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Thursday
Jan302014

Commentary

Income Inequality

Casey Dorman, Editor-in-Chief, Lost Coast Review

 

There seems no doubt that income inequality is increasing in the United States. Paradoxically, global income inequality is decreasing although it certainly persists, as pointed out recently by Pope Francis. But, as Charles Kenny reported in Bloomberg Business Week last December, “worldwide, consumption for the median inhabitant has increased about 80 percent [over the last ten year period], compared to around a 60 percent increase for the world’s highest-spending 1 percent.” So worldwide, incomes have become more, not less equal. This is primarily due to remarkable gains for the middle-class in China and India, where the economies have taken off in recent years, partly due to the consumption of the affluent nations, such as the U.S. who value these countries’ cheap products. Some have seen this as a validation for the “trickle-down” theory of economics, since the spending of the rich has profited the income of the poor.

Despite these worldwide gains, income disparity has increased in the U.S. and the U.S. has, as measured by either the Gini coefficient or Palma ratio, the largest gap between rich and poor of any highly developed country. Three questions arise from this fact: 1) Why is this? 2) Is it bad? 3) If it is bad, what can be done about it?

With regard to the reasons that income inequality has increased in the U.S., there are multiple reasons. A study by the National Bureau of Economic Research conducted in 2008 found that reasons for increasing income disparity included the failure of low-earning women’s salaries to rise—salaries which were more likely to be at minimum wage levels than were men’s. Other reasons were health issues and shorter life expectancy among the poor compared to the wealthy. Increased immigration of low wage earners lowered the wages of high-school dropouts and previous low-earning immigrants, but did not affect native-born high school graduates. At the top end of the wage scale, salaries of the top 10% of earners, and particularly the top 5%—CEOs and sports and media superstars and some professionals—have soared over the last 40 years, far outstripping the increases in salaries seen in the bottom 90%.

So in the United States the rich have gotten richer while those in the middle have stayed the same and those at the bottom have gotten relatively poorer. What’s wrong with that? If those at the bottom are still able to live comfortably, then maybe there is nothing wrong with it. But they are not. A forty-hour a week salary at $7.25/hr., the current federal minimum wage, equals $290 per week or $1305 per month before taxes are taken out. And many of the poor are not full-time employed. In Orange County, California, where I live, the average rent is $1671 per month. California has a minimum wage that, at $8.00/hr.,  is higher than the federal wage, but that still translates into only $1440/month, more than $200 less than the average rent. We have government programs to assist people at such low incomes, but, before the Affordable Care Act, such a salary would not have qualified a family of two for MediCaid; they would have received an earned income credit of only $140;  they would not have qualified for food stamps. These things would change if one of the two was a child, but then there would also be child-care expenses. For instance if one of the two was a child and the other was his or her mother, and the child had child-care expenses of $450 per month, the two of them would be eligible for approximately $320 in food stamp benefits per month (which may be reduced by $90 in the near future if Congress adds such a reduction to the Farm Bill) and the child, but not the mother, might qualify for some kind of health care or discounted health care (after the Affordable Care Act both mother and child would qualify for public health care). It is difficult to see how such a single mother and her child would survive without having to either share an apartment, live with a relative, etc., any of which would lower the eligibility for either earned income credits or food stamps.

So the plight of the poor in America is bad. What can be done about it? A higher minimum wage would help. California is scheduled to raise their minimum wage to $9.00/hr. this year and to $10.00/hr. next year. There are proposals in Congress to raise the federal minimum wage also. David Brooks has recently argued that increasing the minimum wage would only help a minority of families in poverty because the majority of minimum wage earners are third or fourth members of families who are above the poverty line. He cites one study  in support of his position, but other studies have challenged that finding. In fact, the Economic Policy Institute has recently shown that over half of  those earning a minimum wage come from families with a total income of less than $40,000 per year—200% of the federal poverty level for a family of 3—not poverty level, but certainly in the lower income range. Raising the income ceiling for food stamps would also help and providing MediCaid to a larger group with higher incomes will help. These are all government interventions. Republicans oppose such measures and prefer to reduce taxes on those who pay the most taxes, i.e. those who are wealthy, in the belief that they will spend more and invest more and grow the economy so that more people have better paying jobs.

A greater number of better paying jobs will help the middle class, who have the education and training to take advantage of them, although, middle class wages have not increased, relative to inflation, for the past forty years while high incomes have. But at the bottom of the work ladder, those low-paying, minimum wage jobs are surely not going to profit from the increasing wealth of the income elite. Many of the low-paying jobs in our country are part-time. They are part-time because employers don’t want to pay the benefits they would have to pay to full-time workers. Many fast-food  and retail chains are guilty of this practice, which in their belief increases their profits by decreasing their costs (Walmart has recently found that this doesn’t work so well and after a well-publicized reduction of workers to part-time status to avoid Affordable Care Act health insurance requirements, has brought 35,000 workers back to full-time status because of the inefficiency such a reduction caused in their store operations).

A minimum wage should be a livable wage, which at present it is not. Additionally, since life at the bottom of the wage scale is never going to be very good, we need change our society in such a way that those who are born into the bottom socioeconomic rung of society have a way to advance above that status. The answer to that is better education, affordable health care, and training for technical jobs that can be carried out by well-trained persons whose academic, as opposed to technical education need not be above a high school level. Charles Kenny has pointed out that some of the upward movement of the poor in third-world countries has been due to a focus upon education. “Primary school enrollments in Sub-Saharan Africa have risen from 70 percent in 1990 to 100 percent today. Secondary enrollment in the region has climbed from 22 percent to 41 percent over the past 21 years.” But the U.S education system is woefully inadequate, especially for those who live in poor communities where the tax base is weak and the cultural context makes going to school a dangerous and often seemingly pointless endeavor.

The working poor also need political power. A Cesar Chavez figure is needed to champion the low-paid fast-food and retail workers, someone with the charisma and legitimacy to lead a nationwide boycott or some such action that will bring the giants of the food and retail industry to the negotiating table to agree on higher, livable wages. In New York City, the new mayor, Bill de Blasio has called the wage practices of fast-food chains in the city “an unsupportable, situation” and has called for city action to require an increase in wages.

A newly published study by researchers at the University of California, Berkeley and the University of Illinois at Urbana-Champaign found that: “More than half (52 percent) of the families of front-line fast-food workers are enrolled in one or more public programs, compared to 25 percent of the workforce as a whole. The cost of public assistance to families of workers in the fast-food industry is nearly $7 billion per year. At an average of $3.9 billion per year, spending on Medicaid and the Children’s Health Insurance Program (CHIP) accounts for more than half of these costs. Due to low earnings, fast-food workers’ families also receive an annual average of $1.04 billion in food stamp benefits and $1.91 billion in Earned Income Tax Credit payments. People working in fast-food jobs are more likely to live in or near poverty. One in five families with a member holding a fast-food job has an income below the poverty line, and 43 percent have an income two times the federal poverty level or less. Even full-time hours are not enough to compensate for low wages. The families of more than half of the fast-food workers employed 40 or more hours per week are enrolled in public assistance programs.” As Forbes Magazine noted, all these things were true while the ten largest players in the fast-food industry “made a cumulative $7.4 billion in profits in 2012, paying out an additional $7.7 billion in dividends and buybacks to shareholders.”

The rich are getting richer, but the middle-class, the group to whom all politicians seem to speak, is doing OK. It is the poor in America who are falling further and further behind. There is no indication that wealthy or corporate America has any inclination or plan to fix this problem. The burden falls upon the rest of us to support government programs that increase wages and to end our support of greedy businesses that fail to pay their workers enough money to live on.

 

 

 

 

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