Wealth and Poverty: Why Incomes Are Becoming More Unequal

Why Incomes Are Becoming More Unequal

Incomes have become more unequal in the United States for three primary reasons:

  • Changes in employment patterns
  • Increased returns to education
  • Changes in households

Let's take a look at each of these reasons.

Changes in Employment Patterns

The percentage of workers who belong to a labor union decreased dramatically in the past 30 years. That in itself results in a lower wage for millions of workers, because unions exist to push wages upward, and they usually succeed.

As a result, however, management often moves jobs to lower-wage locations. Many high paying U.S. manufacturing jobs have been replaced by lower paying jobs in service industries, such as retail and restaurants. This trend is expected to continue. The Bureau of Labor Statistics states that, of the ten occupations with the largest projected job growth from 1998 to 2008, five pay less than $10 an hour (retail salespersons, cashiers, office clerks, home health aides, and teachers' assistants).

Growth in service-sector employment is also being driven by changes in consumers' spending patterns. Spending on services has been growing faster than spending on nondurables, such as food, beverages, and clothing, and that trend is also expected to continue. Spending on durables, such as motor vehicles, furniture, appliances, and consumer electronics is growing. But those industries have been moved to lower wage nations, such as Mexico, Malaysia, and China.

Increased Returns to Education

More educated and highly skilled workers have always earned higher incomes than less educated and less skilled workers. That tendency has become more pronounced in the United States due to increased demand for “knowledge workers” and managers in an economy where industries such as high technology, financial services, media, communications, and academe have been growing.

Table 11.5 relates education with income levels for men and women.

Table 11.5  Higher Education Means Higher Income (average annual income in dollars, rounded to nearest 100)
Some High School 21,60012,300
High School Graduate 32,10017,700
Some College 40,20023,500
Associate Degree 42,40025,200
Bachelor's Degree 61,20032,800
Master's Degree 71,80042,700
Doctorate 98,80061,300
Professional Degree (M.D., etc.)119,00059,500

Source: U.S. Census, 1999

For both men and women—admittedly with a significant gender gap—income increases with education. (Professional degrees do not increase income for women the way they do for men.) A man with a bachelor's degree earns 90 percent more than one with a high school diploma. A woman with a bachelor's degree earns 85 percent more than one with a high school diploma.

Higher education also means lower unemployment. In 2000—a low-unemployment year—unemployment was 3.5 for high school graduates and, at 1.7 percent, about half that for college graduates.

A bright, motivated individual worker stands a good chance of earning a higher income by obtaining more education. But increased education and skills training will not be enough to shift the current trend in income distribution significantly. Even if it were possible to give all U.S. workers a college education, millions of the jobs being created in the future—in retail, restaurants, home health services, and so on—simply don't require high levels of education. Getting a college degree only to wind up selling hardware or frying potatoes makes no economic sense. Nor does paying a hardware salesperson or a fry cook $25 an hour.

These structural changes in the labor force represent a high obstacle to improving the incomes of the bottom 40 percent of households.

Changes in Households

Households themselves have changed, and these changes have affected household income. The tendency toward more single-adult households, due to people marrying later and divorcing more frequently has, over the past 30 years, created more households for a given level of population. When people marry later and couples divorce, the number of households increases in proportion to the population. Indeed, this is exactly what has occurred in the United States since 1970.

Table 11.6 summarizes key population statistics for 1970 and 2000.

Table 11.6  Population, Households, and Married Couples (1970 and 2000, nearest million)
Total Population203,000,000282,000,00039%
Households 63,000,000105,000,00067%
Average Household Size 3.2 people 2.7 people-15.6
Married Couples 45,000,000 55,000,00022%
Married Couples as Percent of Pop. 22.2% 19.5%

From 1970 to 2000, the U.S. population increased 39 percent while the number of married couples increased by only 22 percent, due to later marriage, increased divorce, and, perhaps, increased acceptance of gay lifestyles. The rise in the number of households relative to the population (67 percent versus 39 percent) increases the number of households that total income is divided by, resulting in lower income per household.

Consider this: If a married couple heading a household—even a two-earner household—divorces, their income is divided between two households rather than one. That halves the household income figure generated by that couple. (And that's assuming that their incomes remain the same, which is not always the case: Women's incomes often decrease after divorce.)

On the surface, this may seem to be a “mathematical” issue rather than a true problem of income inequality. After all, if people want to remain or become single, why shouldn't they? They probably should. But being divorced or an unmarried head of a household (or both) falls harder on the poor. As difficult as divorce and single-parenthood can be, it's tougher for people in the lower income quintiles, because they lack the income and other resources that help a person cope with child-rearing and other challenges of daily living. Society also bears the social cost of a continuing cycle of poverty and the ills that poverty generates.

Excerpted from The Complete Idiot's Guide to Economics © 2003 by Tom Gorman. All rights reserved including the right of reproduction in whole or in part in any form. Used by arrangement with Alpha Books, a member of Penguin Group (USA) Inc.

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