19.3 Income Inequality and Wage Stagnation

Income inequality and wage stagnation have become major issues in American business. Since the 1970s, the gap between high and low earners has widened, with the richest 1% more than doubling their share of total income while the bottom 50% saw theirs shrink.

Meanwhile, middle-class wages have remained flat for decades despite economic growth. Factors like technology, globalization, union decline, and policy changes have contributed to this trend, leading to economic and social consequences that shape today's business landscape.

Income Inequality and Wage Stagnation

Trends in Income Disparity

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• Income inequality in the United States increased steadily since the 1970s widening the gap between highest and lowest earners
• Gini coefficient rose from 0.394 in 1970 to 0.485 in 2021 indicating substantial increase in income disparity
  • Gini coefficient measures income inequality on a scale of 0 to 1
  • 0 represents perfect equality, 1 represents maximum inequality
• Share of total income for top 1% of earners more than doubled since 1970s while bottom 50% saw their share decline
  • Top 1% share increased from about 10% to over 20% of total income
  • Bottom 50% share decreased from about 20% to 12% of total income
• Real median household income grew at much slower rate compared to productivity gains
  • Productivity increased by about 60% since 1980
  • Median household income only increased by about 15% in same period

Wage Stagnation Patterns

• Middle-class workers experienced wage stagnation with inflation-adjusted wages remaining relatively flat for past four decades despite overall economic growth
• Job polarization emerged with growth in high-skill, high-wage jobs and low-skill, low-wage jobs but decline in middle-skill, middle-wage jobs
  • High-skill jobs (software developers, financial analysts) saw wage increases
  • Low-skill jobs (retail workers, food service) remained stable or saw modest increases
  • Middle-skill jobs (manufacturing workers, office administrators) declined in number and wages
• Wage growth lagged behind inflation in many sectors leading to decreased purchasing power
  • Average hourly earnings adjusted for inflation decreased by about 2.4% between 1974 and 2022
• Benefits like employer-provided health insurance and retirement plans became less common especially for lower-wage workers

Factors Contributing to Inequality

Technological and Economic Shifts

• Technological advancements and automation displaced middle-skill jobs contributing to wage stagnation for certain workforce segments
  • Automated manufacturing processes reduced demand for assembly line workers
  • Self-checkout systems in retail reduced cashier positions
• Globalization and outsourcing put downward pressure on wages for many American workers particularly in manufacturing and other tradable sectors
  • Manufacturing jobs moved to countries with lower labor costs (China, Mexico)
  • IT and customer service jobs outsourced to countries like India and Philippines
• Skill-biased technological change increased premium for highly educated workers widening gap between skilled and unskilled labor
  • Demand for workers with advanced degrees in STEM fields increased significantly
  • Wages for jobs requiring only high school education stagnated or declined

Policy and Structural Changes

• Decline of labor unions reduced workers' bargaining power leading to slower wage growth and increased income inequality
  • Union membership declined from about 20% of workers in 1983 to 10% in 2022
  • Wages for union workers on average 11.2% higher than non-union workers in similar jobs
• Changes in tax policies including reductions in top marginal tax rates and preferential treatment of capital gains disproportionately benefited high-income earners
  • Top marginal tax rate decreased from 70% in 1980 to 37% in 2023
  • Capital gains tax rate (20%) lower than top income tax rate benefiting those with investment income
• Rise of "gig economy" and non-traditional work arrangements contributed to income instability and reduced access to benefits for many workers
  • Gig workers (Uber drivers, freelancers) often lack health insurance and retirement benefits
  • Irregular income patterns make financial planning difficult for gig workers
• Financialization of economy led to increased returns to capital relative to labor benefiting those with significant financial assets
  • Financial sector's share of GDP increased from about 3% in 1950 to over 8% in 2020
  • Executive compensation increasingly tied to stock performance widening gap with average worker pay

Consequences of Inequality

Economic Impacts

• Slower economic growth due to reduced consumer spending power among middle and lower-income households which traditionally drive economic demand
  • Consumer spending accounts for about 70% of US GDP
  • Stagnant wages for middle class led to reduced discretionary spending
• Higher levels of household debt as families struggle to maintain living standards in face of stagnant wages and rising costs
  • Average household debt increased from about $50,000 in 1980 to over$150,000 in 2023
  • Student loan debt reached $1.75 trillion in 2023 affecting younger generations' ability to build wealth
• Increased strain on social safety net programs as more individuals rely on government assistance to meet basic needs
  • Number of SNAP (food stamp) recipients increased from 17 million in 2000 to 42 million in 2023
  • Medicaid enrollment grew from 34 million in 2000 to over 90 million in 2023

Social and Health Consequences

• Reduced social mobility and intergenerational economic mobility as income disparities make it harder for individuals to move up economic ladder
  • Probability of children earning more than their parents decreased from 90% for those born in 1940 to 50% for those born in 1980
• Increased political polarization and social tension as economic disparities contribute to divergent interests and experiences among different income groups
  • Growing divide in political views between high-income and low-income voters
  • Increased support for populist movements on both left and right
• Negative impacts on public health including increased stress reduced access to healthcare and shorter life expectancies for lower-income individuals
  • Life expectancy gap between richest and poorest Americans increased from 4.5 years in 2001 to 10-15 years in 2023
  • Lower-income individuals more likely to delay or forego medical care due to cost
• Educational disparities as income inequality affects access to quality education and opportunities for skill development
  • Students from high-income families score on average 400 points higher on SAT than those from low-income families
  • College completion rates for students from high-income families about 50 percentage points higher than low-income students

Addressing Inequality and Stagnation

Taxation and Income Support Policies

• Progressive taxation policies such as increasing marginal tax rates on high incomes and implementing wealth taxes to redistribute income more equitably
  • Proposals for wealth taxes on ultra-high net worth individuals (over $50 million)
  • Restoring higher marginal income tax rates for top earners (proposed 70% rate for income over $10 million)
• Minimum wage increases at federal state and local levels to boost earnings for low-wage workers and potentially stimulate wage growth across income distribution
  • Federal minimum wage remained at $7.25 since 2009
  • Some states and cities implemented higher minimum wages (California $15.50, Seattle$18.69)
• Implementing or expanding universal basic income (UBI) programs to provide financial floor for all citizens and mitigate effects of job displacement and wage stagnation
  • Alaska Permanent Fund provides annual dividend to all residents ($1,114 in 2022)
  • Stockton California pilot program provided $500 monthly to 125 residents for 2 years
• Expanding Earned Income Tax Credit (EITC) and other tax credits to supplement incomes for low and middle-income workers
  • EITC provided average credit of $2,043 to 25 million workers in 2022
  • Proposals to expand EITC for childless workers and increase maximum credit amounts

Labor Market and Education Initiatives

• Investment in education and job training programs to improve workforce skills and increase earning potential particularly for displaced workers and those in declining industries
  • Federal programs like Trade Adjustment Assistance provide job training for workers affected by trade
  • State-level initiatives like Tennessee Promise offer free community college tuition
• Strengthening labor protections and supporting unionization efforts to enhance workers' bargaining power and improve wage and benefit outcomes
  • PRO Act proposed to strengthen workers' rights to form unions and engage in collective bargaining
  • Some states passed laws to classify gig workers as employees eligible for benefits
• Antitrust enforcement and policies to promote market competition potentially leading to better wage and employment outcomes for workers
  • Increased scrutiny of mergers and acquisitions in concentrated industries
  • Proposals to break up large tech companies to increase competition and reduce market power