced the renters at the top of the income distribution. In other words, the drop in income concentration in the first part of the twentieth century is primarily due to the fall in top capital incomes, and that the fall took place mostly during wartime and the Great Depression in most of those countries suggests an obvious explanation. For the most part, income inequality dropped because capital owners incurred severe shocks to their capital holdings during the 1914 to 1945 period such as destruction, inflation, bankruptcies, and fiscal shocks for financing the wars. This interpretation is also confirmed by available wealth and estate data for countries such as France, Germany, and Japan, which are all affected by the conditions that are present during the said period, where the market and the economy is not performing well (Saez & Veall, 2005). The argument above conform with the claims of Voscho and Wallace (2004), which reports that macroeconomic factors such as economic growth have a progressive influence on U.S. family income inequality. The rate of change in consumer prices or inflation and unemployment, although have regressive effects on the income distribution still contributes to the factors which affect income distribution. In accordance with the class struggle model, union membership levels are estimated to increase family income inequality, while the rate of change in strikes frequency is estimated to have a robust progressive influence on income inequality. Further, looking into welfare states, or where the safety nets are provided by the government for its people in terms of socio-economic benefits, there is lagged rate of change in the minimum wage, has a consistent and robust progressive impact on family income inequality. Another explanation of the continuing increasing gap of inequality in income distribution now is key factor behind the high concentration of income, and the likely reason that the concentration has been increasing, can be seen by examining the distribution of what is called capital income which are Income from capital gains, dividends, interest, and rents. In 2003, just 1% of all households, those with after-tax incomes averaging $701,500, received 57.5% of all capital income, up from 40% in the early 1990s. On the other hand, the bottom 80% received only 12.6% of capital income, down by nearly half since 1983, when the bottom 80% received 23.5%. Implications of the Inequality Income Distribution Critical to the study of income distribution including its trends are its impact on demographic values such as poverty, mortality etc. and impact on government policies which include, economic, tax and monetary policies. All of which affect holistic growth and sustainability of a nation. Nevertheless, the most basic implication of the inequality in income distribution is to know who holds the wheel in terms of economic might such as wealth aned income and correlatively authority over the years. Domhoff (2009) relays that wealth and income is a measure of power in the United States. Wealth can be seen as a resource that is very useful in exercising power. Thats obvious when we think of donations to political parties, payments to lobbyists, and grants to experts who are employed to think up new policies beneficial to the wealthy. Wealth also can be useful in shaping the general social environment to the benefit of the wealthy, whether through hiring public relations firms or donating money for universities, museums, music halls, and art galleries. Second, certain kinds of wealth, such as stock ownership, can be used to control corporations, which of course have a major impact on how the society functions. Thus, the trend of decreasing income distribution gaps since World War II unti the 1970s, shows that that power was eventually evenly distributed. This is caused by actors that surrounds the said period. However, after the recovery of business in the 1970s, gaps began to surge again and power was then concentrated again to a few. References Alderson, A. Beckfield, J. & Nielsen, F. (2005). Exactly how has income inequality changed? patterns of distributional change in core societies. Luxembourg Income Study Working Paper Series. Alderson, A.S. and Nielsen, F. (2000). Income inequality trends in U.S. counties over four decades: 1950-1990. Presented at the summer meeting of the Social Stratification Research Committee (RC 28) of the International Sociological Association in Libourne, France. Allen, J.T. (2007). A nation of "haves" and "have-nots"? Far more americans now see their country as sharply divided along economic lines. Retrieved April 29, 2009 from http://pewresearch.org/pubs/593/haves-have-nots. Brauer, D. (1998). The changing us income distribution:Facts, explanations and unresolved issues. Federal Reserve Bank of New York Research Paper No. 9811. Retrieved April 29, 2009 from http://www.newyorkfed.org/research/staff_reports/research_papers/9811.html Danziger, S. (1997). Trends in economic inequality in the us since World War II: A conference. Retrieved April 28, 2009, from http://www.irp.wisc.edu/publications/focus/pdfs/foc12b.pdf Garett, T. (2008) U.S. income inequality:It’s not so bad. Retrieved April 28, 2009 from http://www.stlouisfed.org/publications/re/2008/d/pdf/income.pdf Goldin, C. & Katz, L. (2007). Long-run changes in the wage structure: Narrowing, widening, polarizing. Brookings Papers on Economic Activity - 2007, 2. Retrieved April 29, 2009, from http://muse.jhu.edu/login?uri=/journals/brookings_papers_on_economic_activity/v2007/2007.2goldin.pdf. Levy, F. (2008). Distribution of income. Retrieved April 28, 2009 from http://www.econlib.org/library/Enc/DistributionofIncome.html. Piketty, T. & Saez, E. (2003). Income inequality in the United States, 1913–1998. The Quarterly Journal of Economics, 118(1). Domhoff, W. (2009). Power in America: Wealth, income and power. Retrieved April 30, 2009 from http://sociology.ucsc.edu/whorulesamerica/power/wealth.html. Saez, E. & Veall. M. (2005). The evolution of high incomes in Northern America:Llessons from Canadian evidence. American Economic Review, 95 (3). Stoops, N. (2004). Educational Attainment in the United States: 2003. US Census Bureau. Retrieved April 28, 2009, from http://www.census.gov/prod/2004pubs/p20-550.pdf. U.S. Income Distribution & Class. (2009). Retrieved April 29, 2009, from http://www.uwec.edu/Geography/Ivogeler/w111/greedy.htm. Volscho, T. & Wallace, M. (2004). Explaining U.S. income inequality, 1949-2001: Trends, theories and evidence.  Paper presented at the annual meeting of the American Sociological Association, Hilton San Francisco & Renaissance Parc 55 Hotel, San Francisco, CA, Retrieved April 28, 2009, from http://www.allacademic.com/meta/p110808_index.html Wealth and Income. (2009). Britannica Encyclopedia, Retrieved April 29, 2009 from http://www.britannica.com/EBchecked/topic/638235/distribution-of-wealth-and-income. Read More