Summary
In today’s majorly capitalist global society, disposable income is essential to the everyday lives of people. Although money might not buy happiness, as per the well-known saying, it is vital to have enough expendable income to afford financial security. Some people in the world have enough wealth to afford almost any peculiarity they might think of, as long as they can buy it. However, on the other hand, since the amount of money in the world is finite, thousands and millions of people cannot afford simple needs, such as shelter, food, or water. Although this example is extreme, income inequality is a serious issue that affects millions’ physical and mental health and has a detrimental effect on the country’s economy and welfare.
Measuring Inequality
Economists utilize several methods to measure inequality, including the Lorenz curve and the Gini coefficient. According to Trapeznikova (2019), other commonly used methods include decile ratios, the Palma ratio, and the Theil index. The Lorenz curve and the Gini coefficient, often some of the first measures of income inequality studied by economics students, provide a visual representation of the disparity. The Lorenz curve shows the relationship between income and the percentage of the population that achieves it, comparing it to perfect equality – a 45-degree line. Therefore, the bigger the area between the equality line and the Lorenz curve, the more unequal the distribution of income. The Gini coefficient is a ratio between the area mentioned above and the total area under the equality line. Therefore, a Gini coefficient of 0 suggests a single person has all the income, while 1 means perfect equality (Trapeznikova, 2019). These metrics are prevalent since they make it possible to compare the inequalities between different regions and countries.
The Effect of Income Inequality on the U.S. Economy
Income inequality, together with other types of economic inequality, has a detrimental effect not only on the individuals and families affected but also on the economy. For example, according to Bivens (2017), income inequality influences spending patterns, as a more substantial percentage of income is allocated to wealthy households that prefer to save rather than spend. Hence, income inequality hinders demand growth, which means slower economic growth overall (Bivens, 2017). Moreover, the policies required to correct the consequences of income inequality lead to a decrease in interest rates, which is not sustainable long term (Bivens, 2017). Furthermore, according to Horowitz, Igielnik, and Kochhar (2020), inequality might lead to a lack of opportunities and economic mobility, leading to increased unemployment. In recent decades, the U.S. income inequality measured by the 90/10 scale has increased from 9.1 in 1980 to 12.6 in 2018 (Horowitz, Igielnik & Kochhar, 2020). The ratio means that the top 10% of earners in the U.S. currently have an income over 12 times as high as the bottom 10%. Therefore, diminishing these detrimental effects and, most importantly, reducing income inequality is highly significant to the United States today.
The Gap Between Those Who Hold Bachelor’s and Higher (Master or Doctoral) Degrees and Those Who Do Not
Thousands, or even millions, start universities every year in the hopes of a better future. Although other paths are available apart from the tertiary education level, such as apprenticeships, many choose to obtain a degree to increase their chance of getting a higher-pay job. According to CNBC (Mejia, 2019), the top five of the highest-paying jobs are medicine-related, and the top 25 at the very least require a Bachelor-level degree. At the high end, the yearly salaries might be as high as $265,990, which is more than twice the highest salary of an air traffic controller, the highest-paid job that does not require a degree (Pennington, 2018). The discrepancy between the two extremes is high, with the minimum wage at $7.25 an hour, which is the salary most students and non-degree earners would be earning (U.S. Department of Labor, n.d.). Furthermore, for those under 20, the minimum wage is $4.25 an hour (U.S. Department of Labor, n.d.). Therefore, it is evident that a tertiary level degree opens many more opportunities for those that attain them, increasing the income inequality gap with those that do not.
Reasons Why the Inequality Gap Between Educated and Less-Educated Workers Has Been Widening
As described above, a higher education certificate, more often than not, opens doors for the workers to earn higher salaries. However, the establishment’s prestige also plays a significant role in the employability and potential earnings of the worker. According to Sullivan, Parsons, Green, Wiggins, and Ploubidis (2018), elite universities give their graduates an advantage at joining the top 5% of earners. In the U.S., the top universities cost their students over $30,000 a year. Therefore, often only those from a higher socio-economic background can afford the outstanding education, proceeding to get hired at high-end jobs, and as a result, increasing the income inequality gap. Furthermore, as Bivens (2017) mentioned, educated workers are more likely to save rather than spend all their income immediately. Moreover, educated workers are more likely to have alternative sources of income, such as investment and often family wealth. Therefore, in the long term, educated workers are likely to make better financial choices and earn more money monthly, which widens the income inequality gap.
Evaluate Whether Increasing Opportunities for Higher Education Can Reduce Income Inequality
Apart from the employment opportunities and access to the higher-paid jobs that require a degree, receiving high-level education allows a person to make more informed financial decisions. Furthermore, since income is comprised of all sources of income and not just the salary, understanding what else one can do to increase income is vital. It is essential to be aware of the alternative sources of income, such as renting and investments, and of the correct way of organizing one’s taxes. Therefore, increasing opportunities for higher education and, more importantly, its quality can assist in reducing income inequality.
Analyze What Else Causes U.S. Income Inequality to Widen
Numerous economic, social, and other factors cause the widening of the income inequality gap in the U.S. Some of the commonly blamed entities for the increasing income inequalities increase the cheap labor factories in China and India, forcing American companies to stay somehow competitive (Amadeo, 2021). The competition leads to American companies outsourcing internationally, leaving many Americans out of jobs. Furthermore, the tax laws are often deemed discriminatory, assisting the widening inequality gap (Amadeo, 2021). Over the past few decades, the wealthy minority has been getting richer, while the majority has been staying the same or getting poorer. Many job opportunities are reserved for connections and family members, meaning that those who do not have a high-income background are less likely to have the necessary network.
Furthermore, the technological advances of the recent decades have made some of the manual-skilled and lower-skilled workers redundant, widening the gap. Moreover, it can be difficult mentally to work through low socio-economic backgrounds, especially with the ongoing global pandemic affecting everyone’s mental health. The variety of factors for the increasing income inequality means many people and families are stuck in a vicious cycle of low income.
Recommend How to Reduce Educationally-Based Income Inequality or Other Factors As a Federal Policymaker
The policy-makers need to realize that they must make changes, and a redistribution of wealth is necessary for a sustainable society. One of the most important steps should be improving access to education for the disadvantaged, increasing their competitiveness in the job market. As mentioned above, some might experience limitations due to the costs of prestigious schools and colleges. Therefore, if the government subsidizes the education sector, it would be easier for those with a lower socio-economic background to obtain the necessary degrees.
Furthermore, a greater focus should be made on financial education and not just general or job-specific. If people are more aware of their rights and opportunities, they will be more likely to use them for their benefit. Consumers’ daily decisions, such as where they buy their groceries and how long they use the same shoes and clothes, can significantly affect their personal wealth. Furthermore, having the sense to sell the possessions they no longer need or rent out rooms in the house that remain empty can provide the much-needed income.
Moreover, providing employee training can be beneficial, as it would decrease the need to outsource for the companies. If the people are competent in their field, they will be more in demand, meaning they will likely earn higher wages. However, it is also essential to keep track of the differences in the salaries at different levels of a company. Perhaps introducing an income cap at the higher executive levels could work. For example, according to BBC (Hegarty, 2020), Dan Price introduced an equal pay structure in his company, which decreased the income inequality gap within the company. While this might not be possible on a state or national level, some regulations could be beneficial.
References
Amadeo, K. (2021).Income Inequality in America.The Balance. Web.
Bivens, J. (2017). Inequality is slowing U.S. economic growth. Economic Policy Institute. Web.
Hegarty, S. (2020). The boss who put everyone on 70K. BBC News. Web.
Horowitz, J. M., Igielnik, R. & Kochhar, R. (2020). Trends in income and wealth inequality.Pew Research Center. Web.
Mejia, Z. (2019). These are the 25 best-paying jobs in America in 2019, according to US News & World Report. CNBC. Web.
Pennington, M. (2018). The 35 highest-paying jobs you can get without a bachelor’s degree. The Job Network. Web.
Sullivan, A., Parsons, S., Green, F., Wiggins, R. D., and Ploubidis, G. (2018). Elite universities, fields of study and top salaries: Which degree will make you rich? British Educational Research Journal, 44(4), 663-680. Web.
Trapeznikova, I. (2019). Measuring income inequality.IZA World of Labor. Web.
U.S. Department of Labor. (n.d.). Minimum Wage. Web.