Abstract
This paper first examines the factors contributing to the widening of the income distribution in the United States. It then explores the theories and trends in income distribution based on the macroeconomic and other indicators that have affected the distribution of income in recent decades. We found that the impact of inequality of income distribution affects the economic growth. The widening of the income distribution has contributed to a critical assessment of government policies. The paper also cautions the trend in the distribution of household income in the period between 1976 and 2007 based on the Gini index. Similarly, education and labor market policies become significant factors in promoting growth and improving income gains in the households.
Time
- Introduction
There are several indicators that explain the widening in the united states income distribution since 1970s. The proportion of households below the poverty line has increased significantly. These changes have attracted a significant deal of attention in the United States and have contributed to an essential assessment of government social welfare and tax policies. The paper evaluated theories and trends in income distribution and considers the macroeconomic and other indicators that have affected the distribution of income in recent decades. It finds that cyclical developments have a significant effect on the income distribution.
Other factors that seem to help explain the widening of the distribution in the US include the decline in the minimum wage relative to the average wage and the growth of information technology investment. This has led to increase of the wage premium paid to relatively skilled labor and might have contributed to a steepening of the age-earnings profile. Other factors that have contributed to widening of the income distribution are the rise in single female headed households, aging of the baby –boom generation and decline in the child dependency rate. Moreover, the paper examines the factors that cause inequality and equality of income distribution in the United States. This is illustrated by the tables that shows the measures of the united states income equality and compares the data for other industrial countries. Therefore, the paper will cautions the theories and factors causing a widening of the income distribution in the united States.
- Trend in the income distribution
Real median income per family in the united states increased by over 200 percent in 1970s before falling by 1 percent in 1990s. The income distribution appears to be more skewed. The Gini ratio, which measures the extent to which the income distribution deviates from perfect equality and fluctuated slightly around an average of 0.36 between 1947 and 1976. Other significant industrial countries appear not to have faced the same steady widening of the income distribution in 1970s. For instance, income inequality tended to decline in many European countries in 1970s with the exception of the United Kingdom in which income inequality increased sharply in 1980s.
The Gini ratio indicates that on average the inequality has been relatively stable among other OECD and more developed countries since the 1960s. The table compares the Gini index of the united states with other countries. (See Table 1, OECD) the Gini index of income inequality in the US is 37.0 which is greater than that of Portugal (34.7) and the United Kingdom (34.5). The Gini index of United States is worse because unemployment insurance and social security among others contribute much less in the income than other countries.
- Factors influencing the income distribution
The significant increase in the United State income inequality has been due to widening wage differential for unskilled and skilled labor. This is due to the size of the US manufacturing sector relative to the service sector. Similarly, this is due to the effect of technological changes in the types of skills demanded in the labor market. The increased penetration of imports from low-wage countries into the united state is another reason behind the widening of the income distribution. The increase in the wage gap is as result of the decline in the demand for relatively high wage, low skilled labor in the durable goods and the effect of technological changes. these factors are partially due to increases in the supply of skilled workers compared to less skilled workers.
Similarly, the deterioration in US competitiveness tends to severely affect the wages of less skilled workers. It contributes to trends in income distribution is changing in a lifetime-earning profiles. The changes in the lifetime earnings profile may reflect increasing returns paid to the skills obtained on the job. Therefore, the increased skewness of the income distribution may mainly reflect the aging of the population and may not be based on skewness in lifetime earnings.
Moreover, changes in the distribution of wealth may have an effect on the income distribution by influencing the distribution of nonwage income. This is so because household wealth is highly correlated with household income. Since annual income is only one that measures economic well-being, trends in the distribution of annual income may offer an incomplete picture of trends in the distribution of well-being. For instance, a household’s income in any given period may not accurately reflect its economic circumstances over a longer period. Therefore, average income over several years might be a better indicator of the household’s economic well-being.
- Trend in the Distribution of household income
Family income has been used more often than household income for purposes of measuring inequality. The social changes of the household income are a significant indicator for measuring income distribution. The household’s consumption might be a better measure of its economic well being than income. For households whose spending tracks their annual income, the difference does not matter. However, the newly established family may spend more than its current income depending on borrowing to finance current consumption, while established family may also spend more than its current income such as drawing assets in retirement. (See Table 3, The shape of the family income distribution) the ability of households to smooth their consumption over time based on saving and borrowing indicate that these household wealth might offer another useful perspective on economic well-being.
An increase in the dispersion of household market income was a significant reason for the widening dispersion of household after tax income. Market income is measured before adding transfer payments and subtracting federal taxes and comprises of labor income, business income, capital gains and income among others. The real average market income increased by 58 percent between 1979 and 2007, but median market income grew by only 19 percent .Thus, household consumption is more equally distributed than household income. See Table 2, Income Category minimum) household wealth is much more unequally distributed than household income and the distribution of household wealth have remained relatively unchanged from 1989 through 2007.
The Gini index also indicates the trend in the distribution of household income. The average difference in income between every pair of households in the population is expressed as a percentage of average income. Therefore, the Gini index of 0.479 in 1979 implies that the average income differences between pairs of households in that year was equal to 96 percent of average household market income. In additional, a Gini index of 0.59 in 2007 implies that the average difference between pairs of household was 18 percent of average household market income in that year.
- Theories of income Distribution
The economic theory of factor markets suggests that individual tend to receive income based on their value of marginal products. Along the Keynesian analyses, economic growth is caused by effective demand. There is a significant interdependency between income distribution and capital accumulation. The basic idea is that a developed economy in which unemployment of capital and labor exist as a normal position, income distribution could produce a positive effect and enhance economic growth. The economic growth arises from a higher propensity to consume linked to wage earners than members of the capitalist class with their income based on mainly their earning profits. Generally, there is a relatively higher propensity for low wage earners to consume. This propensity for higher levels of consumption which lead to higher rates of growth in demand becomes compounded via the income multiplier effect.
The connection from income distribution to economic growth assumes the importance of wage shares for effective demand, and considers a powerful and direct relation between real wages and mass consumption. This assumption takes the internal market as the predominant source of effective demand. If not affected by the increase in output, then the increase in productivity could exert pressure on economic growth via unemployment and labor’s declining shares of national income. Financial crisis of 1980s affected the income distribution and more countries have positioned themselves for exporting. For instance, the united states had a particular position within the industrialized countries related to its massive internal market, and the role of the dollar as the dominant international currency. However, the united states has not been immune to this global shift, but has utilized it to help restore productivity and battle against organized labor.
The important point to note is that consumer debt payment does not increase faster than disposable income growth and this relationship depend upon stability of wage contracts and public sector transfers. Therefore, from this view capitalist economic relationship between economic growth and income distribution can be seen as having some independence. For instance, an economy such as China’s which the state continues to exert high levels of influence on the volume and direction of investment, the income distribution is greater.
- Trend towards equal distribution of income
There is adequate evidence that the distribution of income among low, moderate and high groups in the United States has become more equal current than 20 years ago. A variety of certain broad trends operating largely outside corporate influence have brought income compression. These trends of income distribution are due to education, mobility, union, homogeneity of certain groups and corporate practices among others. The education has become a public good which create equality in the amount of education and income distribution. It is clear that education keeps abreast of current technology and end up destroying experience differentials . This could be the reason for the failure of salaries of older professional and technical employees to increase proportionally to those paid to current graduates of universities.
Similarly, the mobility of labor in searching its highest value is very significant in the equality of income within both lower and higher income groups. The fact that young people are willing to migrate to diverse states or adjust jobs serves as a stimulus for the country’s having the rapid advancement opportunity and reason for income narrowing. The practices of unions has contributed to income compression. The mere shift to centralized bargaining mainly decreases the variety and deviations. Therefore, Union are effective in eliminating interregional occupation wage differentials. Their procedures in adjusting to a reduced volume of work via sharing agreements are another factor leading to greater equalization of income.
Government action on taxation, transfer payments, minimum wages and overtime pay tends to equalize the distribution of income. For instance, there is a significant uniformity in the number of hours worked by the individual in industries currently. Similarly, Obama has proposed a minimum wage of 7.25 an hour that tend to equalize the income distribution. Top bracket income tax rate is acting on a salary ceiling to top management in order to squeeze the salaries of middle managers. The minimum wage law which continues to attract different reactions in low paying industries is meant to bring sharp compression of earnings. Moreover, the huge increase in the amount of statistical material available on wages and salaries has been driven companies to pay workers competitively. This tends to bring much greater uniformity of payment because companies do not want to be out of line based on the procedure involving employer earnings. In additional, since the salaries of top executive are known via proxy statements, these payments are subjected to public critique.
- Inequality Distribution Of Income
There are several factors that have contributed to inequality of income in the united States. Family structure, immigration and expanded markets among others are factors that affect income distribution. Inequality of income distribution can affect the economy severely if is due to government privileges. The united stated witnessed both an increase in inequality distribution of income and strong economic growth. In additional, the current rise in income inequality in the united state has received considerable attention in policy debates. The research indicates that between 1975 and 2002, only labor income in the top 10 percent of the income distribution increased more than per worker wage and salary income.
The studies indicated that evolution of income inequality displays different patterns for the top and the bottom halves of income distributions. Similarly, the trend in male and female income inequality are similar over the past years, but the level of inequality is lower among females than males. The inequality between males and females has been increasing and inequality between the two groups has been decreasing. This decrease in the gender gap implies that overall inequality has been reduced because female incomes are caught up with male incomes. In the past years, real personal income per capita had increased by an annual average rate of about 1.5 percent. This is so because the US government involved in the implementation of policies aimed toward achieving economic growth although there was inequality in income distribution.
The income inequality had a positive effect on growth as redistribution from workers to capitalists and incentives for a more efficient use of resources stimulated capital accumulation. Therefore, inequality because of fairness considerations might enhance a policy that is biased toward redistribution rather than being market oriented, which reduces economic growth. The income inequality reduced the ability of the lower income individual to acquire education slowing down the economy.
- Conclusion
The paper has examined the various factors that affect the distribution of income in the united states. Similarly, the paper has examined the economic theories and trends in income distribution and considers the macroeconomic and other indicators that have affected the distribution of income in recent decades. These factors include the decline in the minimum wage relative to the average wage and the growth of information technology investment. Similarly, the paper has evaluated the trend in the distribution of household income where the Gini index was used to evaluate the data of the period between 1976 and 2007. The Gini index indicates that the proportion of households below the poverty line increased significantly. Therefore, the above factors have contributed in the widening distribution of income in the United States.
Source: Babones, Salvatore. "U.S. Income Distribution: Just How Unequal?" Inequality.org. Last modified 2012. http://inequality.org/unequal-americas-income-distribution/.
Source: Market Design. "Market Design: Where do you fall on the US income distribution? CBO report." Last modified 2010. http://marketdesigner.blogspot.com/2011/10/where-do-you-fall-on-us-income.html.
Source: Cole, Jeffrey and Christopher, Towe. 1996. Income distribution and macroeconomic performance in the United States. (New York, Western Hemisphere Dept: 1996).
Notes
Bibliography
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Cole, Jeffrey D., and Christopher M. Towe. 1996. Income distribution and macroeconomic performance in the United States. (New York, Western Hemisphere Dept: 1996).
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Market Design. "Market Design: Where do you fall on the US income distribution? CBO report." Last modified 2010. http://marketdesigner.blogspot.com/2011/10/where-do-you-fall-on- us-income.html.
