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|"Average household income
before taxes grew in real terms by nearly one-third between 1979 and
1997, but that growth was shared unevenly across the income
distribution. The average income for households in the top fifth of the
distribution rose by more than half. In contrast, average income for the
middle quintile climbed 10 percent and that for the lowest fifth dropped
slightly. Furthermore, income growth at the very top of the distribution
was greater yet: average income in 1997 dollars for the top 1 percent of
households more than doubled, rising from $420,000 in 1979 to more than
$1 million in 1997." [Congressional
Budget Office, Chapter One]
Some of the following comments about the distribution of income can be classified as positive economics. Others are normative. Positive economics is value free because positive economics is concerned with what is. Because it is concerned with what should be, what is called normative economics is not value free. Revealed by the comments quoted in this article is the fact that there is substantial disagreement about both what is and what should be.
According to Robert Rector and Rea Hederman of the Heritage Foundation, despite the fact that over the long run living conditions in the United States have improved significantly, interest in an "...alternative approach focusing on the redistribution of incomes remains strong. Indeed, the drive to create greater economic and income equality between the apparent haves and have nots has been an enduring theme in the political realm of the 20th century." [Rector and Hederman]
In recent years some economists, politicians, and journalists have pointed with alarm to statistics that indicate that income inequality is rising. (See the statistics below in Figure One provided by the Congressional Budget Office.) "Why," they ask, "have so many Americans fallen behind in the last two decades, while an affluent minority has so visibly prospered? Why has the resulting income gap become so glaring and persistent, even with six years of steady economic growth under our belts?" [Uchitelle]
Shares of Pretax Household Income, by Income Group, 1979-1997
|SOURCE: Congressional Budget Office. http://www.cbo.gov/showdoc.cfm?index=3089&sequence=2|
|NOTES: Quintiles, or fifths, of the income distribution contain equal numbers of people.|
|Households are people who share a single housing unit, regardless of the relationships among them. Pretax household income is the sum of wages, salaries, self-employment income, rents, taxable and nontaxable interest, dividends, realized capital gains, cash transfer payments, and retirement benefits. Income also includes the corporate income tax and the employer's share of Social Security, Medicare, and federal unemployment insurance payroll taxes as well as all in-kind benefits (Medicare, Medicaid, employer-paid health insurance premiums, food stamps, school lunches and breakfasts, housing assistance, and energy assistance).|
The "quintiles" shown in Figure One were obtained by ranking households from highest to lowest incomes and then dividing them into five groups (quintiles). Then the share of total income received by each quintile was determined.  (This is also done for families, which produces slightly different figures.)
Total income is less unequally distributed than is its component, cash income. Total income includes such things that redistribute income as welfare benefits like food stamps, public housing, the school lunch program, the earned income tax credit, Medicaid, and Medicare. Spendable income is after tax income, and another method by which the federal government reduces the impact on personal consumption of differences in cash income is the levying of a progressive income tax. Although all taxes are not progressive, after tax income is a bit less unequally distributed than is before tax income. However, statistics provided by the federal government show that it, too, has become more unequally distributed in recent years. After tax income by quintiles is shown below in Figure Two.
Shares of After-Tax Household Income, by Income Group, 1979-1997
|SOURCE: Congressional Budget Office. http://www.cbo.gov/showdoc.cfm?index=3089&sequence=2|
|NOTE: Households are people who share a single housing unit, regardless of the relationships among them. After-tax household income is the sum of wages, salaries, self-employment income, rents, taxable and nontaxable interest, dividends, realized capital gains, cash transfer payments, retirement benefits, and in-kind benefits (Medicare, Medicaid, employer-paid health insurance premiums, food stamps, school lunches and breakfasts, housing assistance, and energy assistance) minus individual income taxes, excise taxes, and the employee's share of payroll taxes.|
Because the federal income tax is a progressive tax, the substantial increase in recent years of the income of high income households has caused them to account for a much larger share of the total amount of federal income taxes collected than in the past. However, the tax rate for the highest quintile has declined in recent years, and that of the lowest quintile has steadily declined for many years. (See Figures Three and Four below.) The reduction in the tax rates on these levels of income may be the result of an attempt to raise the standard of living of the poor and to induce the rich to invest more.
Shares of Individual Income Taxes, by Income Group, 1979-1997
|SOURCE: Congressional Budget Office. http://www.cbo.gov/showdoc.cfm?index=3089&sequence=2|
|NOTES: Quintiles, or fifths, of the income distribution contain equal numbers of people.|
|The share of taxes paid by the lowest quintile is less than zero and is not shown.|
Total Effective Federal Tax Rates by Income Quintile
1979 - 1997
|SOURCE: Congressional Budget Office. http://www.cbo.gov/showdoc.cfm?index=3089&sequence=2|
|NOTES: The effective tax rate equals total tax liabilities (individual income, corporate income, payroll, and excise) as a percentage of total income.|
|Quintiles, or fifths, of the income distribution contain equal numbers of people.|
"Households in the top quintile face an effective tax rate that is more than five times that of households in the lowest quintile." [Congressional Budget Office, Chapter One] Spendable income isbefore tax income less ALL taxes, federal, state, and local, some of which, such as state sales taxes, are thought to be regressive in their impact on personal income. Any tax may cause the distribution of after tax income to differ from before tax income. Various other state policies that are not included in federal-government-provided statistics, such as Georgia's Hope Scholarships, which finance college scholarships with lottery money, redistribute income.
Paul Krugman observes that, according to the "...Bureau of the Census, whose statistics are among the most rigorously apolitical," in 1970, "the bottom 20 percent of U.S. families received only 5.4 percent of the income, while the top 5 percent received 15.6 percent. By 1994, the bottom fifth had only 4.2 percent, while the top 5 percent had increased its share to 20.1 percent. That means that in 1994, the average income among the top 5 percent of families was more than 19 times that of the bottom 20 percent of families. In 1970, it had been only about 11.5 times as much. (Incidentally, while the change in distribution is most visible at the top and bottom, families in the middle have also lost: The income share of the middle 20 percent of families has fallen from 17.6 to 15.7 percent.) These are not abstract numbers. They are the statistical signature of a seismic shift in the character of our society." [Krugman]
In Western Europe the ratio of the income of the top 20 percent of income earners to the bottom 20 percent is about 5 to 1. In the U.S. this ratio is 10 to 1. In Brazil, where this ratio may be the world's highest, it is almost 25 to 1. [Birdsall]
Krugman contends that "What few people realize is that this vast gap between the affluent few and the bulk of ordinary Americans is a relatively new fixture on our social landscape." Jude Wanniski says thatthis assertion by Krugman "is utter nonsense. A century ago," he says, "John D. Rockefeller had income the equivalent today of $500 million, year after year, for a quarter century. Andrew Carnegie did almost as well. A handful of Americans possessed a far larger fraction of the national wealth than any collection of wealthy Americans possess today." [Wanniski]
Edward N. Wolff adds wealth and debt to what he contends is a disturbing picture. "Between 1989 and 1998, real incomes have grown slowly for all households except the top 20 percent of the income distribution. Median net worth was also up slightly in 1998 as compared to 1989. The average indebtedness of American families relative to their assets continued to rise, as did mortgage debt on the value of owner-occupied housing." He complains that "There has been almost no trickle down of economic growth to the average family: almost all the growth in household income and wealth has accrued to the richest 20 percent. The finances of the average American family are more fragile in the late 1990s than in the late 1980s. It is not surprising that both the fraying of the private safety net, as well as the public safety net, has lead to a growing sense of economic insecurity in the country." [Wolff]
Becausehe believes that nobody's "boat" is sinking, and some people's are rising, Robert H. Frank denies that increased income inequality is a problem. "Although," he says, "the top 1 percent of earners now have roughly twice as much purchasing power as in 1979, the real earnings of families in the middle have scarcely grown since then. The conventional wisdom has long been that such growth in the income gap between the rich and the middle class is a bad thing. But that view is now under challenge. Some revisionists, respected economists among them, invoke the Pareto criterion, arguing that inequality doesn't really matter so long as no one ends up with less in absolute terms. Using income level to measure the well-being of individual families, these inequality optimists argue that since the rich now have much more money than before and the middle class doesn't have less, society as a whole must be better off." [Frank]
Based on Kernel density estimation, Daly, Crews, and Burkhauser conclude that although income inequality increased in the U.S. between 1983 and 1989, "almost all American families were economically better off in 1989 than in 1983" when recovery from recession began. "Moreover, the largest share of the increase in income inequality over the decade of the 1980s was due to rapid but unequal income gains in the 'middle' of the income distribution. On the whole, workers and older persons were better off at the end of the decade than at its beginning." [Daly]
Problems of Definition and Measurement
Both defining income and measuring it present significant problems. "Because money income is but one measure of economic well-being, the Census Bureau also reports on 14 other definitions of income (the series begins in 1979)." [Weinburg and Nelson]
A footnote to Table One (below) shown below the table illustrates one of the many problems encountered just in the gathering of income data. (The other footnotes noted in this table are not shown.)
Share of Aggregate Income Received by Each Fifth and Top 5 Percent of Families
1947 to 2000
(Families as of March of the following year.)
|Footnote 23 (See 1993 above.) Data collection method changed from paper and pencil to computer-assisted interviewing. In addition, the March 1994 income supplement was revised to allow for the coding of different income amounts on selected questionnaire items. Child support and alimony limits decreased to $49,999. Limits increased in the following categories: earnings to $999,999; social security to $49,999; supplemental security income and public assistance income to $24,999; and veterans' benefits to $99,999.|
Source: U.S. Census Bureau, Historical Income Tables - Families http://www.census.gov/hhes/income/histinc/f02.html
Observe in Table One the significant change in the trend after the change was made in the data collection method in 1993.Note that the changes in the share of income going to the top fiver percent and to the top quintile. A change in the distribution of income of this magnitude from one year to the next is unprecedented. This causes one to suspect that the change in the method of collecting the data accounts for at least some of the increase. The new method might be more accurate, but if the new method of collecting the data is the cause of some of the increase in income inequality, any comparison of income inequality that compares a year after 1992 with one before 1993 exaggerates by how much inequality has increased.
When asked what their income is, many Americans would probably either say that it is the figure they write on the line labeled Adjusted Gross Income (AGI) when they pay their income tax, or they would say it is this amount less taxes. AGI is cash income--such things as wages, business income, pensions, interest, and dividends. However, the standard of living a person can afford to enjoy exceeds this amount. Therefore, what the U.S. Treasury calls "family economic income" adds to AGI unreported and underreported income; deductible contributions to IRAs, 401(k)s, and Keogh accounts; nontaxable transfers, such as Social Security and welfare payments; life insurance; tax-exempt interest; employer-provided fringe benefits; and imputed rent on owner-occupied homes.  (It is impossible to determine some of these, such as imputed rent, objectively.)
Robert Rector and Rea Hederman say that in order to measure the distribution of income accurately, the quintiles must contain the same number of people, but they don't because the Census Bureau bases them on a count of households, rather than persons. It seems that the Census Bureau has responded to this criticism, as in Figure Three (above) each quintile does contain the same number of people.
Rector and Hederman point out that income is usually going to be higher in larger households, and as Table Two (below) reveals, in general, the higher is household income, the greater is the number of people in it.
Mean Size of Household by Money Income
Number of people
|Less than $5,000||
|$5,000 to $9,999||
|$10,000 to $14,999||
|$15,000 to $24,999||
|$25,000 to $34,999||
|$35,000 to $49,999||
|$50,000 to $74,999||
|$75,000 to $99,999||
|$100,000 and over||
Source: United States Bureau of the Census. "Table 2: Selected Characteristics - Households by Total Money Income in 2000." http://www.census.gov/hhes/income/income00/inctab2.html
Rector and Hederman found that that the lowest three quintiles contain the bulk of the nation's elderly population. This is significant because the elderly tend to have lower incomes than do those of working age. (See Table Three below.) They also discovered that the top two quintiles contain substantially more children than do the bottom two quintiles. They learned, too, that the number of working age adults in the top quintile alone was greater than the number of such adults in the lower two quintiles combined.These observations led them to conclude that:
The limitations in the Census measurement of income distribution lead to a considerable exaggeration of income inequality. According to normal Census data, the top quintile of society in 1997 had $13.86 of income for every $1.00 received by the bottom quintile. However, if incomes and taxes are counted more completely, and if the quintiles are adjusted to contain equal numbers of persons, then the ratio of the incomes of the top to the bottom quintile drops to $4.23 to $1.00. Moreover, the remaining difference is due in a large part to the fact that working age adults in the top quintile work almost twice as many hours, on average, as those in the bottom quintile. If such adults worked the same number of hours, the ratio of incomes would fall to around $3.18 to $1.00.
Differences in income in the United States are the natural result of vast differences in ability and behavior between individuals. In general, those persons at high income levels tend to be married, to work large numbers of hours per year, to have high levels of skill and productivity, and to provide higher levels of savings and investment necessary to sustain the overall prosperity of the economy. By contrast, individuals in the lowest income quintile tend generally to be non-married, to work little, and to have lower levels of skill and productivity. Despite these factors, the average per capita income within the bottom quintile remains over $8,000 per year, which is slightly higher, in inflation-adjusted terms, than the average per capita income in the whole society at the beginning of World War II. [Rector and Hederman]
Rector and Hederman also found that adjusting the 1997 Census data for taxes, various benefits, and differences in household size almost tripled the share of income going to the bottom quintile, while cutting the top quintile's share by 20 percent.
Some claim that the lower quintiles represent a permanent underclass. Others say this is not true because mobility (the movement of people from one quintile to another over their lifetimes) has been rising, and "Substantial income mobility, observed in every examination of longitudinal data tracking individuals over time, means that the composition of quintiles changes from year to year." [Congressional Budget Office, Chapter One] 
Causes of Income Inequality
There are several demographic changes that have the potential for causing the amount of income inequality to vary over time. Changes in the relative sizes of different age and ethnic groups; a growing number of college graduates; and the relative decline in traditional families have been identified as likely causes of increased income inequality. New technology, globalization, and taxes have also been cited.
John Bishop's cross-sectional regression led him to conclude that "Age increases family income at a decreasing rate and blacks, Hispanics, female heads, and Southerners receive lower than average family incomes. In addition, greater educational achievement, urban status, and living in the West are associated with higher family income. The number of earners in a family is significant (both statistically and in the magnitude of its effect) as is the number of weeks worked by the head [of the household]." [Bishop]
Bishop observes that based on pre-tax Gini coefficients in 1985 and 1990, the progressivity of the federal income tax reduced income inequality by between 3.2 and 3.9 percent. He concluded that the effect of federal income taxes on income inequality was greater than the effects of race and age. The effects of female-headed households, whose numbers have steadily increased, and the growing number of householders with a college education are even larger. (A Gini coefficient measures to what extent the distribution of income varies from being equal.)
Bishop says that the increase in income inequality caused by the relative increase in the numbers of low-income, female-headed households and high-income, college-educated householders was not offset by the progressive nature of the federal income tax. The "quite substantial" effect of female-headed households and a college degree well exceeded the effect of race, which had only a minor effect.
Globalization and New Technology
Globalization--increased and freer trade that has linkedmore closely the world's product, labor, and capital markets--and technological progress has led to greater international specialization. The comparative advantage in the production of labor-intensive goods and services that their abundant supply of low cost, unskilled labor gives developing nations has led them to specialize in these kinds of industries. Economic theory predicts that this will put downward pressure on the wages of unskilled workers in developed countries like the United States and upward pressure on the wages of the unskilled in developing countries. "Estimates of the contribution of increased trade to the total increase of the wage differential between unskilled and skilled workers range from negligible to 50 percent." [Anonymous 2]
Paul Krugman and Lester Thurow agree that income inequality should be reduced, but they disagree as to what is causing it to increase. Krugman believes that the cause of a growing inequality of incomes is new technology that, by raising the demand for college-trained workers, raises their pay relative to that of less well educated workers. Thurow, his colleague at the Massachusetts Institute of Technology (MIT), disagrees. Thurow attributes increased income inequality to the rapidly evolving global economy because it forces Americans with few skills to compete with hundreds of millions of like, low-wage workers abroad whose output is exported to the U.S. [Uchitelle]
In other words, Krugman thinks increased income inequality is the product of higher demand for skilled workers, while Thurow thinks it is due to a reduction in the demand for unskilled workers resulting from the U.S. importing a large amount of goods produced by low-wage, unskilled foreigners.The immigration of unskilled workers to the U.S. also puts downward pressure on the wages of unskilled workers in the U.S.
Laura Tysonbelieves that "Only workers above the 75th percentile of the wage-and-salary scale have enjoyed significant real increases in their take-home pay. The result has been growing inequality in the distribution of wages and salaries both between and within occupations, skill levels, age cohorts, and educational categories. By far the most important determinant of the growing inequality in labor incomes has been the increasing demand for workers with a high level of skills, particularly those with a college or graduate degree. To use the technology of the Information Revolution well, she believes, require "...high levels of initiative, analytical capability, and communications skills, characteristics that are unevenly distributed among individuals with the same formal education." [Tyson]
Charles Murray provides some support for Tyson's view, for he points out that "In constant dollars an engineer earned about $30,000 in 1952 compared with $20,000 for a manufacturing worker, which was not much different from the ratio at the beginning of the century. By 1988, the engineer earned almost $75,000 compared with $22,000 for the manufacturing worker. He believes that a "...new kind of class stratification based on brains rather than on initial wealth or social status is emerging in the United States. Put another way, wealth and social status still exist, but they are much more closely linked to intelligence than used to be the case." [Murray]
Because of the greater responsibility involved and the higher order of skills needed, one would expect thatmarket forces would cause the ratio of a CEO's pay in a firm employing 50,000 to the pay of the lowest-paid worker to be greater than in a firm with only 5 employees, and certainly over the decades the size of the average firm has increased. Also, as a firm grows, ceteris paribus, additional layers of management must be added, and the fact that those on each level are paid more than those on the levels below them will increase the ratio of the CEO's pay to that of the lowest-paid employee.
The widening and narrowing of the gap between the rich and the poor in the past suggests that the fact that income inequality is increasing today does not mean that it will continue to do so indefinitely. Nancy Birdsall presents a possible scenario for it to narrow: "The rapidly growing wages of the educated and skilled are making education and training much more attractive personal investments. As more people get greater access to education, their relative income advantage over the unskilled will decline. Meanwhile, the high cost of skilled workers should eventually induce technological change that relies more on unskilled labor, increasing the demand for workers with less training." [Birdsall]
The demand for skilled labor is very dependent upon the level of technological development, which is substantially a function of the rate of capital accumulation. By creating high-wage jobs, technological advance both creates a demand for education and provides the wherewithal to finance. it."Moreover, capital accumulation, technological upgrading, and job creation play a key role in raising the quantity and quality of skilled labor by allowing workers to acquire and develop skills through on-the-job training and learning by doing." [Anonymous 1]
Many economists believe that, because the cost of basic necessities equals or nearly equals the income of low-income families, the rich save a larger share of their income than they do. Therefore, if income is redistributed from the rich to the poor, economic growth will be reduced because there would be less capital accumulation. Less economic growth will mean fewer jobs and lower pay for those in the lower quintiles. (This is the--depending on your point of view--the reverse of the famous or infamous trickle-down effect.)
Seeking to reverse rising income inequality by restricting foreign trade is risky because, as Birdsall observes, "Trade (along with mass migration) explains most of the convergence in income among the countries of Europe and between them and the United States in the late nineteenth century. Convergence of incomes in Europe stalled as economic links disintegrated from 1914 to 1950 and then resumed in force in the postwar period, when European economies became more integrated." [Birdsall]
Protectionism hasn't worked for developing countries, as those experiencing the most economic growth have been those most open to and engaged in foreign trade. Furthermore, relatively few unskilled American workers are employed in industries subject to significant competition from industries in low-wage countries. However, some would argue that this is because foreign competition has driven American firms in these industries out of business or forced them to move abroad; thereby reducing the number of potential jobs for unskilled Americans.
Changes in the Age Structure of Society
Relative to age, Thomas Sowell points out that:
Most Americans do not start off in a high income bracket. They work up to it over the years and reach a peak somewhere in their 50s or 60s. That is where most of the high income and most of the wealth in the country is. Census statistics for 1990 show families headed by someone in the 45 to 64 year old bracket earning nearly double the income of families headed by someone in the 25 to 34 year old bracket.
When it comes to wealth, the disparity is even greater. Census data show the net worth of households headed by someone in the 55 to 64 year old bracket to be several times that of households headed by someone under 35.
Most of the people who are called "the rich" could more accurately be called middle-aged or elderly. They are not a class. They are an age bracket. When they were younger, they were usually in a lower income bracket. [Sowell]
The relationship between income and age (See Table Three below.) means that the distribution of income will be affected by changes in the birth rate. The fact that the birth rate soared from 1946 until the early 1960s--the Baby Boom years--and then fell to an all time low--meant that unless immigration interfered, which it didn't, as the Baby Boomers aged, income inequality would increase. Table Four (below) shows how an increase in life expectancy and a baby boom followed by a baby bust has caused the median age of Americans to rise.
Mean Family Income by Age of Householder
|15 and older||$65,574|
|15 - 24||$36,626|
|25 - 34||$56,229|
|35 - 44||$70,813|
|55 - 64||$74,007|
|65 and over||$45,713|
Source: United States Department of the Census. "Table F11: Age of Householder - Families by Median and Mean Income, 1947 - 2000" http://www.census.gov/hhes/income/histinc/f1.1.html
Median Age in the United States
Source: United States Bureau of the Census. "Statistical Abstract of the United States, 2000," p. 12.
Table Five (below) reveals how: (1) a longer life span; (2) a decline in the birth rate to what was then an all time low during the Great Depression; (3) a record high birth rate after World War II (the Baby Boom generation); (4) a decline in the birth rate to a new all time low when the Boomers became parents; has affected the relative size of each age group. (In 1970, the oldest Boomers were 24. In 2000 the oldest were 54.)
Changes in the Relative Sizes of Each Householder Age Group
1970 to 2000
|15 - 24||7.2||4.8|
|25 - 34||20.4||17.7|
|35 - 44||20.8||25.7|
|45 - 54||21.2||22.4|
|55 - 64||16.2||13.3|
|65 and older||13.7||16.0|
Note: Percents do not add to 100 percent due to rounding.
Source: Derived from the United States Bureau of the Census. "Table F-11, Age of Householder - Families by Median and Mean Income, 1947 - 2000." http://www.census.gov/hhes/income/histinc/f11.html
In 1970 the Boomers were in the 15 to 24 year-old age group. In 2000 they were in the 35 to 44 and the 45 to 54 year-old age groups. Their children, born when the birth rate was low, were in the 15 to 24 year-old age group. So, the Boomers caused the 15 to 24 year-old age group to be relatively larger in 1970 than in 2000 and the 35 to 54 year-old age groups to be relatively larger in 2000 than in 1970. The low birth rates during the Great Depression and the post-boomer low birth rates caused, respectively, the relative shrinkage in the size of the 25 to 34 and the 55 to 64 age groups in 2000. The high post-World War I birth rates and people living longer caused the relative size of the 65 and older group to increase from 1970 to 2000. Table Three(above) shows that in 2000 the highest family incomes were those where the householder was from 35 to 54 years old. (The 35 to 54 year-old groups also had the highest incomes in 1970.)
The Inequality of Wealth
Wealth can be viewed as stored income. It is also a generator of income. Wealth refers to the excess of assets over liabilities. It can be negative. Assets are things owned. They are purchased with income. Some assets are tangible, such as real estate. Others are intangible, financial assets like stocks and bonds. "The typical household starts with little wealth and accumulates it during the working years, then draws it down to some extent after retirement." [Weicher]
"In the increasingly service-oriented global economy, education and skills represent a kind of wealth." [Birdsall] You could also consider the present value of pension and social security benefits as a kind of wealth not included in the excess of assets over liabilities.  If these were considered to be wealth, the distribution of wealth might be less unequal.
While the top one percent of the income distribution in the United States ($1.9 million net worth in 1983; $2.2 million in 1989; and $2.4 million in 1992) receive about ten percent of total income, the wealthiest one percent of Americans own about one-third of total household wealth. This wealthy one percent are typically middle-aged, married, and well educated. Most are white. Most of the heads of these households are college graduates. Unincorporated businesses and investment real estate accounts for most of their assets. Financial assets account for less than one-third of their assets. "Most of the rich are entrepreneurs, and most have earned their wealth. Inheritance accounts for about 8 percent of the net worth of these households in the aggregate. More than half have never inherited anything, and inherited wealth is less than 10 percent of total wealth for more than two-thirds of those who have." [Weicher]
The bottom 20 percent in
the wealth distribution are mostly young. About two-thirds of them are single,
and more than one-third of them did not finish high school. Many are non-white.
John C. Weicher is among those who suspect that over time there is substantial
change in the composition of both this and the wealthiest group.
If most wealth was
inherited and in the hands of a small minority of the population, and most of
those with little or no wealth were middle-aged college graduates, there would
be no doubt that the unequal distribution of wealth was a really big
problem. Some do not doubt that the actual situation is a significant problem.
Is Income Inequality A Problem?
Why should we be concerned about income inequality? The answer to this question for some is that it is unfair. 
Woodrow Ginsburg, for example, complains that "Because of the extremely unfair distribution of the nation's growth from 1979 through the early 1990s, income inequality widened so greatly that the current gap between the richest and the poorest is larger than it has been since the Depression years of the 1930s." This contrasts with the 1950 to 1978 period when "... real income (income adjusted for inflation) increased for all groups--from the poorest fifth (quintile) to the richest fifth (quintile). The gain for the lowest fifth was 138%; for the second fifth, 98%; for the middle and fourth fifths slightly over 100%; and for the top fifth, 99%." [Ginsburg]
While some on the leftside of the economic/political/social spectrum like Ginsburg, an Americans for Democratic Action (ADA) official, believe that it is unfair for people's incomes to be unequal, others think it is unfair for people to receive the same income for different work and question whether without the incentive of a higher income that people would work as hard or as well. Some jobs take more out of a person than others do. A police officer's job is far more dangerous than is that of a police dispatcher. The job of a store manager is more stressful than that of a stock clerk. To be qualified to handle some jobs requires far more costly preparation than it does for others. Far more education is required to be a surgeon than to be an orderly.
Richard B. Freeman says that we should be concerned by risingincome inequality because "Falling or stagnating incomes for most workers and rising inequality threaten American ideals of political 'classlessness' and shared citizenship. Left unattended, the new inequality threatens us with a two-tiered society...in which the successful upper and upper-middle classes live lives fundamentally different from the working classes and the poor. Such an economy will function well for substantial numbers, but will not meet our nation's democratic ideal of advancing the well-being of the average citizen. For many it promises the loss of the 'American dream.'" [Freeman] (Was little or no income inequality the dream of the Founding Fathers or even Abraham Lincoln?)
Freeman's reasons for being concerned about rising income inequality are not economic in nature. The usual economic argument against income inequality relies on utility theory. Utility theory postulates that money is subject to diminishing marginal utility, that is, an additional dollar is worth less to a rich man than a poor man. As a result, the total utility enjoyed by society as a whole will be increased if this dollar is taken away from the rich man and given to the poor man.
Economic Growth: Inequality's Product or Its Downfall?
For over 25 years following World War II, the benefits of economic growth were distributed more or less uniformly throughout the income distribution. In 1973, however, the gains from economic expansions began to flow more heavily toward the top of the distribution, increasing income inequality, diminishing the middle class, and raising concerns that the link between economic growth and broad based prosperity had been broken.... Despite six years of sustained economic expansion, the decade of the 1980s closed with a higher degree of income inequality, a larger number of individuals in poverty, and a smaller portion of the population in the middle of the income distribution than had been there at its beginning....[Many were prompted] to ask whether the government should take a more active role in guaranteeing the equality of outcomes among the population....
At the heart of this questioning were two suspicions. The first was that the increases in poverty and inequality and the decline in the middle of the distribution were linked, implying that economic growth was benefiting only the wealthiest of the population. The second was that the increase in inequality and the decline in the middle of the distribution were outcomes unique to the United States and not experienced in industrialized nations with more intervention-oriented economic policies. [Daly]
Freeman doesn't think there is anyone who believes that, by providing an incentive to work harder and better, income inequality promotes economic growth. "No one argues," he says, "that we need more inequality to generate work effort or economic growth. To the contrary, most recent economic studies suggest that inequality is harmful to growth." He expresses surprise over the fact that rising income inequality has taken place in the U.S. during a period of time in which both the number of hours worked and job creation well exceeded that experienced in Western Europe, where income inequality was less.
Mark D. Partridge differs with Freeman in regard to the relationship between income inequality and economic growth. He observes that, as Freeman has noted, "...virtually all of the advanced economies, led by the United States and the United Kingdom, have experienced increased income inequality since 1980." However, Partridge contends that "The Gini coefficient results suggest that states with more income inequality at the beginning of the period actually experience greater subsequent economic growth..." [Partridge]
The United States has a more flexible labor market than do Western European countries, who have higher unemployment benefits and minimum wages and various job protection measures not present in the United States. Job creation and economic growth has been much greater in the U.S. Some believe that more income inequality is its cost. ( To reduce income inequality while promoting job creation, the U.S. government offers wage subsidies.)
Based on their study of the U.S. and Germany, Daly, Crews, and Burkhauser believe that "...even in countries committed to guaranteeing a minimum level of well-being and spreading the benefits of economic growth to all citizens, the benefits of economic expansion are likely to be unevenly distributed." [Daly]
Proponents of the government taking action to reduce income inequality sometimes claim that "Policies that promote equity can increase social cohesion and reduce political conflicts. To be effective, most policies require broad political support, which is more likely to be forthcoming when the distribution of income is seen as fair." [Anonymous 2]
Proposals To Reduce Income Inequality
The only logical way to formulate policies other than income redistributionby the government that will halt and/or reverse rising income inequality is to determine what is causing it to rise. Rising income inequality has been attributed to a variety of causes. Hypothesized causes include such things as immigration, foreign trade, new technology, high taxes, excessive government regulation, declining unionism, the unequal distribution of wealth, and a decline in the real value of the minimum wage.  The nature of some of these hypothesized causes makes obvious some possible solutions: eliminate or reduce immigration; restrict imports; raise the minimum wage; and have the government promote unionism as it did in the 1930s.
Arguments can be mounted against all these proposals. Raising the minimum wage, for example, is said to make some people--mainly poorly-educated young people without job experience--unemployable because they aren't worth that much. It is also claimed that raising it will cause employers to replace several unskilled workers with one skilled worker or automate jobs formerly performed by unskilled workers.
Higher tariffs on imports levied to reduce them will raise the prices poor people have to pay for both domestic and imported goods. Rather than shift to jobs where they will be more productive and more highly paid, workers will remain employed in inefficient industries that are able to survive because they are protected from foreign competition.
Despite their differing beliefs about the cause of rising income inequality, Krugman and Thurow believe that it could be reduced by the strengthening labor unions, taxing the rich to finance subsidies for the poor, and providing everyone with an education that will make them highly skilled. Since at least in the foreseeable future there will be jobs that require little or no skill, causing everyone to be highly skilled would seem to create a problem, as people tend to dislike working in jobs beneath their ability.
Considering the enormous size of the incomes of people like Warren Buffet, Bill Gates, and Ted Turner, or even the less lofty incomes of sports stars like basketball super star Michael Jordan, and that probably very few people believe that this much money is necessary to induce them to do what they do or that they are worth that much more to society than, say, your average physician, it is not at all surprising that there is outrage over the amount of the nation's income concentrated in the hands of people like them.
Measuring income and its distribution is less distant from being an exact science than is economic forecasting, but it is clear that there are problems in terms of the accuracy, adequacy, and appropriateness of the various measures of income that are used as a proxy for the material well being of the American people. 
It is clear that changes in wide variety of factors cause the distribution of income to become less equal. At best, the government probably could have prevented only a very few of them from taking place. Even if the government does nothing, inequality is not likely to increase indefinitely, because it has fluctuated in the past, and there is good reason to think that this will continue to be the case. Forecasting very accurately the costs and benefits of the things the government can do to alter the distribution of income is difficult. So the government should tread very carefully in this economic minefield.
Implied by some is that any increase in the inequality of income is bad. This can only be justified on a normative basis. People who believe that there is one "right" distribution of income, and that is not the distribution that now exists, will believe that we have a problem. If they believe that the distribution of income is changing in the wrong direction, they will, of course, believe that this problem has gotten worse. The solutions they propose will depend on their economic/political/social philosophy and/or, possibly, their self-serving interests. 
1. Data is not collected on an individual basis because people with little or no incomenay have a high standard of living because they are supported by other members of their family or household.
2. Note that in Figure One that households are people who share a single housing unit, regardless of the relationships among them, and that after-tax household income is the sum of wages, salaries, self-employment income, rents, taxable and nontaxable interest, dividends, realized capital gains, cash transfer payments, retirement benefits, and in-kind benefits (Medicare, Medicaid, employer-paid health insurance premiums, food stamps, school lunches and breakfasts, housing assistance, and energy assistance). Figure Two subtracts from this individual income taxes, excise taxes, and the employee's share of payroll taxes.
"It has been suggested that consumption is a better measure of well-being than income....If a family can maintain its consumption through judicious use of assets when income falls, is it truly poor? Unfortunately, it is difficult to collect accurate annual data on consumption or even expenditures. Further, consumption reflects choices on how to allocate resources, rather than need." [Weinburg and Nelson]
3. Mobility is higher in the United States than in other industrialized countries. In these countries there is less income inequality than in the United States.
4. When, one wonders, did we have the right amount of income inequality? Or isthere any "right" level? (Not according to Karl Marx!)
5. Observers' values seem to tend to be correlated to the nature of what they think is causing income inequality to rise. The AFL-CIO, for example, says it is due to declining unionism.
6. One of the inadequacies is that income alone isn't enough to measure well being. An interesting point Wanniski makes about this subject is that: "If you own a $100,000 bond that pays 7 percent a year, you will have an annual income of $7,000 for the life of the bond. If you are entitled to a government check to cover your Medicare bill of $35,000 a year, for the rest of your life, you have wealth that is the equivalent of $500,000." [Wanniski] (Note also)
7. For example: Congress men and women may vote to subsidize low income people to alleviate poverty and/or to buy votes. Congress men and women may vote to reduce the marginal tax rate on high incomes to induce people to work harder and invest more and/or to reward contributors to their campaign.
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