Income inequality is an economic condition in which monetary earnings vary greatly among members of a society, creating a vast disparity in wealth. Income refers to wages—money paid to employees for their work—but also revenue from other sources such as bonuses, interest on savings, profits from investments and sales, and gifts. People with higher incomes and low debt can accumulate wealth through homeownership, savings, and investments, allowing them to provide privileges to their families during their lifetimes and pass money to others through inheritances, which can increase opportunities, such as access to higher education, over generations. People with lower incomes, who can afford only the necessities and sometimes not even those, instead struggle to stay ahead of expenses and debts and are unable to accumulate wealth. Moreover, their children start off on the same footing or worse.
In the United States, the earnings gap between the wealthiest Americans and the rest of the population has been growing since the 1970s. Between 1979 and 2019, the average salary for the top 1 percent of earners increased by 160.3 percent, while the wages for the bottom 90 percent have only increased by 26 percent over that same period. At the very top of the population, the top 0.1 percent of earners have seen an even higher increase in wages at 345 percent.
Even these figures reflect only part of the wealth disparity. While the stock market rose steadily over the 2010s, the top 10 percent of households own 87.2 percent of the stock investments and are largely the only ones who directly benefit and become wealthier from those returns.
Drivers and Indicators of Income Inequality
Income inequality in the United States is high in comparison to other developed countries. Economists use a measure known as the Gini coefficient to rate the equality of income distribution within a country from 0 (meaning every person earns the same income, or complete equality) to 1 (meaning one person earns all the income and the rest earn nothing, or complete inequality). According to the United States Census Bureau, in 2019 the United States had a Gini coefficient of .481, a slight decrease from .485 in 2018 but still significantly higher than countries such as the United Kingdom (.347), Germany (.297), and France (.292). Though the United States had 4.25 percent of the world’s population in 2020, it had 39 percent of the world’s millionaires and controlled nearly 30 percent of the world’s total wealth.
As the rich have become richer, low- and middle-income Americans have seen their wages stagnate. In earlier eras of US history, workers’ hourly wages rose steadily along with increases in their productivity. Between 1948 and 1979, for instance, productivity increased by 108.1 percent, while hourly compensation grew by 93.2 percent. From 1979 to 2018, however, a 69.6 percent increase in productivity yielded only an 11.6 percent growth in hourly wages. Though economic growth continued to occur in the later period, workers received a smaller share of the benefits of that growth, while wealthy corporate executives and stockholders received a larger share.
Economists cite several factors to explain wage stagnation and widening income disparity. Some argue that economic globalization has suppressed wages by forcing US workers to compete against low-paid workers in developing countries. Some blame workplace automation and information technology for eliminating good-paying jobs in factories and offices. Some blame the declining power of labor unions for allowing companies to dictate employment policies and suppress wages. And some claim that decreasing government regulation and taxation of businesses, especially in the financial sector, enabled corporate leaders to inflate their own salaries, bonuses, and stock options.
The widening of the income gap accelerated following the 2008 recession. Between 2009 and 2012, the incomes of the top 1 percent grew by 30 percent, while those of the bottom 99 percent increased by only 0.5 percent. Economics experts warn that a similar phenomenon is developing in the wake of the novel coronavirus 2019 (COVID-19) pandemic in 2020. Many higher-paid professionals were able to transition to remote work and remain employed, while many personal service and retail positions, already lower-paid, disappeared altogether, many permanently. As the stock market bounced back from dramatic drops early in 2020, a “K-shaped recovery” occurred, where the wealthier part of the population saw their incomes again growing steadily as the incomes and wealth of the lower classes continued to decline.
Social and Economic Mobility
Income disparity and concentration of wealth have created inequalities in other aspects of US society. For instance, the extremely wealthy gain a disproportionate level of economic and political influence by contributing large amounts of money to political candidates and causes. According to critics, such contributions corrupt the democratic process by giving wealthy individuals the opportunity to influence government policy for their own benefit. During the 2020 election cycle, more than 76 percent of large itemizable contributions to all federal candidates, political action committees, and outside groups were given by only 1.42 percent of the US population.
The issue of income inequality is compounded by a lack of socioeconomic mobility. As the wealth gap has widened, it has become more difficult for people in lower economic strata to improve their situations in life, particularly in the South and areas in the Rust Belt (the region between the Northeast and Midwest previously known for its flourishing manufacturing industry). In addition, many people born into high-income families receive a financial boost from the intergenerational transfer of wealth through inheritance, gifts, and educational opportunities. Economists at the Brookings Institution projected that Americans would inherit nearly $765 billion in 2020. While people receiving inheritances in households making under $50,000 per year were expected to average about $62,000 in bequests, households with over $1 million in income were expected to average $3 million in inheritances. A 2018 report by the Federal Reserve Board found that 56 percent of all intergenerational transfers of wealth went to people whose wealth already ranked in the top 10 percent nationally, whereas only 8 percent of transfers went to people in the bottom 50 percent.
Educational achievement is strongly correlated with income and income inequality. An analysis of data from the US Bureau of Labor Statistics shows that American adults over age twenty-five with a bachelor’s degree earned 67 percent more in 2019 than people with only a high school education. Earnings were even higher for people with professional degrees, who earned 150 percent more in 2019 than people with only a high school diploma. Economic researchers have also determined that, as income inequality increases in the United States, inequality in educational attainment also increases. The correlation between educational and income inequalities contributes to a vicious cycle that inhibits social mobility and is compounded over generations.
Socioeconomic mobility is especially limited for racial and ethnic minorities and other marginalized groups that have experienced discriminatory treatment throughout US history. Notably, from the 1940s through the 1960s, the Federal Housing Administration employed a policy known as redlining to deny mortgage loans to African American families who wanted to purchase homes in suburban neighborhoods. This policy forced Black families to live in racially segregated urban areas and denied them the benefits of homeownership. Meanwhile, working-class white families purchased suburban homes and have accumulated wealth as the homes have appreciated in value. Many white families have used their home equity to finance college educations and provide inheritances for their children, increasing the wealth of future generations, which gives them additional opportunities such as funding for higher education, down payments for homes, or investments in business ventures.
In 2019 the median wealth for white households was $188,200, while the median wealth of Black households was just $24,100, making the average wealth of white households nearly eight times that of Black households. As of the second quarter of 2020, white households (60 percent of the US population) owned 84 percent of all US wealth, while Black households (13.4 percent of the population) held just 4 percent. Some activists argue that the US government should pay reparations to African Americans to make up for the lasting economic harm done by centuries of slavery, segregation, and discrimination.
Policy and Future Directions
Proposed solutions to income inequality include increasing access to higher education for students from low-income families, strengthening labor unions and legal protections for workers, and increasing government regulation of business and finance. Another popular proposal involves increasing the federal minimum wage from $7.25 per hour, which provides an annual household income well below the poverty level. Laws calling for a minimum wage of fifteen dollars per hour have been passed in cities like New York City and Washington, DC, and as of 2021, nine states had approved graduated increases to bring the minimum wage to fifteen dollars an hour over several years. In January 2021 President Joe Biden’s proposed American Rescue Plan included a fifteen-dollar federal minimum wage as one of its measures. The federal minimum wage was last raised in 2009.
A different approach to addressing income inequality involves instituting a maximum wage in the form of a 100 percent tax on income above a certain level. In 2018 the Securities and Exchange Commission enacted a regulation passed in 2010 requiring US public corporations to disclose the ratio of total executive compensation to the median wage of a typical worker. As large corporations began disclosing this information, it raised public awareness of the vast discrepancy in pay between top management and workers.
Many approaches to reducing income inequality involve revising the tax code in ways that allow low-income people to keep more of their wages and require wealthy people to pay more in taxes. Some economists suggest increasing the estate tax on inherited wealth. Others propose eliminating the carried interest loophole that allows billionaire financial managers to treat their income as investments, which are subject to a lower tax rate. Critics of the tax reform bill signed into law by President Donald Trump in 2017 argue that it exacerbated income inequality by reducing taxes on wealthy Americans and large corporations. In 2020 the richest 1 percent of taxpayers received an average tax cut of $50,000 under the 2017 law, while the bottom 80 percent saw a cut averaging just $645.
Biden took office in January 2021, having run on an economic policy of reducing wealth inequality. In addition to increasing the federal minimum wage to fifteen dollars, his proposals have focused on job creation through large-scale infrastructure and green energy investment by the federal government. He has expressed support for increasing top-tier income tax and corporate tax rates, forgiving student loan debt, and making college free for Americans making less than $125,000 per year. Some of his first actions in office were related to economic rescue measures to support citizens, businesses, and state and local governments through the pandemic.