Income Inequality: How the U.S. Compares To Other Nations

Andrew Burton/Getty Images

Andrew Burton/Getty Images

When many approach the argument that income inequality must be mitigated, they often do it for normative reasons — as a moral or human rights issue. Here’s one example from TED, written by Harvard philosopher T.M. Scanlon: “Economic inequality can give wealthier people an unacceptable degree of control over the lives of others.” This basically encompasses any and every argument one could make about the moral and “fairness” aspects of the inequality argument, because it’s basically about power.

Those with more wealth have more power, and those with less are subject to the strength and control of the well endowed. It’s a tale as old as time, but it’s not an economic argument against inequality. A quantitative approach can be more effective on so many levels when confronted by partisanship and particularly more conservative economic policy preferences, which is the case in the United States.

How is the income gap hurting the economy?

There are a number of more concrete reasons that one can argue in favor of reducing the wage gap between America’s richest and poorest workers that have a basis in the economy, in government, and growth. This is where the Organisation for Economic Co-operation and Development’s (OECD) latest report comes in handy. It provides both important comparative data on inequality in the U.S. and globally, and shows how inequality is a global problem with significant economic damage resulting. According to the report, the income gap is higher than it has been in 30 years, at 9:1 in the 2000s compared to the 7:1 in the 1980s and 8:1 in the 1990s.

The report focuses not on the top 1%, but instead on the lower income groups and on the damage this reduction in income has on global growth.  “Beyond its impact on social cohesion, growing inequality is harmful for long-term economic growth. The rise of income inequality between 1985 and 2005, for example, is estimated to have knocked 4.7 percentage points off cumulative growth between 1990 and 2010, on average across OECD countries for which long time series are available,” states the OECD, noting that the largest contributing factor to this growth decline has been the income gap widening between the bottom 40% and the top 60%.

OECD’s report explains that some of the economic disadvantages are seen in the form of investment reduction. This disadvantage occurs as a result of the monetary concentration in higher socioeconomic classes, and thus among a smaller group. “High levels of indebtedness and/or low asset holdings affect the ability of the lower middle class to undertake investments in human capital or others,” states OECD, and “high wealth concentration can weaken potential growth.”

Source: iStock

Source: iStock

What are some root causes of the wage gap?

Inequality is one of those problems that invites the, “Which came first, the chicken or the egg?” question. As the OECD points out, part-time work and fewer hours have contributed to the difficult financial situation of many in America.

The job market, while improving, still suffers from an overabundance of jobs that don’t pay the bills without some sort of supplemental income, or don’t last and turn into long-term employment. This is an issue that was brought up during the Keystone XL pipeline debate, with Republicans pointing to job increases, Democrats questioning whether most of these jobs would have any sort of longevity, and Republicans offered the counterargument that so much of the available job market is made up of temporary or part-time work that such an argument is ultimately invalid.

This part-time availability could be a result of the suffering job market, which took its downturn along with the rest of the economy during the recession. But the difficult job market has had its own effect on the economy, and so the cycle continues even as improvements are seen. The job market may be getting better with unemployment dropping, but there remains a high propensity for jobs to be only part-time. This makes it hard for families and individuals to see the economic improvement reach themselves, ultimately putting a ceiling on growth and improvement.

How does the U.S. compare globally?

The short answer to this, unfortunately, is not well. As the table above shows, the United States is without fail near the higher scores in income gap, poverty rate, and Gini coefficient. That last measurement requires some explanation. It shows a score that at it lowest (0) means that income is consistent across the population, and at its highest (1) means that only a single individual holds all of the income within the entirety of the country in question. As a point of reference, Mexico takes the worst score in Relative Income Poverty (21.4%) and the income gap (30.5), while Chili takes the highest Gini coefficient at 0.5. The U.S. has 17.6% income poverty, 18.8 income gap, and a Gini coefficient of 0.4.

Knowing how the United States measures up allows us to consider where our policies are strong and where they might be aided by comparing and contrasting outside policies that appear to be more effective. Yes, the U.S. is unique and has a system that might not incorporate some ideas or policies, but given its poor performance it might be worth considering where others have been right, and not just where the U.S. has deviated from good policy.

OECD’s suggested solutions

The OECD emphasizes women in the workforce as an important means to reducing inequality, but laments that the pay gap between the genders remains an issue. In two-parent households where both parents work having multiple incomes may help, but not as much as it would help if women were paid the same as their male counterparts. It also addresses the need for “policies for the quantity and quality of jobs; jobs that offer career and investment possibilities.”

A “tax-and-transfer” system was recommended for the “redistribution” of wealth, i.e. tax the rich a more proportional amount. Perhaps the most interesting item is that of education, and the need to continue skill growth throughout an individual’s lifetime within lower income groups.

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