"The Challenge of Inequality,"by Justin Steil March/April 2014 issue of Poverty & Race
Economic inequality and mobility are increasingly recognized as defining issues for America’s future. Between 2009 and 2012, 95% of all national income gains went to the very top 1% of earners. Extreme concentrations of income and wealth pose fundamental challenges to America’s ideals of democracy and equal opportunity. Indeed, President Obama remarked in December that “increasing inequality . . . challenges the very essence of who we are as a people.” (Obama 2013) Evoking Eleanor Roosevelt and Harry Belafonte, New York City Mayor Bill de Blasio focused his inaugural remarks on the crisis of inequality faced by the city, resolving that he would not let inequality “define our future.” (de Blasio 2014)
What do we actually know about the dynamics of income inequality over time? And what can be done about it? Recent economics research by some of our nation’s leading scholars offers important insights into these profound challenges now facing American society. This article reviews some of this recent scholarship, including studies from scholars affiliated with the Economic Disparities research cluster of the Haas Institute for a Fair and Inclusive Society at U.C. Berkeley, on accelerating economic inequality, the stalled rate of economic mobility, and the shrinking of the middle class. It also describes several policy recommendations that emerge from this research to address either rising income inequality or rising poverty rates, including raising the minimum wage, enhancing the Earned Income Tax Credit, taxing more progressively, extending investments in education, and addressing residential segregation.
Accelerating InequalityThe share of the national income received by the top 1% of residents in the United States has more than doubled over the last 30 years, rising from 9% of the total in 1976 to more than 22.5% (including capital gains) in 2012. (Alvaredo et al. 2014) The average annual income for the top 1% of households in 2012 was about $1.3 million, as compared to the median household income of $51,371. (Alvaredo et al. 2014) The increasing share of income going to the top 1% of earners is not limited only to states that are centers of banking and finance (such as New York and Connecticut, where average incomes of the top 1% in 2011 were roughly 40 times those of the bottom 99%), but extends to every state in the nation. (Sommeiller & Price 2014)
The recent recession has only exacerbated this inequality because its effects were not evenly distributed. In terms of unemployment rates, the recession affected men more than women, African Americans and Latinos more than whites, and younger workers more than older workers. The recession’s impact on unemployment for black men was almost double that for white men and the impact for black women was almost triple that for white women. (Hoynes, Miller & Schaller 2012) Overall, declining workforce participation rates have added a significant obstacle in the path of working- and middle-class families’ efforts to move further up the economic ladder and have pushed many families into poverty. These challenges are reflected, for example, in an increase in the poverty rate from 12.5% in 2007 to 15.9% in 2012. More than 1 in 5 children currently live in poverty.
Stalled Economic MobilityThe growing economic inequality that the recession accentuated is of particular concern because that growing inequality has the effect of pulling the rungs on the ladder of class advancement farther apart, potentially affecting economic mobility. It is a long-standing pillar of faith in the United States that regardless of where one starts out, one has the opportunity to do better than one’s parents. Yet recent research by Raj Chetty, Nathaniel Hendren, Patrick Kline & Emmanuel Saez (2014) finds that how much children are able to earn as adults is strongly correlated with how much their parents earned. While there is indeed still some mobility across classes, the majority of children retain an economic status similar to that of their parents—more than 60% of those children who grew up in families with incomes in the top fifth of income earners remain in the top two-fifths, while more than 60% of those children who grew up in families with incomes in the bottom fifth remain in the bottom two-fifths (Chetty et al. 2014).
One of the most surprising findings in this research is that intergenerational mobility varies substantially by metropolitan region. The probability that a child from the bottom fifth will end up in the top fifth of income earners is only 4.4% in Charlotte but nearly three times higher in San Jose—12.9%. (Chetty et al. 2014) A child whose parents’ earnings were in the 20th percentile ends up, on average, in the 45th percentile in Salt Lake City, but only the 35th percentile in Indianapolis. (Chetty et al. 2014) In short, the geographic location where one grows up matters significantly for where one ends up economically as an adult.
A Growing Economy but a Shrinking Middle ClassAt the same time as inequality is increasing and mobility seems stagnant, the middle class is shrinking. Between 1990 and 2012, the proportion of households with incomes between $40,000 and $100,000 (in 2012 constant dollars) fell from 43% to 39%, while the proportion of households with incomes less than $40,000 (in 2012 constant dollars) increased from 35% to 39%. The middle class is increasingly being pushed toward poverty. But it’s not because the U.S. economy has failed to grow.
During the three decades following the Second World War, the United States witnessed rapid upward mobility because productivity and wages grew together and gains were relatively evenly distributed over the income scale. Since the 1980s, however, productivity has continued to grow (increasing by 78% between 1980 and 2009) yet median wages have stagnated. (Levy & Kochan 2012) In the 30 years between 1982 and 2012, the median household income increased only $5,289, from $46,082 to $51,371 (in 2012 constant dollars). Where, then, did the economic gains from increased productivity go? A growing share went to the top 1%.
From 1993 to 2012, the incomes of the top 1% grew by 86%, while the incomes of the remaining 99% grew by just 6.6% (an annual growth rate of only 0.34%). (Saez 2013) The top 1% captured over two-thirds of the overall income growth between 1993 and 2012. (Saez 2013) This disparity has only grown since the recession. Looking just at the time period since the economic recovery began in 2009, fully 95% of all of the national income gains went to the top 1%. (Saez 2013)
Is Inequality Inevitable?Some suggest that this widening gulf between the wealthiest few and the rest is inevitable (e.g., Cowen 2013). Broad historical and international trends suggest, however, that we have the capacity to reduce income inequality and increase economic mobility. First, incomes in the United States were much more equal from the 1940s through the 1970s, when the top 1% of earners took home roughly 9% of national income and the economy grew at a rapid pace. (Alvaredo et al. 2013) Indeed, the significant income gains of the immediate post-war period were generally equally shared across classes. (Alvaredo et al. 2013) Second, the fact that many other industrialized countries have not experienced the same rapid increase in inequality yet have continued to grow economically at a similar pace suggests that national policies can make a difference. (Alvaredo et al. 2013) Finally, the findings with regard to the wide gaps in economic mobility across metropolitan regions suggest that local policies can also influence access to opportunity. (Chetty et al. 2014)
Recent economic research suggests that it is possible to reduce inequality and address poverty without significantly slowing economic growth by, among other things, increasing the minimum wage, enhancing the Earned Income Tax Credit, taxing more progressively, investing in education, and addressing segregation.
Minimum WagesOne approach to reducing income inequality is to raise wages for those workers at the bottom of the distribution, the nearly 4 million workers earning the minimum wage or below. (Bureau of Labor Statistics 2011) Congress and the White House are currently debating an increase in the federal minimum wage, but there is uncertainty about the impact any increase will have on employment rates, especially for the low-wage workers the increase is meant to help.
The primary argument against the minimum-wage increase is that it may lead to losses in low-wage jobs because: 1) higher wages will raise the cost to employers of producing goods and services and consumers will then reduce their consumption as prices rise; and 2) employers forced to pay higher wages will have more incentives to substitute more efficient technologies for low-wage workers. Any effects on employment rates are likely to fall disproportionately on those groups already hardest hit by the decline in employment during the recession, such as black low-wage workers. At the same time, however, a higher minimum wage shifts more income to low-wage workers who generally spend a greater proportion of their earnings than higher-wage workers, potentially leading to increased demand for goods and services that could boost employment.
The most accurate way to predict what will happen if the minimum wage is increased in the future is to examine what has actually happened when minimum wages have been increased in the past. Sylvia Allegretto, Arindrajit Dube, Michael Reich and Ben Zipperer (2013) have studied the effect of state minimum wage increases on the earnings and employment rates of two groups of low-wage workers—teenagers, who comprise more than one-quarter of all workers earning within 10% of the minimum wage, and workers in the restaurant industry, which is the largest employer of minimum-wage workers in the nation.
The findings suggest that many existing studies overestimate the negative impact of minimum wage increases on employment levels because they do not sufficiently take into account the economic and political differences between states with relatively high versus low minimum wages. Allegretto et al. (2013) controlled for these differences by comparing the effects of a minimum wage increase across neighboring counties where one county experienced an increase in the minimum wage while the neighboring county did not.
Allegretto et al. (2013) found no statistically significant evidence that an increase in the minimum wage reduced the growth of employment. What higher minimum wages did do was significantly lift the earnings of the teenagers and of restaurant workers studied. Higher minimum wages also reduced the high rates of employee turnover that are pervasive in low-wage industries, which is beneficial news for employers who waste significant resources in searching for and training new employees.
The research cannot rule out some effects on employment rates from increasing the minimum wage, even if their magnitude is significantly less than has traditionally been estimated. Increases in the minimum wage also do not significantly address the declining fortunes of the middle class, but higher wages for the lowest-paid workers have the potential to lift nearly 1 million people out of poverty and add approximately $2 billion to the nation’s overall real income. (Congressional Budget Office 2014)
The Earned Income Tax CreditThe largest federal program currently aimed at raising the incomes of working poor families in the United States is the Earned Income Tax Credit (EITC). Almost 1 out of 5 tax filers in the U.S. receive the EITC, resulting in an average credit of $2,194 in 2010. In recent years its impact on families has lifted roughly 4.7 million children above the poverty line annually.
Extensive research has shown that the EITC provides critical support to families who are working but still poor and also that it significantly increases labor force participation for single parents (e.g., Eissa & Hoynes 2006). The additional income it provides to working families has been correlated with improvements in maternal and infant health (Hoynes, Miller & Simon 2012) and with improvements in cognitive achievement in children. (Dahl & Lochner 2012)
The significance of the EITC is highlighted by the fact that at least 26 states have adopted their own earned income tax credit programs to add state benefits to the federal credit. The boost that these state programs provide for low-income families matters for economic mobility. Chetty et al. (2014) find larger earned income tax credits provided by states are associated with higher levels of upward mobility at the metropolitan level.
Recent research on participation in the EITC program during times of economic hardship, however, suggests that it may not serve as an effective safety net for some groups. (Bitler, Hoynes & Kuka 2014) Taking advantage of the differences among states in both the timing and severity of recent economic downturns, Bitler, Hoynes & Kuka (2014) find that the EITC significantly reduces the effect of an increase in unemployment on the increase in the poverty rate for two-parent households but has only minimal effects for single-parent households.
Together, this research suggests that the EITC is a critical program for raising the incomes of working families and especially for encouraging labor force participation by single-parent households, but that it could do more to provide an effective safety net for those single-parent households that experience employment losses during recessions.
Top Tax RatesThe primary factor contributing to growing income inequality is the consistently rising share of income increases that go to the very top 1% of earners. Alvaredo et al. (2013) have noted that as the share of income going to the top 1% of earners has increased, the top income tax rates have declined. The federal income tax rates for the very highest earners fell from 70% or greater from 1936 to 1981 to 39.6% today for the top income category (i.e., an individual filer making more than $406,751). It is commonly argued that lower tax rates lead to economic growth, based on the idea that lower levels of taxation for the highest earners spur more work and greater entrepreneurship (e.g., Feldstein 1995; see also Mankiw 2013). But Alvaredo and his co-authors (2013) find no correlation between cuts in the top tax rates and growth in real per capita GDP. Between the late 1970s and the beginning of the recession, OECD countries such as the U.S. or the U.K. that cut top tax rates dramatically have not grown significantly faster than countries that did not reduce their top tax rate, such as Germany or Denmark.
Indeed, Alvaredo et al. (2013) suggest that lower top tax rates did not make top income earners more productive, but instead increased their incentives to bargain for higher compensation (see also Stiglitz 2012). And American chief executives have reaped salaries that are multiples higher than their counterparts at companies in similar sectors and of comparable sizes in continental Europe, where top tax rates have remained largely unchanged. Piketty, Saez & Stantcheva (2011) suggest accordingly that the top tax rate could be higher, providing more resources for investment in education and other priorities, without negatively affecting economic growth or productivity.
Investments in EducationResearch on numerous fronts reinforces established findings regarding the significance of educational quality for future economic opportunity and mobility. Recent studies by Rucker Johnson (2010) confirm that differences in early education and school quality are among the most important components of the persistence in income disparities across generations. Johnson (2012) has also found that early childhood educational interventions, such as Head Start, have significant beneficial effects on educational attainment and earnings. The positive effects of these interventions are magnified when spending on those programs is higher and when children subsequently attend schools with higher per-pupil spending during their adolescent years. (Johnson 2012)
These findings are supported by those of Chetty et al. (2014) showing that areas with higher mean test scores in math and English from grades 3-8 (after controlling for income levels) and lower high-school dropout rates were highly correlated with economic mobility. The findings regarding school quality make sense, especially because differences in intergenerational mobility appear to emerge early in life, well before children actually enter the labor market. The findings are also consistent with earlier studies by Chetty and others that have found that kindergarten test scores are highly correlated with college attendance, homeownership, retirement savings, and later earnings (Chetty et al. 2011; see also Card & Krueger 1992). In short, investments in education beginning in early childhood can increase economic mobility, contribute to increased productivity, and decrease economic inequality.
Residential SegregationIn analyzing the economic mobility data, Chetty et al. (2014) found that higher levels of racial residential segregation within a metropolitan region were strongly correlated with significantly reduced levels of intergenerational upward mobility for all residents of that zone. Segregation by income, particularly the isolation of low-income households, was also correlated with significantly reduced levels of upward mobility. These findings are especially worrisome, given that growing income inequality is contributing to increasing levels of segregation by income (see Reardon & Bischoff 2011) and the continuing concentration of poverty. (Jargowsky 2013)
It is not the average income of commuting zones that matter—children in the commuting zones with the lowest mean incomes (around $21,900) reach the same percentile of the national income distribution at the same rate as those in the commuting zones with the highest incomes (around $47,600). What matters for the mobility of all residents of the metropolitan region is the level of economic and racial segregation within that region. Building on the insight that enduring neighborhood inequalities create a “durable spatial logic that mediates social life” (Sampson 2012), these findings suggest that residential segregation is a crucial mechanism in the reproduction of inequality (see Pattillo-McCoy 1999; Sharkey 2013).
These findings regarding the correlation between segregation and lack of economic mobility highlight the significance of local and national efforts to support fair housing enforcement, to invest in fostering greater opportunity in low-income neighborhoods, and to provide more pathways for housing mobility.
ConclusionAfter reaching a high point in 1928 when the top 1% received 23% of national income, income inequality declined from the 1930s until the 1970s while the economy grew. Through this period of economic growth, there was support for government investment in programs like the New Deal and the G.I. Bill that were designed to create a safety net and to invest in educational and residential opportunities (at least for whites—see e.g. Katznelson 2005).
Income inequality has now reached levels not seen since the 1920s. Recent research suggests that policies such as investments in education, more progressive taxation, and efforts to address the racially and economically segregated structure of U.S. metropolitan areas could decrease inequality and increase economic mobility. Higher minimum wages and enhanced EITC, although addressing poverty, most directly also have the potential to affect inequality and mobility.
Policymakers must be attentive to the impacts universal approaches such as these can have on differently situated groups that could have the unintended impact of exacerbating existing disparities. Particularly low-wage workers could be hurt by a slight increase in minimum wages that could cause some reductions in employment, the reduction of some employment benefits, or additional costs passed on to workers. Nevertheless, each of these policies, if carefully implemented, has the potential to lift working households out of poverty, support greater economic mobility, or reduce the growth of income inequality. The inter-relatedness of these issues suggests that a strategy of focusing on both poverty and inequality is important, recognizing that, although related, poverty and inequality are not the same. To understand the impacts of such policies going forward requires disaggregating information on different populations and geographic areas, especially because the existing research has identified wide variations among each.
All of these policies could be enacted at local, state and federal levels—if there is the political will. On the one hand, the increasing concentration of income at the top of the income scale creates the possibility that inequality becomes ever harder to challenge, as that income can be used to influence the perception of its fairness through the media, and efforts to address it, through lobbying. (Alvaredo et al. 2013) On the other hand, the widening gulf between the top 1% and the remaining 99% creates momentum for creative policies that can bring together broad constituencies to address the structures that continue to pull us apart.
Justin Steil is a doctoral candidate in urban planning at Columbia University and a legal research fellow at NYU’s Furman Center for Real Estate and Urban Policy. He is a co-editor of Searching for the Just City: Debates in Urban Theory and Practice (Routledge 2009). This article is adapted from a report prepared for the Haas Institute for a Fair and Inclusive Society at UC-Berkeley, available at http://diversity. berkeley.edu/haas-institute. email@example.com
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