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The Story Of How Income Inequality Has Exploded In America

Technology, globalization, and political choices all play a role. The current debate is over how much of each. What’s at stake is our future.

The Story Of How Income Inequality Has Exploded In America
[Illustration: Eric Palma for Fast Company]

Inequality is inevitable in a market economy like America’s. There is unequal income and wealth because people are different. They’re competing. Some people want to work harder, they apply themselves better, or they acquire more skills that allow them to climb the ladder. Others are purely lucky. And some inequality is a good thing: These differences are what make people want to go to college, compete for jobs, suck up to their bosses, create new inventions and businesses, and generally raise productivity. Inequality provides incentives and gets people going.

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But there’s a point beyond which the forces of inequality become too powerful, when they’re no longer motivating because they’re impossible to overcome.

“You can have too much inequality or too little,” says MIT labor market economist David Autor. “The concern about inequality is where economic dynamism gives way to dynasticism, and inequality becomes self-reinforcing: If you don’t ‘choose the right parents,’ you’re stuck in the bottom forever.”

Income gaps have grown in America in the last few decades, calling into question whether the economy is now crossing over some invisible line into a very stagnant place. At the top end, incomes have spiraled (the famous 1%), while wages at the middle-bottom have been stuck. The top 1% saw income gains of 154% between 1979 and 2013, while compensation for the “production and nonsupervisory workers,” who make up 80% of the private sector workforce rose just 8%. Although inequality has narrowed slightly since the recession (when the rich lost a lot of money), it’s still at historic highs. The top 1% now makes 17.5 times the median income in America, up from about six times in 1979.

Why does this matter? For at least two reasons. One, if average people aren’t making decent wages, they’re not spending money and contributing to the success of the economy. Inequality knocked off 4.7% of cumulative economic growth in richer countries between 1990 and 2010, according to analysis from the Organization for Economic Co-operation and Development (inequality clearly isn’t just a U.S. issue, though gaps in this country are some of the widest among developed economies).

The second reason is that these large income gaps deepen the cycle of poverty, perhaps making it an endless loop. We know that children of poor families do less well than the children of richer families, but the question is at what point are many kids starting too far behind that they can never get ahead? “It’s just ridiculous to suppose that an unequal society can have equality of opportunity,” says veteran Nobel Prize economist Robert Solow. “It helps a lot to have a good diet when you’re young, to be well taken care of, and to be well-dressed, and warm and comfortable, and to get an internship from your parents when you’re older.”

Traditionally, America hasn’t cared much about inequality because the income gaps have either been much less wide than they are today, or people have imagined that inequality isn’t as serious as it is. That inequality is now debated at think-tanks and generally on the public agenda in a national election is down to the fact that inequality is a more far-reaching issue than mere poverty. It concerns the fundamental distribution of society, not just the lives of the poorest.

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Inequality’s causes

Why has inequality been growing so much in the last 35 years?

There are several reasons, starting with the role of globalization and technology. The emergence of China, India, and other large economies allowed companies to move production overseas, offshore functions, outsource service roles, and move capital around more freely. These trends have all led to job losses and downward pressure on wages.

At the same time, technology allows companies to automate a growing number of jobs, both physical and mental, eliminating even more jobs. “Technology is especially good at doing routine, repetitive types of work and tasks, especially for information processing work,” says Erik Brynjolfsson, a professor at MIT and co-author of the book Race Against the Machine. “Tens of millions of people in the U.S. and other advanced countries work in [these fields]. Repetitive tasks with forms, book-keeping, clerical work are increasingly easy to automate. As a result, there is a decline in demand for a lot of middle skill jobs.”

According to Brynjolfsson and others, advances in robotics and artificial intelligence could result in the replacement of an ever-larger number of people. Technology is increasingly substituting for workers, rather than just complementing them, he says. And it’s allowing IT entrepreneurs to make “winner-take-all” levels of profits themselves. By making a series of previously labor-intensive processes more efficient, IT services such as Google and Dropbox are effectively transferring income away from workers to business owners and investors.

But other economists disagree, saying we overestimate the importance of technology in the trend of more inequality. “A lot of people who follow technology for a living just believe that it’s transforming everything and so they don’t look at the [bigger picture],” says Lawrence Mishel, president of the left-leaning Economic Policy Institute, in Washington, D.C. “At the same time, it’s also a very comfortable explanation for those who would like to just say that workers need more skills and that will solve everything.”

In the ’80s and ’90s, economists proposed that technological advancement increased penalties for lower-skilled workers (e.g., reducing their wages or putting them out of work) while raising rewards for those with college degrees and access to computers. There was a huge increase in the “college premium”–the wage advantage of getting a college degree–and the answer to inequality seemed to be to raise people’s skill levels.

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But Mishel argues that “skill-biased technical change” doesn’t fully explain more recent rises in inequality. For one thing, most of the jobs created since the recession are lower-skilled, not the higher-skill jobs you would expect. “The jobs we’ve created have almost all been in the bottom-third of the wage distribution,” he says. “The argument for technology is that we would create more jobs that require college education or high level skills, and that employers would not be able to find such workers. But we’ve not created disproportionately more jobs that require such educations.”

And since the recession, there’s been a general slackening of labor demand for both college graduates and those without a degree, says Marshall Steinbaum, a research economist at the Center for Equitable Growth. There are plenty of people with high-end degrees but an increasing number of them are doing jobs for which they’re over-qualified, a New York Fed study showed, such as working behind the counter at Starbucks. Research by Jesse Rothstein, at U.C. Berkeley, shows how, since the recession, people with higher skills aren’t seeing commensurately higher wages reflecting those skills.

Mishel argues the computers-did-it explanation avoids talking about other (more sensitive) factors causing inequality.

Political factors

To Mishel and Steinbaum, technology isn’t causing inequality; it’s political factors like the weaknesses of unions, the way minimum wages haven’t kept track with cost of living increases, and a series of tax cuts benefiting both the rich or people making income from investments rather than wages. Examples include lower tax rates for capital income compared to wage income and President Bush’s 2003 dividend tax cut, which exempted corporations from taxes on the money they pay shareholders and increased corporate profits. Those profits, which are passed on to a company’s owners, have risen in direct proportion to decreases in employee compensation; wages now make up a falling share of gross national product as a result.

“There’s basically a power shift…[investors] get paid off, and the workers basically lose,” says Steinbaum. “It’s an economy that doesn’t value labor as much as owning things, and owning things is something rich people do.”

Given the weakness of wage income, some have suggested moving towards other forms of income, even for those with less wealth. Things like basic income guarantees offered by government. Steinbaum says that’s premature–there are still many other options to restore the purchasing power of wages, such as reviving the collective bargaining power for workers, raising minimum wages, and raising taxes on the rich.

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In the end, we can see pretty clearly what’s causing inequality: big increases at the top-end and stagnation across the bottom-middle. Understanding exactly what is causing those trends is harder, but important for designing solutions. If technology is the cause, then we need new schools and colleges so that people have the right skills. If inequality is really the function of political choices, for example in how we tax people, then we need to change that. In America, we tend to shy away from the political fixes—including any idea of redistribution—in favor of just teaching people new skills to allow them to do an ever-shrinking number of new jobs. That’s perhaps a mistake if we really want to do something about the problem.

About the author

Ben Schiller is a New York staff writer for Fast Company. Previously, he edited a European management magazine and was a reporter in San Francisco, Prague, and Brussels.

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