The infamous concept of the “American Dream” is based on notion of existing economic mobility and equality in the U.S. It is an idea that Americans are not limited by their present economic circumstances and they can climb the social ladder if they are willing to put the effort. Unfortunately, statistics show that income inequality in America has worsened in the past three decades (Athreya & Romero, 2012). They are five economic classes in the American society: upper class, upper middle class, middle class, working class and the poor. A big chunk of the American population falls within the working class and the poor. Economists wonder why economic inequality is persistent in the American society. Why do the rich get richer, while the poor is languishing in more poverty? The poor face increased economic and systemic challenges that make it hard to climb the economic ladder.
Economic inequality is the difference in the economic status of various members of the society derived from various financial metrics, the most popular metric being income. Income entails various revenue streams such as wages, salaries and savings. Income is defined as pre-tax cash market income, and it also entails returns on invested capital, business profit and attained capital gains. Therefore, income inequality is the uneven distribution of income among different members of the population (Keister & Moller, 2000). The extent of economic inequality in America is so big such that about 5% of the richest in the society possess more wealth than 95% members of the society. Keister & Moller (2000) note that as early as the 1920s, the top one percent possessed an average of 30% of the total household wealth. This number increased further such that in the 1980s and 1990s, the top one percent possessed over 40% of the total household wealth (Keister & Moller, 2000). Evidently, the U.S. has surpassed all nations on the issue of wealth inequality. It is crucial to analyze the trends of wealth distribution in America to understand how the rich manage to keep accumulating wealth, and the effects of wealth inequality to the poor.
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In the 1920s, the top 1% received 23.9% of all the pretax income in the U.S. as wealth inequality was at its peak towards the end of the 1920s (Keister & Moller, 2000). However, wealth inequality drastically reduced during the depression and World War 2, eventually reshaping the income distribution in America. In the 1940s, the top 1% only owned 11.3% of the total wealth, whereas the bottom 90% owned 67.5% of the wealth. The trend continued until 1970s, when the wealth of the richest 1% began increasing dramatically. An investigation of the wealth distribution in the 21st century now shows that the top 1% owns up to 22.5% of the pretax income in 2011, while the bottom 90% own below 50% of the income (Bloome &Western, 2011).
A common method for analyzing economic inequality is using the family as the basic income unit. According to Bloome (2013) economic inequality between households and economic mobility across generations are closely linked. Bloome (2013) observed that over the past four decades the disparities grew in all aspects of income, particularly hourly wages, annual earnings and family incomes.
According to Bradburry (2011) family income mobility is an indicator of the economic well being of the family in comparison to its starting point. Family income inequality has risen annually since the mid-1970s, increasing the cross-sectional inequality in the American society. Bradburry (2011) reviews over ten longitudinal studies on family income mobility. All the studies have one thing in common, U.S. family income mobility has decreased since 1969-2006, and the decline was at its highest in the 1980s (Bradburry, 2011). The study also concludes that families in the poorest quintile are less likely to make any moves than those in the middle and higher quintiles. The study also shows that mobility declined across all quintiles almost equally in the period from 1981-1991 due to the decrease in post-government income (Bradburry, 2011). There was a higher mobility in the 1990s and early 2000s, compared to the 1970s and 1980s (Bradburry, 2011).
A commonly held concept is that high economic inequality hinders intergenerational mobility, such that children from rich backgrounds are likely to stay rich while those from poor families will find it hard to move to another class (Russel Sage Foundation, 2013). Boone (2013) cites the theory of cumulative advantage to explain the negative effects of income inequality on intergenerational mobility. According to the theory of cumulative advantage, children’s advantages lie in each developmental stage. High and low income parents have different forms of investment regarding the child’s education, health and social development for different stages. Early childhood achievement is encouraged by high income parents, who invest more resources in their children as they develop. As they enter the labor market, children from high income families already have an advantage in comparison to children from low income families, making it hard to compete. Hence, children from low-income families are more likely to settle for low-paying job, hindering intergenerational income mobility.
Boone’s assertions (2013) are supported by Corcoran (1995). Corcoran (1995) states that the “culture of poverty” plays an important role in the intergenerational transmission of poverty in the U.S. Regardless, there are recent studies that challenge the notion that poverty cycle is projected onto the children by their parents. The recent statistics on the wealthiest 1% shows that today’s wealthy individuals do not necessarily come from wealthy families, rather they use their knowledge to come up with successful ideas.
Most U.S. citizens are not aware of the real extent of wealth inequality, but there is a general notion that the economic system favors the wealthy. It is crucial to explore the real causes and effects of income inequality to understand the extent of this problem in the American society. Understanding the problem well is the first step towards solving it.
Bloome & Western (2011) investigate the racial differences in educational attainment to explain the persistent economic inequality in the American society. Quality education is often associated with increasing income mobility. Individuals with college degrees earn more than individuals who finished high school only or high school drop outs. Highly educated individuals have more access to many opportunities in comparison to individuals who are less educated. Unfortunately, the education inequality in America is almost a true reflection of income inequality. Minorities tend to be less educated, for instance black men are less educated that white men (Bloome & Western, 2011). The history of blacks, women and other notable minorities in the American society shows that they did not have access to equal educational opportunities like white males. In the mid-20th century, African Americans did not have access to the same schools as whites. Even after the Brown v. Board of education (1954), which banned desegregation most learning institutions still refused to admit African American students. Until now, there are disparities in educational attainment among blacks and whites. White students tend to attend well-performing schools in better districts, while low-income African American students are relegated to poor-performing inner city schools with very limited resources.
In analyzing education as a cause of the increasing income inequality, Bloome & Western (2011) also talk about the effects of the parent’s education on the child’s future. Parental education plays an important role in the upbringing and educational achievement of the child. Bloome & Western categorize parental education into five classes: missing, less than high school, high school, some college, or college or more. More educated parents are more likely to invest in their children’s education, they will take their children to good schools and monitor their academic performance, unlike parents with no education or little form of education. From the study conducted by Boone & Western (2011), most black respondents claimed that their parents fell into the missing education category, hence they were not engaged in their education in comparison to more educated parents.
Another reason for the income inequality is discrimination (Bloome & Western, 2011). Discrimination entails any form of distinction, exclusion, restriction or preferential treatment that is not based on merit. A discriminating society favors one group over the others, such that marginalized groups in the American society such as blacks, women, immigrants, and Muslims are less likely to be accorded equal treatment. Studies show that a high percentage of working and poor class in America comes from the ethnic minorities (Bloome & Western, 2011). According to Keister & Moller (2000), in the 1980s the median income for blacks was about 60% the income whites, and the median net worth of black families was only 8% of the white families. In 1992, only 25% of white families had zero or negative assets in comparison to 60% of black families (Keister & Moller, 2000). Educational inequality and systemic discrimination can be blamed for the historical income differences between blacks and whites.
While cases of overt discrimination no longer exist in the American society, indirect discrimination exists. Such that in an organization, the top management is likely to be composed of white males, while the subordinate positions are made up of women and minorities. Unfortunately, it’s not because women and other ethnic minorities are not qualified, rather it is because white males have traditionally held the leadership roles. Indirect discrimination also exists in the American society through policies and practices that appear neutral, yet they have a disproportionate impact on certain groups. For instance, the U.S. criminal justice system is known to be unfair to African Americans, they contribute a bigger percentage of the arrests, while the criminal system overlooks simple mistakes made by whites. Such systemic forms of discrimination are present in schools and at work, making it hard for certain minorities to progress and bridge the income gap.
Lastly, an important cause of income inequality is the uneven wealth distribution. There is no period in the American society when there was an even distribution of wealth/income in the society (Bayaz-Ozturk, 2014). With certain members of the society holding more wealth, such individuals and their families have an advantage. According to Bloome (2015) parents with high income will invest a lot in shaping the child’s future. He also adds that there is a complex relationship between family, state and the market, such that the external forces are more favorable to children from richer families. Inequality reduces opportunities for the poor, while increasing opportunities for the rich.
The causes of income inequality discussed above are the most visible causes that have contributed to the enduring income inequality in the American society for years. According to Athreya & Romero (2012) the increasing economic inequality in the American society is raising concerns over the nature of opportunities available in the American society. Persistent income inequality and lack of mobility is a sign that only a few members of the society continue to be rich, while the poor continue being poor. Athreya & Romero (2012) note that nearly half of the Americans between ages 18-29 believe they will be rich at some point in their lifetime, but the odds are against them. Only 5% of the U.S. households earned more than $150,000 per year and about 1% earned more than $350,000 per year in 2012. Most of the individuals in the top 5% and 1% brackets were not born to poor parents, hence the American dream will only remain a dream for most young people.
Income inequality has adverse effects on the society, especially among the poor. However, this opinion is not shared by all members of the society, especially the top 1%. The wealthy claim that income inequality is the incentive for innovation and entrepreneurship in America. If economic equality was enforced in America like in a communist society, there would be no coveted positions or the need to work hard as everyone will be content that they earn the same as others. Others argue that wealth disparities are inevitable ins a successful economy (Athreya & Romero, 2015). Inequality in the short term only creates more inequality in the long run because the wealthy pursue high rewarding investment ventures.
However, the increasing rate of inequality in the American society is a worrying trend. When the top 5% own a bigger percentage of the nation’s wealth, it means that most Americans are struggling to make ends meet. The most notable effect, which is also a cause of inequality is lack of mobility (Athreya & Romero, 2012). Mobility is the ability of an individual/ household to move from one economic class (quintile) to another. With increasing inequality, the rich are becoming richer, making it impossible for the poor to be a part of the rich class (Federal Reserve Bank of Boston, 2011). Lack of mobility is disadvantageous to the minorities and immigrants who move to the U.S. in search of better opportunities. Income inequality decreases both intergenerational and intragenerational mobility, making it hard for individuals to experience actual change.
There are other effects of income inequality that goes beyond the economic aspects. Increasing income inequality is also associated with educational inequality, political inequality, health inequality and crime in the society (Bloome & Western, 2011). Social and political aspects of the society are strongly tied to the economic aspects, hence economic inequality is bound to produce adverse implications. Income inequality increases crime in the American society. Researchers note that societies that have low rates of income inequality experience less crime in comparison to American society. Increasing inequality contributes to crime in various ways, first, the disadvantaged 90% members of the society are more likely to suffer resentment and hostility towards the rich. Additionally, with the lack of equal opportunities for the rich and the poor, some might see crime as the only way to make a living.
Still on a social level, income inequality leads to health inequality. Health studies shows that there increasing disparity in access to health care and occurrence of illnesses. Impoverished members of the society are more likely to suffer from certain illnesses, they also have higher mortality rates because they cannot afford health insurance in comparison to the rich. In 2009, 2.2% of American households were located in food deserts, where they lacked access to fresh foods and suffer from high cases of obesity and lifestyle diseases (Athreya & Romero, 2012). Reports suggest that Americans with living below federal poverty levels are more likely to suffer to die from diabetes.
Lastly, income inequality also leads to political inequality. The political class in America is now a reserve for the wealthy. Wealthy individuals have the resources and networks to fund expensive political campaigns in the U.S., eventually, the political class will only in favor of the rich. Without representatives that know the struggles of the poor or the working class Americans, it will be hard to implement policies to tackle the economic inequality issue.
Athreya & Romero (2012) analyze the persistence of economic inequality in order to come up with recommendations to change the situation. They suggest that persistence in economic inequality is caused by a wide range of factors, such as neighborhoods, education of the child, and “human capital.” Athreya & Romero (2012) suggests that changes in the educational system are not enough to address the problem of income inequality in the American society. Regardless, changes in the educational system provide the foundation, it gives young people a chance to experience intergenerational mobility. Human capital embodies more than the years and the degree attained, rather it involves both cognitive and non-cognitive skills that will help children address societal issues. The government and the society have to invest more in education. Skill development from early childhood should be prioritized, instead of focusing curriculum subjects only.
Athreya & Romero (2012) also suggest the need for policy changes to address the income inequality. Market shocks such as job losses and decreased earning affects the evolution of income inequality in the society. The government should introduce better policies aimed at maintaining a consistent level of income across all job groups to give individuals the right income as per their set of skills and experiences. Government policies to bring changes to the market do not always work because it is a reactive measure. Athreya & Romero (2012) believe the most effective policy is through a human capital model, characterized by universal access to early childhood interventions. Such interventions will focus on the equal educational development of children from a young age, such that children from low and high income families will have the same opportunities.
In conclusion, statistics on income inequality show that gap between the rich and the poor is constantly increasing. The biggest consequence of the increasing gap is lack of mobility in the society, a reality being faced by most ambitious and educated young people. Without economic mobility in the society, individuals are stuck in their present economic class despite their efforts to climb the ladder. There are other effects of economic inequality, such as educational disparities, health inequality, crime and political inequality experienced in the American society. All these adverse effects also make it hard to break the cycle of poverty.
References
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