Should you have more money? For decades America has gotten richer and individual workers have gotten more productive. We work longer hours, produce more per hour and raise stock prices to once-unimaginable levels… and almost no one has gotten a meaningful raise since the Carter administration. Income equality has a lot to do with that.
What Is Income Inequality?
Income inequality measures how evenly income is distributed across an economy. When a journalist or economist writes about how much wealth the top 1% has or how much a CEO makes relative to their employees, this is a discussion of inequality. Income inequality is expressed by the Gini coefficient, which uses a scale of 0 to 1. The higher the score, the more unevenly wealth is distributed. At a coefficient of 0 the society has perfect equality with all workers earning the same income. At a coefficient of 1 the society has perfect inequality with one person holding all of the wealth.
Economists look hard at income inequality, in part, because it measures how efficiently an economy distributes resources. An economy with no inequality raises concerns that it has stopped creating incentives for innovation and risk-taking behavior. This can lead to stagnation. An economy with high inequality, however, may have stopped rewarding workers in proportion to their contributions. This, too, can lead to both stagnation and volatility.
What Is the Right Level of Inequality?
Economists hotly debate how much inequality is good for an economy. A healthy economy should produce at least some because, if everything works well, people who create more value will receive proportionately greater financial rewards. Bill Gates should be rich (or, as economists like to say, it is economically efficient for him to have gotten rich) because he created something with value to millions of people.
While there is disagreement, the broad consensus is this: Inequality is good for growth when it is high enough to encourage investment and entrepreneurship, but not so high that it rewards those individuals beyond the value of what they create. For example, consider John Smith who would like to start a neighborhood restaurant. This will have value because he’s a good cook and the people near him would like a new place to eat. In an efficient economy, then:
- Inequality will be high enough to convince Smith to open his business. Succeeding at creating a delicious neighborhood restaurant should make him money, otherwise he’s unlikely to do it and everyone is worse off.
- …But low enough that it will not reward Smith beyond the value of his creation. A neighborhood bar only creates a maximum amount of value. Rewarding Smith beyond that point is inefficient and takes money from other potential entrepreneurs and workers.
In some cases, these two will not overlap. The value of a new enterprise isn’t high enough to convince someone to start it. In that case, either the economy has effectively priced out an inefficient project (it just wasn’t worth doing) or someone else will come along and work for that price.
As to exactly what this magical middle point is, this is another constant subject of debate, up to and including whether there are any practical upper or lower bounds on efficient inequality at all. There is no agreed-upon standard Gini coefficient for growth. But we are certain of one thing:
The Current State of Income Inequality
In the U.S., inequality has the momentum of a runaway train. Americans have not lived this financially far apart since the Gilded Age. Too much income inequality can be both a symptom and a cause of a very unhealthy economy, and that’s where America increasingly finds itself today. The wealthiest households don’t simply have more than other people do. They have almost everything. The rich collect most of the income, own most of the wealth and have captured virtually all of the economic gains over the past 40 years. Some numbers to make this more concrete.
In the 1950s, an average CEO made about 20 times what one of his workers did. Today, a single wealthy worker can make hundreds of times as much as someone else in the same office. While the top 10% of earners do well, it’s really the top 1% that leaves everyone else in the dust. They’re helped by trends such as:
- In 2015, a family in the top 1% nationally received, on average, 26.3 times as much income as a family in the bottom 99%, according to a report by the Economic Policy Institute. This isn’t just about surgeons making more than fry cooks. This is about a handful of high-earners making more than everyone else.
- A CEO at a large firm makes 312 times what one of their employees earns on average. This has been trending up every year since the early 1980s.
- The richest 10% of Americans took home nearly half of all the country’s income in 2017. The richest 1% of Americans took home a fifth of it. The other 90% of us got to divide the remaining pie among ourselves.
Where income is what someone actually takes home in a year, wealth is the total amount of money and property that someone owns. Wealth concentration in America is higher than it has been since 1928. Today, a tiny 0.1% of U.S. households own almost a quarter of all the money and property in the country. Even more than that:
- The richest 1% of households own approximately 40% of all U.S. wealth. This would be like living in an apartment building with 100 people, but one person claims all the even numbered units just for himself.
- The richest 200,000 families in America own about as much wealth as the bottom 90% of all American households combined.
The wealth gap is getting worse. The wealthiest Americans have captured virtually all of the wealth created in recent decades. While over the past 40 years most Americans averaged less than 0.9% annual wage growth, the richest 1% grew their wages by more than double that. The richest 0.001% did seven times as well. This led to effects such as:
- Five percent of Americans took home 25% of all the wealth created by the U.S. economy in 2017.
- From 1980 to 2016 the inflation-adjusted average income for the bottom half of American households went from $16,000 to $16,200. The average hourly wage ticked from a little over $20 to $22.65. For the top 1% of American households in that same period, inflation-adjusted wages grew from $428,200 to $1.3 million.
The rich are getting richer and the process is picking up steam.
Why Income Inequality Matters
Income inequality is a story that resists being told. It is easy for this to simply look like sour grapes in the face of other people’s success, and getting into the weeds on this issue means badgering readers with a dry wall of statistics. But this is about more than numbers. More and more of America’s wealth is held by increasingly few people. This has been getting worse since the 1980s, but now it has reached levels not seen since shortly before the Great Depression. The economy of the last 40 years has made a few people very, very rich, and everybody else much poorer. Here are a few specific ways that it has probably affected your life: