Income Inequality in the United States

In economic analysis, a nation forms the basic economic unit that utilizes resources and inputs to produce output. The owners of capital, as well as the workers involved in the production process, get a share of the income received from the sale of the commodities produced1. The way that the different classes of people share in the revenue from the various production activities in a given economy is one of the parameters present in macroeconomics. The analysis of the distribution of national income has become an ever prominent issue in economic discourse as many people want to find out if there is fairness in the allocation2. While not everyone gets to receive an equal share, it is nonetheless important that the system put in place ensures that each earns their fair share. Many countries including the United States have for years struggled with lopsided income distribution with the few wealthy individuals controlling too much of it and leaving the rest to receive less than their fair allocation3. 

Over the past three decades, America has slowly become the nation for the haves and the have- nots. That assertion perhaps marks the best way to describe the current economic reality in America, a country that has seen the widening of the gulf between the rich and the poor4. National economic indicators such as the expansion of the national GDP or even per capita income do not capture the accurate picture of the income situation on the ground5. As such one can only start to understand the reality of the situation by undertaking a breakdown of the income attributable to various portions or sectors of the population. In the case of America, such an analysis does not make for a very interesting read as one discovers that the rich continually becoming richer as the poor sink further into poverty6. 

The Top 1 Percent Vs. The 99 percent 

Over the years, the best way to depict the income gaps in the United States is by comparing what the people that occupy the top one percent of the wealth ladder and comparing that with what the rest of the population collectively controls7. Also, the analysis is not complete without evaluating the changes in the distribution over time, something possible from evaluating how changes in national income accrue to the various population groups. In the year 2013, the top one percent in the US made 25 percent of what the rest of the population made8. That is to mean that most of the income for the year went to the owners of capital and resources with very little trickling to the ordinary citizens. 

Research by the Economic Policy Institute (EPI) revealed that income inequality had increased in all the states in the US from the 1970s decade9. In 24 of the states, at least half of the income growth went to the individuals that comprise the top one percent of the population. In 15 states, this group captured all the growth, with the remaining 99 percent getting none10. Further, in 10 states, the small minority at the summit saw double- digit growth in their wealth while that of other people declined. During the 2009- 2013 period, the one percent of the wealthiest Americans captured 85 percent of the total income growth11. Such statistics serve to illustrate the disturbing phenomenon that is the unfair income distribution. Those at the top continue to receive a disproportionate share of the income. Since the 1970s, there has been a continued gap in income for those at the top of the pyramid relative to those in the mid and lower tiers. 

The most concerning aspect about the trends in income disparities is that the inequitable nature has become entrenched, and continues to persist regardless of the prevailing economic situation12. It is disturbing enough that no single US state has seen a narrowing of the income gap. However, it's even more scandalous to find out that not even the economic downturns of recent years have changed matters. Recessions may have had the effect of slowing down the income growth among the top one percent, but only temporarily13. The reality is that they have not affected the pattern that has seen the wealthy become even wealthier while the incomes of those in the middle class have negligible growth or even stagnate completely. It then comes down to a state of the rich continuing to enjoy their riches while everyone else sees no meaningful change in their situation14. 

Case of a National Problem

Thinking of income inequality in the US, perhaps the picture that immediately comes to mind is New York14. The city is the location of Wall Street and has the reputation as the hallmark of capitalism where thousands have become extremely wealthy through speculative activities in the financial markets15. However, the reality is that the problem extends to each and every corner of the country, in each and every state, metropolitan area, municipality, and county. Findings by the EPI show that the lopsided nature is 24 percent of all income in five states, 22 metropolitan zones, and 75 counties. That figure equals the highest recorded income disparity indicator that was back in 1928, at the height of the Great Depression16.

The three most unequal states according to the report were New York, Connecticut, and Wyoming, with each having the top one percent earning on average 40 times what the rest of the people earned17. The assessment of metropolitan areas revealed that the 12 with the widest gap had the top one percent earning not less than 40 times what the 99 percent earned18. The most unequal was Jackson, a metropolitan area straddling the states of Wyoming and Idaho, where the one percent at the top made more than 200 times what the other 99 percent of households made19. Other notable metropolitan areas with huge income gaps included Bridgeport-Stamford-Norwalk in Connecticut, andNaplesImmokalee-Marco Island in Florida, Sebastian-Vero Beach Florida, with a par captal income at 73.7:1, 73.2:1, and 63.5:1 respectively20. In 25 counties, the top one percent received incomes that were at least 45 times greater than those earned by the remaining 99 percent in 2013. The worst country was the Wyoming county of Teton, located within the Jackson Metropolitan area that had an income ratio of 233:1 for the top one percent to the bottom 9921.

A Brief History of American Income equality

In a study by Lindert & Williamson, (2016), the authors discovered that the colonial America was more equitable than most other places such as Great Britain and the Netherlands. The founding father, George Washington made the bold prediction that even the lower classes would get the opportunity to prosperity because of factors such as the equal distribution of property and the vast unoccupied lands that they could occupy and put into productive use22 . The 19th century ushered in a period of rapid expansion of the American economy to overtake most European nations in per capita income. However, the distribution of the gains was not fair with most the proceeds going to large landowners and factory owners23. The growing population provided the required labor, but most of the people were unskilled laborers who received minimal wages. Changes in technology and globalization have also had a role in widening the rift between the skilled and unskilled workers and became early sources of the income inequality24.

The increased industrialization and urbanization in the 19th century brought about an increase in the gulf of incomes earned by the wealthiest and the rest of society25. However, the period after the Great Depression saw the bridging of the income gap. The reduction of the gulf took place up to 197926. During that period, all the States in the US experienced a reduction in the portion of the population comprising the top one percent. That period saw the emergence of America’s middle class and marks the era that many attained the American dream27. Productivity and employment grew in the period, and households became more prosperous and the income disparities improved from the pre- depression levels28. 

The 1980s decade witnessed a reversal of the trend before 1979, and the income gap progressively widened up to 2007, when the world underwent an economic recession29. During that period, the share of income held by the top one percent increased in all the states and the District of Columbia30. The top ten states where the wealthiest hold a disproportionate share of the income have unique characteristics in their economic activities that explain their circumstances. The first band of four states, comprises states with large financial sectors. These include New York, Connecticut, New Jersey, and Illinois. One common characteristic that they have is that the top executives of investment banks and hedge funds receive massive sums in executive compensation31. States with large information technology sectors also score poorly in the income equality rankings32. Areas under this category include Washington, Massachusets, and California, home to the Silicon Valley, one of the world’s foremost technology hubs33. Wyoming has a large energy sector while Nevada is the hub of America’s gaming industry. Further, Florida is a retirement state where many wealthy individuals choose to spend their latter years34.

Wall Street and the Culture of Corporate Greed

Many people have often cited the growth of capitalism, as explained by the exponential expansion of financial markets as one of the causes of income inequality in America35. It is, therefore, no coincidence that New York and Connecticut have perpetually topped the list of the most inequitable states in the country36. At the same time, America has somewhat reluctantly accepted the culture of corporate greed and reckless risk- taking that is synonymous with the corporate elite37. These people have come up with smart ways to make profits given that their compensation depends on the money that their organizations make38. Each year, this group receives handsome bonuses while the ordinary employees hardly see any growth in their paychecks39. Over the years, the voice of those calling for the measures to restrain the powers that those at the top of Wall Street’s power rankings to award themselves huge compensation have been growing. Many hope that can be a significant step that will go towards bridging the income gap. However, structural reforms and policies that will benefit the middle and lower classes reamain the more promising and the longer- term solutions towards this problem40. 

Notes 

See Dadush, U. (2012). Inequality in America. Washington, D.C.: Brookings Institution Press pg. 15

See Dadush, U. (2012). Inequality in America. Washington, D.C.: Brookings Institution Press pg. 17.

See Dadush, U. (2012). Inequality in America. Washington, D.C.: Brookings Institution Press pg.19

See Economic Policy Institute,. (2016). Income inequality in the U.S. by state, metropolitan area, and county. Washington D. C.: Economic Policy Institute. Retrieved from http://www.epi.org/files/pdf/107100.pdf pg. 6 

See Economic Policy Institute,. (2016). Income inequality in the U.S. by state, metropolitan area, and county. Washington D. C.: Economic Policy Institute. Retrieved from http://www.epi.org/files/pdf/107100.pdf pg. 6

See Economic Policy Institute,. (2016). Income inequality in the U.S. by state, metropolitan area, and county. Washington D. C.: Economic Policy Institute. Retrieved from http://www.epi.org/files/pdf/107100.pdf pg. 7

See Economic Policy Institute,. (2016). Income inequality in the U.S. by state, metropolitan area, and county. Washington D. C.: Economic Policy Institute. Retrieved from http://www.epi.org/files/pdf/107100.pdf pg. 8 

See Economic Policy Institute,. (2016). Income inequality in the U.S. by state, metropolitan area, and county. Washington D. C.: Economic Policy Institute. Retrieved from http://www.epi.org/files/pdf/107100.pdf pg. 9 

See Economic Policy Institute,. (2016). Income inequality in the U.S. by state, metropolitan area, and county. Washington D. C.: Economic Policy Institute. Retrieved from http://www.epi.org/files/pdf/107100.pdf

See Economic Policy Institute,. (2016). Income inequality in the U.S. by state, metropolitan area, and county. Washington D. C.: Economic Policy Institute. Retrieved from http://www.epi.org/files/pdf/107100.pdf pg.11 

See Economic Policy Institute,. (2016). Income inequality in the U.S. by state, metropolitan area, and county. Washington D. C.: Economic Policy Institute. Retrieved from http://www.epi.org/files/pdf/107100.pdf pg.11

See Lindert, P. & Williamson, J. (2016). Unequal Gains. Princeton: Princeton University Press.

See Lindert, P. & Williamson, J. (2016). Unequal Gains. Princeton: Princeton University Press pg. 56 

See Lindert, P. & Williamson, J. (2016). Unequal Gains. Princeton: Princeton University Press pg. 56 

See Lindert, P. & Williamson, J. (2016). Unequal Gains. Princeton: Princeton University Press pg. 56

See Economic Policy Institute,. (2016). Income inequality in the U.S. by state, metropolitan area, and county. Washington D. C.: Economic Policy Institute. Retrieved from http://www.epi.org/files/pdf/107100.pdf pg. 12 

See Economic Policy Institute,. (2016). Income inequality in the U.S. by state, metropolitan area, and county. Washington D. C.: Economic Policy Institute. Retrieved from http://www.epi.org/files/pdf/107100.pdf pg. 12

See Bergstrand, J. (2015). The changing distribution of income in an open U.S. economy (3rd ed.). Amsterdam: North-Holland pg. 98.

See Bergstrand, J. (2015). The changing distribution of income in an open U.S. economy (3rd ed.). Amsterdam: North-Holland pg. 99

See Economic Policy Institute,. (2016). Income inequality in the U.S. by state, metropolitan area, and county. Washington D. C.: Economic Policy Institute. Retrieved from http://www.epi.org/files/pdf/107100.pdf pg. 11

See Bergstrand, J. (2015). The changing distribution of income in an open U.S. economy pg. 116

See Lindert, P. & Williamson, J. (2016). Unequal Gains. Princeton: Princeton University Press. pg. 173

See Lindert, P. & Williamson, J. (2016). Unequal Gains. Princeton: Princeton University pg. 173

See Lindert, P. & Williamson, J. (2016). Unequal Gains. Princeton: Princeton University Press. pg. 173

See Economic Policy Institute,. (2016). Income inequality in the U.S. by state, metropolitan area, and county. Washington D. C.: Economic Policy Institute. Retrieved from http://www.epi.org/files/pdf/107100.pdf pg. 16

See Economic Policy Institute,. (2016). Income inequality in the U.S. by state, metropolitan area, and county. Washington D. C.: Economic Policy Institute. Retrieved from http://www.epi.org/files/pdf/107100.pdf pg. 15

See Dadush, U. (2012). Inequality in America. Washington, D.C.: Brookings Institution Press pg.156

See Dadush, U. (2012). Inequality in America. Washington, D.C.: Brookings Institution Press pg.156

See Lindert, P. & Williamson, J. (2016). Unequal Gains. Princeton: Princeton University Press. pg. 167

See Economic Policy Institute,. (2016). Income inequality in the U.S. by state, metropolitan area, and county. Washington D. C.: Economic Policy Institute. Retrieved from http://www.epi.org/files/pdf/107100.pdf pg.15

See Economic Policy Institute,. (2016). Income inequality in the U.S. by state, metropolitan area, and county. Washington D. C.: Economic Policy Institute. Retrieved from http://www.epi.org/files/pdf/107100.pdf pg. 14

See Economic Policy Institute,. (2016). Income inequality in the U.S. by state, metropolitan area, and county. Washington D. C.: Economic Policy Institute. Retrieved from http://www.epi.org/files/pdf/107100.pdf pg. 13

See Dadush, U. (2012). Inequality in America. Washington, D.C.: Brookings Institution Press pg.180

See Dadush, U. (2012). Inequality in America. Washington, D.C.: Brookings Institution Press pg.192

See Economic Policy Institute,. (2016). Income inequality in the U.S. by state, metropolitan area, and county. Washington D. C.: Economic Policy Institute. Retrieved from http://www.epi.org/files/pdf/107100.pdf pg. 14

See Dadush, U. (2012). Inequality in America. Washington, D.C.: Brookings Institution Press pg. 145

See Lindert, P. & Williamson, J. (2016). Unequal Gains. Princeton: Princeton University Press. pg. 156

See Economic Policy Institute,. (2016). Income inequality in the U.S. by state, metropolitan area, and county. Washington D. C.: Economic Policy Institute. Retrieved from http://www.epi.org/files/pdf/107100.pdf pg. 15

See Economic Policy Institute,. (2016). Income inequality in the U.S. by state, metropolitan area, and county. Washington D. C.: Economic Policy Institute. Retrieved from http://www.epi.org/files/pdf/107100.pdf pg. 16

See Dadush, U. (2012). Inequality in America. Washington, D.C.: Brookings Institution Press pg.30

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Economic Policy Institute,. (2016). Income inequality in the U.S. by state, metropolitan area, and county. Washington D. C.: Economic Policy Institute. Retrieved from http://www.epi.org/files/pdf/107100.pdf pg.15

The list of relevant tables 

1. Ratio of top 1% income to bottom 99% income, U.S. and by state and region, 2013 on page 8

2. Ratio of top 1% income to bottom 99% income for the top and bottom 25 of 916 metropolitan areas, 2013, page 10

3. Ratio of top 1% income to bottom 99% income for the top and bottom 25 of 3,064 counties, 2013, page page 12