Why is there income inequality?

by Krantcents · 19 comments

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Income inequality has grown significantly in the United States! The top 1% increased income and the middle class income has been declining at a much faster rate. Some of the factors that contribute to income inequality are geographical, globalization, race, gender, education, immigration, institutional, taxation and decline of unions. What do you think is the biggest factor in income inequality? 

Geographical

As you can imagine, there are wide differences between states and major cities. In addition there are wide differences between regions, major cities and other areas of the country. Just comparing the major cities and the income disparity from New York City to Chicago or Los Angeles for the same position, you will find more income inequality. In some of the highest income cities, you will find more disparity of income.  What can you do about it?

Globalization

The United States used to be a manufacturing economy, but that was a long time ago. Corporations are always looking for a low cost method for manufacturing. We can blame the corporations for outsourcing, but consumers have created demand for lower prices and globalization is the answer. Corporations outsource manufacturing to low wage countries and they can meet demand with a low priced product. Manufacturing kept wages relatively higher and created a middle class.

Race

The recession has increased income inequality between white and non-white Americans. The recession has affected African American and Latino families much more than white families. Much of the gap is the loss in housing values and higher unemployment rates. Most wealth is in your personal residence, then retirement accounts and finally savings. All of which are materially affected in a recession particularly if you lose your job.

Gender

There has been a great deal of discussion regarding income disparity regarding men and women. Statistically, women earn approximately seventy-seven (77%) percent of what men earn. The disparity is greater when you include race too. I will not discuss the variety of reasons given for the disparity because that would be another article by itself. For the record, I feel that men and women should earn the same based on the same job description. Since no one has the exact same skills and experience, there will be differences, but the salary range should be the same for the same job.

Education

More women are going to college and yet there is still a considerable disparity in income. Some may say it will take a generation or two for women to catch up. I think this excuse has been used for a variety of changes and it does not hold up under scrutiny. My wife and I raised our children (boy & girl) to do their best and achieve in education and the real world too. They should be able to earn based on their skills and experience. Education is one way to help men and women overcome income inequality.

Immigration

As a country of immigrants, people come to this country with little wealth and find opportunities for success. This takes generations and adds to income inequality. I live in southern California and many immigrants fulfill low wage jobs. I also see immigrants who fill technical and professional jobs too. I am referring to vast majority of immigrants who start out with many of the jobs, U.S. citizens are unwilling to do.

Institutional

Our universities attract some of the brightest students in the world, but our immigration policies and laws discourage these same students to immigrate to the United States. The decline of union membership has added to income inequality. Since our economy has moved from a manufacturing economy to more of a service economy, the income disparity has increased. The income disparity of CEO’s relative to the lowest paid employee is increasing. Is this institutional?

Taxation

Tax policy has added to income disparity probably more than any other factor. A good example is former Governor Mitt Romney. There was a great deal of discussion when he was running for president about his income which is taxed at capital gains rates (15%). There are a lot of people including ordinary people who receive capital gains income. I do and wished I earned more! Donald Sterling (Los Angeles Clippers owner) just earned nearly two ($2) billion dollars in capital gains selling his professional basketball team.

Rich people have more to risk and therefore more they can earn at a capital gains rate. Capital gains is a profit from the sale of property or of an investment. It may be a home, income property, classic car, investment, business, stocks, bonds, mutual funds, or collectibles. The more money you earn, the more likely you will pay more taxes. That said, the more you earn, you will have more choices to avoid or defer taxes thanks to good tax advice.

Final thoughts

“The rich get richer and the poor get poorer” is a catchphrase when discussing income inequality. I tried to objectively point out many of the reasons for income inequality, although I refrained from offering solutions. Success as it is measured in wealth is not going to go away no matter what is done. Taxes have been higher and it did not stop people from becoming wealthy. There will always be income inequality, but it does not have to keep increasing. The cure for income inequality is multifold, but it begins with an emphasis on education, skills and opportunity for success.

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{ 12 comments }

Holly@ClubThrifty June 18, 2014 at 5:49 am

I try not to worry about things I feel are beyond my control. I feel powerful when I just focus on my own situation and do things to improve it.

Krantcents June 18, 2014 at 7:44 am

I agree! So much has been made of income inequality, I thought it was worthwhile to explain it.

Brian Davis June 19, 2014 at 9:16 am

Have you seen Hans Rosling’s TED video that, among other things, talks about income inequality? On a global scale, he has a compelling argument that income inequality is decreasing.

Yes, there are ways to look at income inequality in the US that shows some significant changes… what are the real root causes and what can be done about them?

I think the primary influencers are: education inequality (poor students get the shaft at public schools for a variety of reasons), cultural inequality (poor kids don’t get the same cultural influences that richer kids do) and then a handful of things related to manufacturing. Let’s look at that a bit more next.

Manufacturing used to be: highly unionized (support for higher wages among other things), dependent on lots of people (mostly men) with strong muscles and relatively local (as in US local). Today, since the cost of information transfer (internet) is tiny and transportation by way of international shipping containers is so small, it is now possible (and profitable) to make lots of stuff where the cost of labor is lower. A lot of people call this a bad thing. Umm… think about it if the shoe were on the other foot. What were the people of Europe thinking as they saw the shift of manufacturing move from Europe to the US during the 20th century? Do the folks in China, India and Viet Nam deserve a shot at manufacturing stuff? As capitalists, shouldn’t we all support the concept of making stuff where it is most efficient to do so?

Now, as an American, I want the best for us, too. We are going through a bit of a manufacturing renaissance here due to some new high tech sorts of processes as well as a bit of a leveling of wages in the rest of the world (is it not an OK thing to pay people in other countries a “living wage” also?). So how do we keep the edge / grow our “good jobs”, etc and keep the renaissance going?

Undoubtedly, the answer lies in education. If we create a pool of highly educated people, corporations will come to the US to get their stuff done with a high quality and efficient workforce. As we move on, I think it is most important for this education to focus more on imagination, creativity, critical thinking and the like as opposed to rote memorization.

So… let the rest of the world grow and start picking up some of the advantages we’ve had for years and be happy about how they are growing. At the same time, let’s keep growing ourselves to keep the rich blessings we’ve enjoyed for so long.

Krantcents June 19, 2014 at 1:26 pm

You’re right, education is a great way to level the playing field. More women than men are graduating form university than ever before, it will probably take a generation or two to see a change. Education or training is necessary in even more necessary as technological changes occur. Even manufacturing requires more skills. The economy is changing and we need to change with it.

maria@moneyprinciple June 21, 2014 at 12:41 pm

I am with Brian on this one. Would like to add one thing: there is a tendency amongst personal finance bloggers to put the blame for less than sterling money record on the individual; a lot of poverty is actually structural and it is about cultural and educational capital and opportunities.

Krantcents June 21, 2014 at 1:03 pm

There are a number of factors that contribute to poverty and income inequality. You could take 2 people and provide educational opportunities and only 1 takes advantage of it. I see this all the time in my classes. Most of my students are from low socioeconomic communities and do not realize education is their ticket to a better life. The parents do not encourage it and they generally do not finish high school. It is the culture of poverty!

Annie Logue June 22, 2014 at 1:39 pm

There’s an interesting gender angle on this, which is that with more women becoming educated and taking professional jobs, they are marrying men who are their equals. In the olden days, a lawyer might marry a legal secretary. Now, a lawyer might marry another lawyer. When you have two professional incomes, you have a household with far more money than a household with two blue/pink collar incomes.

Krantcents June 22, 2014 at 2:39 pm

Absolutely! I would go a step further that women are starting to earn more than men and there may a new gender gap.

Michelle June 24, 2014 at 11:18 am

I think a lot of these things are out of my control. Right now, I try to worry about my own financial situation and how to better myself while working on decreasing my amount of debt.

Krantcents June 24, 2014 at 12:49 pm

Very true, but you still need to be awar eof the other things.

Brian Davis July 20, 2014 at 6:55 am

Michelle — Here’s how I read your message: I hear a lot of noise about income inequality. It is basically just noise, so instead, I focus on things I can actually control and things that matter to me.

You are clearly headed towards the top quartile of income earners and top quartile of net worth.

A suggestion? Change “worry” to “focus”. Obviously it is just semantics. It’s a world of difference in how our brains deal with things — moving from a negative (worry) to a positive (focus). Keep up the good work!

Krantcents July 20, 2014 at 10:00 am

I follow my mother’s lead. She never worried about the obstacles. She just worked hard and went right through them.

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