How Policy Is the Root of Income Inequality in the U.S.

Source: Thinkstock

Source: Thinkstock

While wage stagnation is the obvious culprit of income inequality in the United States, there are clear policy problems that keep the benefits going to the rich.

The Economic Policy Institute’s Raising America’s Pay project was launched with a study last summer that targeted the roots of income inequality. The study found that regardless of increased productivity in the economy, wages for most Americans have stayed the same or declined since 1979. And between 1979 and 2007, more than 90% of American households saw their incomes grow more slowly than average income growth — meaning there was an out of control increase for the few on top.

Wages don’t reflect productivity

There was a correlation between workers’ hourly wages and productivity from 1948 until the mid-1970s. But after 1979, productivity growth continued to rise consistently, while the average worker’s wages began lagging. Data from the Economic Policy Institute shows that productivity grew 64.9% between 1979 and 2013, while hourly compensation grew only 8.2%. That means productivity grew nearly eight times faster than hourly compensation.

Where did the money create from increased productivity go? To the top, of course. Workers in the 95th percentile saw the benefits of increased productivity while the rest of the workers stayed with their same hourly wages. The policies that allowed this to happen are at fault for wage stagnation and the subsequent income inequality of the last 30 years.

Part of this comes back to the argument for increasing the minimum wage, as the Institute notes that the “eroded minimum wage” accounts for about two-thirds of the wage gap between low- and middle-wage workers between the 1970s and the late 2000s, while another fifth to a third can be explained by weakened unions.

Even college graduates are suffering

According to the Economic Policy Institute, even those with a four-year degree are seeing wage stagnation. In fact, entry-level hourly wages decreased by 8.1% for female college graduates and by 6.7% for male college graduates from 2000 to 2013. And, as far up as the 90th percentile, college graduates’ hourly wages only increased 4.4% cumulatively from 2000 to 2013.

Wage stagnation is keeping poverty alive

Because of the stagnation of wages, people can’t even look at the issue of poverty the same way they did for most of the 20th century. Between 1959 and 1973, poverty reduction and economic growth were tightly correlated. But because most Americans aren’t receiving the financial benefits of economic growth — and haven’t been for 30 years — poverty has grown from 11.7% in 1979 to 15% in 2012.

If poverty reduction and economic growth were correlated as they once were, the economic growth of the last 30 years should’ve reduced the poverty rate to nearly zero, according to the Economic Policy Institute. According to the institute, “the foremost policy priority should be raising wages” to those concerned about poverty.

Gender and race are still issues

The Economic Policy Institute writes that wage disparities by gender have gradually narrowed over the last 35 years, but women still lag in higher-paying areas. Women in the 95th percentile of wages made only 76.1% of men’s 95th percentile wage.

And wage disparities by race and ethnicity have not decreased. In fact, Politics Cheat Sheet recently reported on the widening gap: In 2013, white households held 13 times the median wealth of black households, while in 2010 it was eight times, according to a Pew Research Center study,

What are the effects of income inequality?

According to the Center for American Progress, “middle-class household incomes remain stagnant at a near-25-year low, and the share of the nation’s economic gains going to the middle class has fallen to near-record lows,” and this has led to a shrinking of the middle class. The center reported in December that the average incomes of the top 20% of earners grew by 42.6% between 1979 and 2012, while the average incomes of those in the middle 60% grew by only 9.5%, and the incomes of the bottom 20% actually fell by 2.7%.

The negative effects of income inequality on the middle and lower class translate to negative effects on the economy — and this is true worldwide.The Organization for Economic Co-operation and Development posited that the economy would be 20% bigger if they inequality gap had not grown so much between the 1980s and today. According to the OECD, “[t]he single biggest impact on growth is the widening gap between the lower middle class and poor households compared to the rest of society.”

The OECD wrote in a paper based on 30 years of data that policies to reduce income inequalities should be pursued to sustain long-term growth, and, to reduce inequality, countries should invest in education and redistribute wealth through taxes.

What policy changes can be made

The Economic Policy Institute suggests a few ways to improve wealth distribution. The first way is to redistribute “through taxes and transfers, with stronger social insurance (for example, expanded Social Security), guaranteed retirement accounts, improvements in the Affordable Care Act, a stronger safety net, and expanded wage subsidies like the earned income tax credit.” This would call for significantly higher tax margins for those with high incomes.

Another suggestion is addressing the policy choices that policy choices that led to the financial windfall of increased productivity all going to the 95th percentile instead of increasing the hourly wages of the rest of the workers. This would mean “targeting genuinely full employment, making the rules of globalization fairer to workers, changing corporate governance to reform uncompetitive labor markets for corporate executives, and changing labor market policy and business practices to support workers’ wages.”

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