===================================================================== Center for Community Economic Development University of Wisconsin-Extension Community Economics Newsletter No. 308 June 2002 ===================================================================== A Newsletter from the Center for Community Economic Development; Community,Natural Resource and Economic Development Programs, and University of Wisconsin-Extension, Cooperative Extension Service ===================================================================== Income Inequality in the United States by Steven C. Deller* During the glory days of the post-WW II era, Americans enjoyed a revolution in their standards of living. The family that could afford a new automobile every six years in 1947 could afford to buy a new one every three years by 1973. By 1970, 99 percent of American homes had refrigerators, electric irons, and radios; more than 90 percent had automatic clothes washers, vacuum cleaners and toasters ­ a far cry from the typical home before the war. Not only did average income levels grow at healthy rates, but the gap between the richest Americans and the poorest closed. The poorest fifth of all families saw their real income grow by three percent a year while the top fifth say their incomes grew by 2.4 percent annually. Not only did inequality actually decline, but by 1973 the proportion of families in poverty declined by 50 percent. Unfortunately the good times did not last. As the economy faced increased global competition, new technologies made old skills obsolete, and the bargaining powers of organized labor weakened, wage growth moderated and inequalities surged. Instead of growing together, income grew apart. The wealthiest fifth of all families continued to see real growth incomes while the poorest two-fifths saw their inflation-adjusted incomes actually decline. Income inequality, as measured by the Gini coefficient (Figure 1), underwent a “Great U-Turn.” With increasing numbers of two-wage earning families and generally longer work weeks, many families saw themselves running faster to basically remain in place on the ladder of economic well-being. This unpleasant trend is not necessarily due to the bottom weakening for “working poor” but equally important is the surge at the top of the income distribution. In 1967 families in the highest fifth percentile accounted for 43.8 percent of aggregate income but in 2000 their share increased to 49.6 percent: nearly half of all income goes to the top 20 percent of families. Since 1980, the “richest of the rich,” the top five percent of families saw their share climb from 15.6 percent of aggregate income to 21.9 percent with no evidence of the trend slowing or reversing (Figure 2). The rich are indeed getting richer and the poorer are getting poorer. It was the great economic historian Simon Kuznet who first posted a long-term relationship between economic growth and economic equality. As poor countries underwent development and industrialization he hypothesized their income distribution would be coming increasingly unequal during the transition. This would be caused by the emergence of a skilled working class and a propertied middle class whose initial gains would outpace farmers and unskilled workers. Over time as capitalism matured, more people would be incorporated into the “modern” economy, narrowing wages and income differentials across classes and individuals. While the data from post-WW II through much of the 1960s confirmed Kuznet’s ideas, the most recent 30 years does not. Among the reasons advanced for this decline in equality is the decline in organized labor which has historically fought to advance the wages of the working classes. As the economy shifts from a goods producing economy to a service producing one, organized labor has not been as successful in following the transition. Some point to industrial deregulation that occurred during the 1980s such as the airlines and trucking industries. In each of these newly deregulated industries, intense competition from new nonunion, low-wage entrants forced existing firms to extract wage concessions from their employees to remain competitive. A few have even suggested that the trend towards privatization in the public sector has seen a shift from well paying public jobs to lower paying private jobs. As firms compete with other firms, and indeed the government itself, for local contracts there is significant pressure to force wages downward. Two more substantial arguments advanced for the widening income gap point to the rapid escalation of technologies and the role of education in the ability to take advantage of new technologies and the growing competition from developing countries and freer trade policies. High-tech capitals such as Silicon Valley seem to demand a disproportionate number of skilled workers who command high wages for these specialized skills. While this may explain part of the widening gap others point to the fact there is strong evidence that there is growing wage and salary inequality within occupations. It appears not all computer technicians are not created equal. It is clear that individual investment in education is a necessary condition to be competitive in the new technology economy, it is not sufficient to ensure high wages. The US has also witnessed significant increase in competition from developing countries for a range of goods and services over the past few decades. As the industrial base of developing countries expands, firms within these countries directly compete with US firms. The ramification of this increased competition rests in the wages paid across countries. Wages that may be reasonable in these developing countries are significantly below US wages making US firms less than competitive. To remain competitive US firms must relocate production to these lower wage counties or extract significant wage reductions from US workers. Attempts to try to identify “who done it?” will frustrate those who ask the question because there is not one simple answer to the question; in essence they all did it. Although economist have attempted to assign shares in the blame game one could reasonably argue that assigning blame does not advance our understanding of what, if anything, can or should be done to reverse this trend towards heighten inequality. There is no magic bullet or quick policy fix. Further reading: Barry Bluestone and Bennett Harrison, Growing Prosperity: The Battle for Growth with Equity in the 21st Centruy. Boston: Houghton Mifflin. 2000. Richard Freeman and Lawrence Katz, “Rising Wage Inequality: The United States vs. Other Advanced Countries. In Working Under Different Rules edited by Richard Freeman. New York: Russell Sage. 1994. * Steven C. Deller is a Professor with the Department of Agricultural and Applied Economics at the University of Wisconsin-Madison/Extension. Steven C. Deller Community Development Economist Issued in furtherance of Cooperative Extension work, Acts of May 8, and June 30, 1914, in cooperation with the U.S. Department of Agriculture. Carl O‘Connor, Cooperative Extension, University of Wisconsin-Extension. University of Wisconsin-Extension, U.S. Department of Agriculture and Wisconsin counties cooperating. UW-Extension provides equal opportunities in employment and programming, including Title IX and ADA. Note: Figures 1 and 2 are Adobe Acrobat pdf files.