The U.S. Inequality Debate

Striking McDonalds workers demanding a $15 minimum wage demonstrate in Las Vegas, Nevada.
Striking McDonalds workers demanding a $15 minimum wage demonstrate in Las Vegas, Nevada. Mike Segar/Reuters

Public policy experts call income and wealth inequality one of the defining challenges of our time. Recent crises have accelerated these divisions, and the coronavirus pandemic looks set to deepen them further.  

July 15, 2020

Striking McDonalds workers demanding a $15 minimum wage demonstrate in Las Vegas, Nevada.
Striking McDonalds workers demanding a $15 minimum wage demonstrate in Las Vegas, Nevada. Mike Segar/Reuters
Backgrounder
Current political and economic issues succinctly explained.

Introduction

Income and wealth inequality in the United States is substantially higher than in almost any other developed nation, and it is on the rise, sparking an intensifying national debate. The 2008 global financial crisis, the slow and uneven recovery, and now the economic shock caused by the pandemic of a new coronavirus disease, COVID-19, have deepened these trends and challenged policymakers to respond.

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Economists say the causes of worsening inequality are complex and include a failure to adapt to globalization and technological change, shifting tax policy, and long-standing racial and gender discrimination. The effects of inequality are similarly varied, and have been seen as exacerbating crises such as the COVID-19 pandemic and deepening societal divisions. This has fueled populist movements around the globe, including the rise in the United States of Bernie Sanders on the left and President Donald J. Trump on the right.

How unequal is the United States?

More on:

Inequality

U.S. Economy

Coronavirus

Globalization

Trade

According to the nonpartisan [PDF], income inequality in the United States has been rising for decades, with the incomes of the top echelon rapidly outpacing the rest of the population. The average household income (after taxes and government benefits, and adjusted for inflation) of the top 1 percent rose 226 percent from 1979 to 2016. Meanwhile, income for the rest of the top 20 percent grew 79 percent. The average income of the bottom 20 percent rose by 85 percent, while income for the majority of the population—in the middle of the income distribution—grew just 47 percent over the same period. 

 

Furthermore, in 1965, a typical corporate CEO earned over twenty times more than a typical worker. By 2018, that ratio was 278:1, according to the , a progressive think tank. Between 1978 and 2018, CEO compensation increased by more than 900 percent, while worker compensation increased by just 11.9 percent.

In 1965, a typical corporate CEO earned over twenty times more than a typical worker. By 2018, that ratio was 278:1.

The picture is much the same when looking at wealth—that is, total net worth rather than yearly income. From 1989 to 2016, the share of wealth in the United States held by the top 10 percent of Americans increased from 67 percent to 77 percent. The bottom 50 percent, roughly sixty-three million families, of total U.S. wealth in 2016. 

However, some experts argue that the rise in inequality is being overstated. The libertarian Cato Institute, for instance, argues that inequality has not increased as much as some economists claim, and that it makes more sense to focus on poverty because inequality does not matter so long as everyone is doing better. The overall poverty rate in the United States fell sharply, by more than 10 percent, between 1959 and 1969, but it has [PDF]. Jason Furman, a former chair of the White House Council of Economic Advisers, has argued that inequality is not the and that the United States should boost productivity by investing in infrastructure, research, and education, among other policies.

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“We should want to live in a society with a reasonable degree of mobility rather than one where people are born into relative economic positions they can never leave. But so long as those conditions are met, the ratio of the incomes of the top 1 percent to the median worker ,” conservative analyst Ramesh Ponnuru wrote in 2015.

Still, inequality in the United States outpaces that of other rich nations. This is captured by the steady rise in the U.S. Gini coefficient, a measure of a country’s economic inequality that ranges from zero (completely equal) to one hundred (completely unequal). The United States’ Gini coefficient was 39 in 2017, according to the Organization for Economic Cooperation and Development (OECD), a group of advanced economies—higher than all other members except Chile, Mexico, and Turkey. 

More on:

Inequality

U.S. Economy

Coronavirus

Globalization

Trade

Recent economic shocks have deepened these trends. The Great Recession of 2007–2009 caused incomes to fall, and even when they recovered to prerecession levels by 2015, the median income was the same as it was in 2000: $70,200. The recovery was also unequal. By 2016, the top 10 percent than they did in 2007, while the bottom 90 percent had less. In 2020, the economic turmoil caused by the response to COVID-19 led to the largest spike in unemployment in modern U.S. history.

What is the state of U.S. economic mobility?

Americans have long prided themselves on the ability to move up the income ladder, but there are signs that U.S. economic mobility is disappearing. The fraction of Americans who earn more than their parents has shrunk from more than 90 percent of those born in the 1940s to 50 percent of those born in the 1980s.

bob体育网址Harvard University economist Raj Chetty, who has studied social mobility extensively, found that mobility in the United States [PDF]. Some wealthy cities have high mobility, on par with countries such as Denmark and Canada, while children in some lower-income areas have less than a 5 percent chance of reaching the top fifth of the income distribution when starting from the bottom fifth.

bob体育网址Overall economic mobility is lower in the United States than in many other developed countries, which some experts argue hampers U.S. economic growth. A 2016 Stanford University study [PDF] between parents’ and children’s earnings in twenty-four middle- and high-income countries. The United States ranked sixteenth, ahead of Italy and the United Kingdom but far behind Canada and Denmark.

How do race, ethnicity, and gender factor in?

The relationship between race, ethnicity, and inequality has been well-documented. Since 1960, the median wealth of white households has tripled while the wealth of Black households . For decades, the unemployment rate among Black Americans has been roughly twice that of white Americans. Black Americans are also underrepresented in high-paying professions, including corporate leadership. As of 2020, only four of the CEOs of Fortune 500 companies are Black. Black and American Indian children have far lower economic mobility compared to white, Asian, and children of Hispanic ethnicity, according to Chetty’s research.

Race/ethnicity

bob体育网址U.S. inequality today is rooted in systemic racism and the legacy of slavery. Through a that resulted from a New Deal program in the 1930s, Black Americans were systematically denied mortgages, leading to housing segregation and a disparity in home ownership, which is a major source of wealth. Though racial discrimination in housing was banned by the Fair Housing Act of 1968, the effects persist. Black Americans were similarly excluded from the benefits of the G.I. Bill after World War II, which is widely credited with helping to grow the middle class.

bob体育网址Black Americans also face discrimination in the labor market, because hiring is often done internally via networks that exclude them, says William E. Spriggs, an economics professor at Howard University and the chief economist at the American Federation of Labor and Congress of Industrial Organizations.

The COVID-19 pandemic has laid bare many of these disparities. According to a New York Timesbob体育网址 analysis of data from the Centers for Disease Control and Prevention (CDC), Black and Latinx Americans were to be infected and die from COVID-19 than white Americans—an inequity that CFR’s Catherine Powell calls the “.” People of color are more likely to be laid off; at the same time, they are more likely to be considered essential workers, performing jobs that typically come with greater exposure to the virus, such as cashiering or delivering packages.

bob体育网址The existence of a is also well-founded, though there is a debate over its causes. The pay gap has narrowed over the past forty years as women have obtained more education, but it has not shrunk as much since 2000, according to the Economic Policy Institute’s Elise Gould. Gould attributes this in part to discrimination and the underrepresentation of women in high-paying jobs.

What are some other drivers of growing inequality?

bob体育网址Long-term economic forces play a role, both by boosting rewards to high earners and undermining wages for low- and medium-skill jobs. Some Americans have greatly benefited from a globalized world, such as the star actor whose movies reach a global audience or the entrepreneur who can quickly and cheaply bring a new product to market through Chinese manufacturing. Globalization has also brought tough competition for American workers, as some jobs were moved overseas and wages stagnated.

The decline of unions— and other factors—has played a role: the average union member earns roughly 25 percent more than their non-union counterpart. In 1983, one-fifth of all workers were represented by unions. By 2019, that number had dropped to just 6.2 percent. The decline in unionization has disproportionately affected Black workers, who historically were more likely to unionize.

Then there is trade policy, a perennial controversy that has been supercharged by President Trump’s election in 2016. Trump has long been critical of U.S. trade deals, claiming that other countries, particularly China, have taken advantage of the United States to the detriment of U.S. workers. The impact of trade is hotly debated, however. In an influential and controversial , economists David H. Autor, David Dorn, and Gordon H. Hanson found that imports from China contributed substantially to a decline in U.S. manufacturing employment, a so-called China shock. Other economists have disputed their findings, as well as argued that the job losses were [PDF] and that wages increased as a result of trade.

It cannot be denied that the outsourcing of jobs from high- to low-wage places has devastated communities in the American Rust Belt and elsewhere.
Robert Lighthizer, U.S. Trade Representative

Still others say that technological change, including automation, is primarily responsible for job losses, not trade. U.S. Trade Representative Robert Lighthizer, writing in Foreign Affairs, counters that even though trade is not the sole reason jobs disappeared, “it cannot be denied that the outsourcing of jobs from high- to low-wage places has in the American Rust Belt and elsewhere.”

What role does education play?

bob体育网址Most high wages come from jobs that require a high level of education. In 2016, U.S. families headed by someone with a bachelor's degree earned 100 percent more than those headed by someone without, according to a [PDF] by the Federal Reserve Bank of St. Louis. For a household headed by someone with a postgraduate degree, that number increased to 175 percent. The share of the nation’s income earned by families with at least one bachelor’s degree increased from 45 percent to 63 percent between 1989 and 2016.

The difference is even starker for net worth. In 2016, families headed by a postgraduate degree holder had nearly eight times more wealth than families without a college degree. In 2015, nearly 25 percent of people without a high school diploma were living in poverty, compared to just 5 percent of those with a college degree, according to the U.S. Census Bureau.

bob体育网址However, college degrees do not guarantee good jobs, as many well-paid professional positions in medicine, software, finance, and accounting have been filled by workers abroad or have been automated. Though the college wage premium (the percentage by which the wages of college graduates exceed those of high school graduates) grew rapidly from 1979 to 2000, it has , and there is significant income inequality even among college graduates. The Federal Reserve study found that the college wealth premium (the increase in net worth from having a degree) has declined significantly for white Americans born in the 1980s and has disappeared entirely for Black Americans born that decade.

What about tax rates?

bob体育网址The top U.S. income tax rates have been repeatedly cut over the past half century, which some experts say has contributed to growing inequality. When President John F. Kennedy entered the White House in 1961, the top tax rate was more than 90 percent. Today, the top rate stands at 37 percent. The top 1 percent’s share of income after President Ronald Reagan slashed taxes in the early 1980s.

bob体育网址Likewise, the corporate income tax has declined steadily as a share of corporate profits and as a percentage of gross domestic product over the past half century. The Tax Cuts and Jobs Act of 2017 dramatically lowered the corporate rate from 35 percent to 21 percent.

bob体育网址The , a tax on the sale of assets including stocks, land, and art, has also declined over time, though the rate was increased in 2013 to 20 percent. The wealthy generally benefit more from capital gains than from regular employment income, leading some experts to argue that the gap between the capital gains tax and the income tax contributes to inequality.

What could be the political effects of rising inequality?

Recent years have seen the election of populist leaders around the world, which some researchers have caused by economic inequality. In his campaign, Trump railed against trade and globalization, vowing to reverse job losses, particularly in manufacturing. He won eighty-nine of the one hundred counties from Chinese imports, according to a Wall Street Journal analysis. Sanders, who made inequality one of the defining issues of his campaign for the Democratic presidential nomination in 2016, won many similarly affected counties in the Democratic primary.

61%
Percentage of Americans who say there is too much economic inequality
Source:
Pew Research Center

A majority of Americans—61 percent—say there is too much economic inequality in the United States, and in the 2020 Democratic primary, inequality was again a major issue. Some candidates, most notably Andrew Yang, supported proposals to guarantee a universal basic income; many supported higher taxes on the wealthy and corporations; and nearly all of them supported raising the federal minimum wage to $15 per hour.

What are some policy proposals to address inequality?

Proposals put forward in recent years to address income and wealth inequality have included raising the minimum wage; making the tax code more progressive and taxing wealth alongside income; and increasing access to education, including early education and college.

One tool for addressing income inequality that has received much attention is a more progressive tax codebob体育网址, meaning that higher incomes are taxed at a higher rate than lower ones. Some experts and politicians argue that shifting more money from the rich to the poor would reduce inequality and benefit society overall. But others say that higher taxes would stifle economic growth and innovation. Democrats generally subscribe to the former view and Republicans to the latter, though some Democratic presidents have cut taxes and some Republicans ones have raised them. The parties’ positions on taxes have calcified in recent years.

Proposed taxes on wealth, rather than income, have become increasingly popular among Democrats and were championed by in the 2020 presidential primary. But critics challenge the merits of redistribution, countering that such a tax would be bad for the economy, difficult to implement, and may even be unconstitutional. Sanders and Warren have also proposed increasing the , which is known as the estate tax or, to critics, as the death tax. While proponents say such a tax would dramatically reduce inequality, others argue that it could lead to more tax evasion and discourage investment and entrepreneurship.

To address the rising cost of college—which has increased by almost triple the rate of consumer prices since 1978—some policymakers, including Sanders and Warren, have proposed tuition-free public college and the elimination of student loan debt. Trump, meanwhile, has pushed to allocate more federal money toward teaching skills and trades as an alternative.

To help close the Black employment gap, Howard University’s Spriggs suggests making all job postings publicly available, using computer algorithms to better match job seekers with job openings, and encouraging companies—particularly Silicon Valley firms—to recruit more Black students. Spriggs also argues for stronger monitoring and enforcement of antidiscrimination laws.

The coronavirus pandemic, which has ravaged the U.S. and global economy, could lead to as low-wage workers tend to be fired first and hired last during economic crises. However, the massive federal spending in response to the pandemic has so far .

Some experts, including CFR’s Edward Alden, say the pandemic should compel Washington to retool the U.S. economy. A stronger social safety net, including better unemployment benefits, robust sick leave policies, and more job retraining programs, could help workers manage shocks and allow the economy to recover faster.

“What the country needs is not a series of short-term bailouts, but long-term plans to ensure that most Americans are protected against such crises in the future,” writes Alden.

Steven J. Markovich contributed to this report.

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Resources

Opportunity Insights, a nonprofit based at Harvard University, researches .

Trymaine Lee as part of the New York Times’s “1619 Project.”

Explore from the Urban Institute about income and wealth inequality.

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