Income inequality: Causes and Trends The distribution of wealth is extremely unequal in America and the whole world. This paper documents the growing inequality, and examines three reasons for its increase. The income growth for top earners is faster than income growth for the poor. This accelerated income growth for top earners would increase the income gap between top earners and the poor. In addition, income inequality between the poor and top earners in the US is becoming greater than in other countries. There are three reasons for this increasing inequality. First, top earners usually have more ducation than the poor.
Making college more affordable leads to higher income inequality. Wage and income inequality is rising among the college-educated. Second, taxation on top earners has declined over several decades. Top earners can keep more of their earnings under this policy, so the gap between top earners and middle class is getting larger. Third, due to the effect of the globalization, income inequality is larger in between-nation than within-nation. Nevertheless, race and gender are not explanations for rising income inequality, since differences in income ased on sex and race are declining.
Education: Education is the biggest factor for income inequality. Many argue that reducing the education gap is the most efficient way to eliminate income inequality. They might think that education always has positive social value. There is a large college premium between high school graduates and college graduates. So the government would make college more affordable through borrowing or lower the tuition. According to Willen, Hendel and Shapiro (2004), making college more affordable, however, can increase income equality. We both know that it is so costly for low- bility persons to take college education through signaling theory.
They should take greater effort and tuition to attend a college. There are two kinds of persons not going to college. One is the low-ability worker, but the other one is the high-ability worker without financial resource. “The wage of uneducated workers reflects the mix of abilities: the smaller the proportion of high-ability persons in the uneducated pool, the lower the wage for unskilled labor” (Willen, Hendel and Shapiro). Now, government programs will provide with financial aids, lower the tuition or borrowing hrough reducing interest rate.
So more high-ability workers will consider taking the college to make them better off. Lots of the high-ability workers will leave uneducated group after they attended a college, so the wage for unskilled labor will be lower because the quality of unskilled workers will be lower after more high-ability workers leaving. Improving education opportunities will cause income inequality higher between educated workers and unskilled labor. More than half of Americans have post-secondary degrees. According to US Census Bureau report, the percentage of high school graduates is 86. % and the percentage of some college is 55. 60%. There is a trend to increase more college education workers within families. As time goes by, more workers are going to college, but income inequality is rising among the college-educated people. According to Hoxby and Terry (1999), there are three possible sources of growth that can influence this growing dispersion. First, college different ranks of family. They were used to come from the same background. For example, students who went to college might most come from high-income family. However, different groups of students are increasingly going to college.
Second, different abilities and achievements among the college students generate a higher income inequality. High-ability college students usually earn more than low-ability students. Here is an interesting data collected by Hoxby and Terry to show income inequality among different verbal testing ability students: people who increased one percent on the verbal aptitude test would lead to increase 0. 0168 log point in their income. Third, difference between ability and achievement in same school is falling, but difference between ability and achievement in different school is increasing.
For example, the highest-ability students are more concentrated at the best schools today than they were in the past. We can use the observable factors to explain how these three sources influence income inequality. According to Hoxby and Terry (1999), “we find that about 114th is associated with extensive margin, about 113th with an increased rate of return to aptitude, and about 5/12th with the intensive margin. ” The third source is the biggest factor to determine income inequality among college- educated people. We know that those with higher education have more skills are paid more.
There is a big distinction between high-quality college-educated workers and low-quality college educated workers. The high-quality college-educated workers mostly come from the top universities. However, the low-quality college educated workers most get some college education with an associate degree. According to US Census Bureau report on educational attainment in the United States, the high-ability workers with a Bachelor’s degree can earn averaged over $50,000 for both sexes, but the low-ability workers who attended some college with an Associate degree only can earn averaged over $30,000 for both sexes.
Total averaged wage difference between workers with a Bachelor’s degree and workers with an Associate degree is more than $20,000 which is 64. 9% more. So the income gap has shifted to the gap between top earners who are commonly high-quality college educated workers and the middle class who are commonly low-quality college educated workers. Although taking college education is a good way to change the lives of the poor, many poor, even some talented poor, are still not consider entering a college. Most poor want to enter into the labor market as early as possible, so they can make their living and support heir family.
Most low-income students choose to stop when they graduate from high school. Even better education fails to lure talented poor. Lots of talented poor get really good scores on SAT but they do not choose to continue on to college. According to analysis conducted by Hoxby and Avery, only one third of high-ability high school graduates from low-income family would attend one of most selective colleges. If more poor people not get higher education, income inequality between the rich and the poor will be increased. Taxation: Changes in taxes have resulted in income inequality.
Taxation on top earners has declined over several decades. Top earners can keep most of their earnings under this policy, so the gap between top earners and the poor is getting larger. According to Piketty and Saez (2001), “top income and wages shares display a U-shaped pattern over the century. ” During the great depression and World War II, top earners’ income They pointed out that the percentage earned by top 1% was increasing since the 1980s. As taxation on top earners has declined, top earners can keep more their income than before. The top 1% controlled more than 16% of total wealth in 1984 and ncreased to 22% in 1988.
More income controlled by the small group of top earners would lead to the greater gap between top earners and the poor since 1980s. In general, government can increase the tax level on the top earners to decrease the income inequality. However, top earners do not want their money to go away because they put forth a lot of effort to earn that much income. They may donate some to charity or move to a tax haven, where the tax is much lower than other places, in order to keep their income and wealth. If top earners go away, they will also force their wealth and company to leave.
This will definitely influence the local labor market. Many local workers may be unemployed. So the government cannot tax too much on top earners but tax some. What is more, the tax rate for the top earners is decreasing in recent years. According to Feenberg and Poterba (1993), “By lowering marginal tax rates on top-income households from 50% to 28%, TRA86 reduced the incentive for these households to engage in tax avoidance activities. ” Top earners who less likely to avoid tax would consider keeping their income in their countries. But the income they earned would be more by lowering marginal tax rates than efore.
This also can lead to greater income inequality. Income inequality in between-nation: Income inequality is greater in between-nation than inequality in within-nation. World’s income inequality most comes form between-nation not within-nation. According to Firebaugh (2000), “Between-nation inequality is the bigger component because average incomes in the richest nations are roughly 30 times greater than average incomes in the poorest nations. ” We all know that the workers in developed countries like the United States have higher average incomes than workers in other developing countries like North Korea.
The within-nation income inequality can be solved by different ways, but between-nation income inequality is hard to reduce. In addition, we also examine that globalization has raised the between-nation income inequality, but it does not effect too much about the within-nation income inequality. According to Lindert and Williamson (2003), “The world economy has become far more unequal over the last two centuries. Within-country income inequality has risen and fallen episodically… globalization has raised inequality between all nations. ” Due to the effect of globalization, the world economy becomes ore integrated.
Highly skilled workers earn more during the globalization. For instance, the United States has a comparative advantage in highly skilled workers like technology labor and intensive capital, so America will export more products from the high technology labor than lower labor’s products and import lower skilled labors’ products, like importing clothes and shoes from China. Meanwhile, the developing countries like China will import the high technology products and export the lower skilled labor’s products. China has abundant cheaper low-skilled workers. So the mployer might prefer employing low-skilled workers in China.
This might result in lower wage even lots of unemployment for low-skilled workers in the United States. The unskilled and lower skilled workers in America do not earn more through the increase the income inequality in the United States. What is more, more highly skilled workers from other countries will also consider immigrating to the developed countries like America, because America has better capital and education for themselves and their next generation. The United States is also considering increasing high-skill immigration from other countries.
The highly skilled workers will be concentrated in America and the lower skilled workers will be concentrated in other developing countries. Finally, globalization has raised the between-nation income inequality. According to Sala-I-Martin (2002), “the aggregate GDP growth of the African continent should be the priority of anyone concerned with increasing global income inequality. ” Sala-I-Martin analyzed the estimated density functions for the world income distribution to show that globalization makes the world richer. The within countries income inequality is a small part of the world income inequality.
If he Africa still not starts growing in the future and countries like China and India still develop fast, income inequality between counties, however, will become greater. World income inequality only can be reducing through Africa starts growing in the future. Gender and race: For centuries, women have earned much less than men. In recent years, this pay gap has shrunk. According to Blau and Kahn (2000), there are two kinds of differences for group to pay. One is the about the differences in human capital or qualifications; other is discrimination.
Lower rates of education made women less competitive with en, but the situation has changed a lot because women are now also accepted by universities. More women could go to college and their qualifications are improved a lot. According to U. S. Department of Labor’s report, there are more women in labor force. More than half women have attended a college and more than one third of women in the labor force with college degree. The fact that more women go to college now would cause income inequality to decrease. In addition, the discrimination to women decreases a lot. As more women get higher education, they are paid more than before.
More women are in labor force and earn more could arrow gender pay gap. In reality, women are paying higher than men in some fields. Some Jobs like costumer services are more likely employed women. The gender pay gap is getting smaller. Moreover, race pay gap is also decreasing over decades. According to Waters and Eschbach (1995), they found out that income inequality between the Black and White decreased from 1940s to 1970s because of the narrowing education gap. Thanks to the Civil Rights Act of 1964, race-based discrimination is illegal for employers. Black workers have increased both their education and education returns.
According to Chandra, Amitabh (2000), back to 1940, the average weekly wages for white male workers were twice as many as the average weekly wages of black male worker. However, the average weekly wages for black male workers were 75 percent of the average weekly wages for white male workers in 1990. The race pay gap is continuing getting smaller. Conclusion: As we have discussed above, we can clearly see that growing income inequality results from different factors. Education is the biggest factor that causes income inequality. Top earners most get more education than the poor.
Making college orkers choose to leave uneducated pool and lower the unskilled workers’ wages. More than half of Americans have taken some college, income inequality is increased between high quality educated workers and low quality workers. More students from low-income family might not consider attending a college. Furthermore, taxation on the top earners is decreased recent years, so income inequality could be greater through this way. Because of decreasing taxation on the top earners, they might consider not avoiding tax but their total income can remain more. Income gap between top earners and the poor would become greater.
In addition, globalization makes income inequality greater. Countries like America that are intensive on the highly skilled workers will export more products from highly skilled labor. This will leave highly skilled labor in America better off but the lower skilled workers worse. Meanwhile, more highly skilled workers consider immigrating to the United States for highly skilled labor. World income inequality only can be reducing through Africa starts growing in the future. Race and gender are not explanations for rising income inequality, since differences in income based on sex and race are declining.
All of those can contribute to a conclusion: globalization has raised the between-nation income inequality. All in all, the growing income inequality is caused by those major reasons. Paul Willen, ‘gal Hendel, Joel Shapiro “Educational Opportunity and Income Inequality’ NBER Working Paper No. 1087901ssued in November 2004 Caroline M. Hoxby, Bridget Terry “Explaining Rising Income and wage Inequality Among the College Educated” NBER Working Paper No. 687301ssued in January 1999 “US Census Bureau report on educational attainment in the United States, 2003” U. S.
Department of Commerce Economics and Statistics Administration U. S. CENSUS BUREAU Thomas Piketty, Emmanuel Saez “Income Inequality in the United States, 1913-1998 (series updated to 2000 available)” NBER Working Paper No. 846701ssued in September 2001 Daniel Feenberg, James Poterba “Income Inequality and the Incomes of Very High Income Taxpayers: Evidence from Tax Returns” NBER Working Paper No. 4229 (Also Reprint No. rl 797)01ssued in June 1993 Glenn Firebaugh “The Trend in Between-Nation Income Inequality’ Annual Review of sociology, vol. 26, (2000), pp. 323-339 Peter H. Lindert, Jeffrey G.
Williamson “Does Globalization Make the World More Unequal? ” Chapter in NBER book Globalization in Historical Perspective (2003), Michael D. Bordo, Alan M. Taylor and Jeffrey G. Williamson, editors (p. 227 – 276) Xavier Sala-I-Martin “Disturbing “Rise” of Global Income Inequality’ NBER Working paper NO. 890401ssued April 2002 Francine D. Blau, Lawrence M. Kahn “Gender Differences in Pay’ NBER Working Paper NO. 773201ssued June 2000 United States” Annual Review of Sociology 21 : 419-446 1995 Chandra, Amitabh (2000) “Labor-Market Dropouts and the Racial Wage Gap: 1940-1990” American Economic Review 90 (2): 333-38