Unit 6: Labor Markets and Income Distribution

Much of what is discussed in economics is seen from the viewpoint of a business owner.  It is sometimes easy to overlook the contributions of labor.  This section is devoted to looking at the contributions of labor in the field of economics.  I will try to explain this section using positive economic statements, rather than normative ones.

The Demand for Labor

Acquiring skills can be costly.  In the United States, workers usually pay the cost of acquiring skills before they receive a benefit in the form of a higher wage.  As was discussed in unit 4,  human capital is the accumulated skill and knowledge of human beings.  Remember from unit one, there is an opportunity cost in acquiring skills, which includes such things as tuition and reduced earnings.  Businesses are willing to pay a higher wage rate to a higher-skilled worker than to low-skilled worker.   Wage rates workers receive can also be influenced by changes in the supply of labor.   An increase in the supply of labor, such as an increase in the number of adults, can have the affect of pushing down wages.  With respect to a firm’s demand for labor, both price and non-price issues come into play.  The law of demand affects a firm’s demand for labor quite simply: if the wage rate increases the quantity of labor demanded decreases, and vise versa.  With respect to issues other than wages, a firm’s demand for labor will decrease if the firm’s output price decreases.

Labor Unions

union1Labor unions were born out of social change of the industrial revolution.  Labor unions are associations of workers which seek to promote their members interests.  Unions came into existence because workers felt that the owners of business were not representing their interests.  Labor unions have had a long struggle in our nation’s history to acquire a change in their position.  This struggle has cost many their lives.  Our nation has declared a national holiday (Labor Day) to honor the labor struggle and workers.

A Very Short History of Labor in the United States

Why would workers want to organize themselves into a union?  As has been demonstrated in previous units, capitalism stresses the profit motive. One way to increase profits is to reduce wages, benefits, and any costly improvements to worker safety.   This creates tension between management who want to increase profits for either their benefit or the benefit of stockholders, and workers, whose goals are to earn a living wage and a safe work environment.

samgompersThe man who is the first person who needs to be discussed in United States labor history is Samuel Gompers.  Samuel Gompers led the AFL (American Federation of Labor) from 1886 to 1924.  He began organizing skilled unions.  Later in the labor movement, unskilled labor also began to organize.    By the turn of the twentieth century, the membership of the AFL was 1.7 million.   By the beginning of World War I, it climbed to 2 million.  Gompers held conservative political views and believed that trade unionists should accept the economic system.  He was also resistant to include women, minorities, especially blacks, and non-skilled workers in the AFL.  As a result, a rival, more radical organization, the Industrial Workers of the World (IWW) was formed. However, their  numbers  remained small compared to American Federation of Labor.  Regardless of the union, it was recognized in the early part of the twentieth century that individual workers could not secure bargaining power on their own against huge corporations.  But thousands of workers banding together did have a certain amount of leverage- they could withhold their labor. That is why early activists used the slogan: “individually we beg, collectively we bargain”.  Unions exist because workers realize that acting together provides them with more bargaining power than would acting individually and being at the mercy of their employers.  Corporations used a number of methods to defeat the labor movement, from blacklisting union members, to court orders prohibiting strikes, to the use of violence to resist labor’s demands.  The struggle even went to the court of public opinion.  Many Americans saw unions as subversive, un-American, and in some cases, evil.

The early labor struggle focused on safer working conditions, a reduced work week, and wages. It was not easy starting a union or participating in a union strike.  The owners of corporations had a great deal of power and a number of strategies to suppress union activities.   One strategy used by employers was to bring in recent immigrants, desperate for work, to break strikes.  When employers brought in Italians to break a strike in the coal mining area around Pittsburg in 1874, 3 of the Italian replacement workers were killed.  The wealthy class benefits from economic competition between various ethnic groups. In Rock Springs, Wyoming, in the summer of 1885, whites attacked five hundred Chinese miners, killing twenty-eight of them.

“I can hire one-half of the working-class to kill the other half.”–Jay Gould, Gilded Age rail tycoon and real estate speculator

 

Employers of large corporations, had enormous amounts of money to influence labor disputes.  One strategy was to spend money in local and national elections to gain support from local officials who could call out state or national troops.  An example of this is the railroad strike of 1877 where one hundred people were killed.    Another strategy was for an employer to hire its own private army.  An example of this is the Homestead Strike of the Carnegie Steel Plant in 1892.  The Pinkerton detective agency was hired to protect strikebreakers and to break the union.  On the night of July 5th, 1892,  hundreds of Pinkerton guards boarded ships and made their way down the river to the plant. Gunfire broke out.  Three Pinkertons and seven strikers were killed.

haymarrketsquareIn 1886 there was a movement for an eight-hour work day.  On May 3, there was a demonstration in Chicago where police fired in a crowd of strikers, killing four.  The next day there was a demonstration at Haymarket Square in Chicago.  Approximately 3000 people gathered.  180 policemen showed up and ordered the crowd to disperse.   A bomb exploded, killing seven officers.  Police began to fire into the crowd, killing several people and wounding over two hundred.

pullmanstrikeMany workers went on strike because of dangerous work conditions. There were many occupations where workers would die on the job. On average, from 1905 through 1930, well over 2,000 U.S. miners would die every year. In the 1890’s , it is estimated that two thousand railroad workers were killed on the job each year.   The Pullman strike of 1884 in Chicago saw 3000 workers go on strike.  Four thousand strikebreakers were brought in.  Violence broke out.  There were many casualties.  12,000 federal troops were deployed (approximately half the U.S. army), on pretenses  to keep the peace, but surely to break the strike.   It is estimated that thirty-four people were killed.   The Triangle Shirtwaist Company on March 25, 1911, burned to the ground.  Because it was standard practice to lock the doors so that workers couldn’t leave,  146 workers, mostly women, were burned to death.   In 1904, it is estimated that 27,000 workers were killed on the job in manufacturing, transportation, and agriculture.  According to a report of the Commission on Industrial Relations, in 1914,  35,000 workers were killed in industrial accidents and 700,000 injured.   In 1912, in Lawrence Massachusetts, there was a strike against the American Woolen Company.  Ten thousand workers went on strike.  The strike occurred during the winter.   Because of the cold and the lack of food, strikers sent their children to other families until the strike was over.  City officials in Lawrence, declared this violated a statute on child neglect and would not allow any more children to leave.  When a group of children tried to leave from the train station, police moved in and beat with clubs parents and children.  In 1914 there was a strike by coal workers in Colorado.  When the strike began, the miners were evicted and forced to live in “tent cities”.   On April 20, 1914, National Guards soldiers began shooting on the tent city.  Twenty people were killed, including 11 children.

In 1938 John Lewis and the United Mine Workers, who were trying to unionize unskilled workers,  broke away from the AFL and formed the CIO (Congress of Industrial Organizations).  They rejoined in 1955 to form the AFL-CIO.

1.  The Purposeful Destruction of Worker’s Compensation Benefits

Key Labor Legislation

collectivebargainingThe Great Depression created an environment for the growth of labor unions.  In 1935 the National Labor Relations Act was passed.  This act is sometimes referred to as the Wagner Act, from its author. The Wagner Act  allowed workers to join unions and engage in collective bargaining.  Employers were forbidden from interfering with workers organizing and from penalizing employees who engaged in union activities.  This act put the force of the government on the side of unions for the first time. One of the rights won by workers was collective bargaining.  This is the process of negotiations between the union and management over wages and working conditions.  During the negotiation process, unions and management have a set of strategies that can be used to ensure that companies bargain in good faith.  Unions may threaten a strike, which is a group decision not to work.  Management might threaten a lockout, which is where the firm refuses to operate.  Management might also threaten to hire replacement workers to get an agreement in its favor.  In the collective bargaining process if the two sides can not come to an agreement, often the process moves into binding arbitration. Binding arbitration is a process where a third party, an arbitrator, determines issues such as wages and working conditions.

unionstrikeAfter World War II the Republicans captured control of Congress.  In 1947 Congress passed the Taft-Hartley Act.  This piece of legislation was more favorable to business.  The Taft-Hartley Act had three main provisions.  The first gave the government the right to halt a strike by a court order if the strike would jeopardize “national health and safety”.  It allows the president to declare an 80 day cooling off period.  If an agreement can not be reached during that time frame, then the strike may resume. The second provision was that it allowed states to enact “right to work” laws, which gives states the right to restrict union shop contracts.  These right to work laws prohibit a contract that requires union membership as a condition of employment.   25 states, mostly in the South, have right to work laws.   Lastly it provided that the union or the employer must, before terminating a collective-bargaining agreement, serve notice on the other party and on a government mediation service.

1.  A Short History of American Labor

2.  Images of Child Labor

3.  Would a Right to Work Law Be Good for Wisconsin”s Economy?

4.  Judge Rules Wisconsin’s Right to Work Law Unconstitutional

Unions in the United States Today

Union membership has changed in the United States.  Currently, only 1 in 8 workers is unionized.  Many traditional jobs that had heavy union membership (factory workers, steel workers)  have declined over the years as production has moved elsewhere.  Yet, union membership in professional organizations ( teachers, government workers) has increased. Nearly 40% of public-sector workers are union members.  The largest labor union today is the National Education Association with over two million members.  The future of unions may lie in the public sector, such as state and municipal workers.  Increased deregulation since the 1980’s in industries such as airlines and trucking has forced firms to compete more intensely and to hire less expensive nonunion labor.  In addition, the downsizing trend has closed plants and eliminated jobs, making it harder to organize a union or to win concessions.

1.  Steven Colbert and the Removal of Labor Murals in Maine

bls_union_membership_by_industry

Are Workers Better Off With Labor Unions?

Lawrence Mishel  at the Economic Policy Institute has produced a study documenting the union impact on wages and benefits in  The State of Working America.  For all workers in the United States, the union wage premium in 2011 was 13.6%. That is, on average, union members earn this much more than their nonunion counterparts. The comparison is made especially significant since it holds the following wage-determining factors constant: experience, education, region, industry, occupation, race/ethnicity, and marital status. This means that if we compare those with the same education, race, occupation, etc., union workers still make more money. We get similar results if we look at benefits. Union employees are more likely to have employer-financed health insurance (28.2%), pensions (53.9%), and time off (14.3%). Union benefits are also better. For example, union workers have lower deductibles and co-payments in their healthcare plans and are much more likely to be covered when they retire. They are more likely to have defined benefits pensions.2

Some argue there are economic costs to unions ( loss of productivity, retention of poor workers). The Employment Policy Foundation (EPF) stated that a unionized company’s output per employee would be 2.4 percent less than a union-free competitor, if that unionized company experienced just a .25 percent reduction in productivity. Their conclusion was that unless the unionized company could sell their product at a higher price or other cost savings could be attained, the unionized company is likely to see 14 percent less in profits per labor hour than their non-union competitor.3

Whatever your feelings are towards unions, they have bought benefits to all workers, union and non-union alike.  How can this be true?  Because today non-union companies offer many of the same benefits as union companies, even though they don’t have to.  Nonunion firms do this because they are competing for labor.  They don’t wish to lose productive employees to a union firm, so they try to offer the same benefits as union firms.

How does union membership in the United States compare with union membership in other leading economies?  The graph below shows that the United States has one of the least unionized workforces in the world.

1.  International Trade Union Membership Rates by Country

unionmembershipbycountry

Union Objectives and Goals

Since the labor movement began, unions have tried to win benefits for their workers.  Over the years, their struggle has produced the following benefits:  1) shorter work week, 2) time and a half for overtime pay, ) 3)  safer workplaces, 4)  health insurance, 5) retirement benefits, 6) paid vacations, and 7) a minimum wage. What the preceding list provides are benefits won by unions in the past.

unionmadeUnions have goals for their workers.  One goal is to decrease the supply of labor.  This is done through certifications, apprenticeships, reduced immigration, and professional organizations.  This has the affect of raising the wage rate, but decreasing the number of jobs available.  Because of this, unions also try to increase the demand for union labor. They try to increase the demand for labor, through things like the “Look for the Union Label” campaign.  It is hoped that this would increase demand for union made products.  They may also encourage restrictions on imports, push for minimum wage laws, and support immigration restrictions.    A third goal is to increase wages, usually done through collective bargaining. What has been described in this paragraph are goals that unions seek to maintain in the present.

1.  Connection Between Higher Healthcare Costs and Lower Wages

2.  Worker Retirement Theft in Four Despicable Steps

3.  Public Pensions Fact Sheet

4.  The Move Away From Defined Benefit Plans

 

 

The Minimum Wage Rate Debate

In 1938 Congress passed the Fair Labor Standards Act which called for the establishment of a 25 cent an hour minimum wage.  Since then the minimum wage has been raised, but not enough to keep pace with inflation. Some states have enacted minimum wages of their own that exceed the federal minimum.  There are some economists who believe that minimum wage laws hurt the very people they are intended to help.  These economists believe that minimum wage laws create a surplus of workers, especially amongst teenagers and the poor- those who need the help the most.  The argument here is that if there is no government involvement there will exist a market equilibrium wage rate.  For example, if no minimum wage exists, the market might pay low skilled workers $4 per hour. At that rate there would be 6 million workers.  If however, a minimum wage is enacted at $6 per hour, there will only be 5 million workers.  So there exists a trade-off between an increase in wages and an increase in unemployment.

On the other side, our economists who believe the minimum wage law was put into effect to abolish sweatshop wage levels.  If the current minimum wage is $7.25 an hour, is there anyone whose work is worth less than that?  Can anyone in the United States live on our minimum wage?  Is lowering the minimum wage just another excuse to pay workers less?  Another argument that a raise in the minimum wage is good for workers is that it increases labor productivity.  By raising the incomes of workers, a minimum wage may inspire them to become more productive.  In 1914 when Henry Ford raised the wages of his employees from $2.50 per day to $5 per day, there was a sharp decline in workers quitting their jobs and absenteeism. This resulted in productivity gains that outpaced the increase in wages. Economists also raise the concept of price elasticity.  Think about gasoline and how it is an inelastic good.  The price has gone up over the past few years considerably, but people still have to fill up their cars to get to work.  Many economists think that minimum wage types of jobs are also price inelastic.

So where does this leave us?  There is some evidence that increases in the minimum wage do cause people to lose jobs, especially among the unskilled.  But the last minimum wage increase in 1996 saw employment actually go up slightly.  Some economists say that because unemployment did not rise that the long held economic belief that unemployment always goes up when there is a raise in the minimum wage is no longer true.  Other economists say that the reason the unemployment rate didn’t go up was due to differences in regional economic growth, not to changes in the minimum wage. So what would the father of economics have to say?  In his book “The Wealth of Nations” he said,  ” A man must always live by his work, and his wages must at least be sufficient to maintain him.  They must, even upon most occasions, be somewhat more; otherwise it would be impossible for him to bring up a family, and the race of workers would not last beyond the generation.”2

The chart below shows the unemployment rate for the year when the minimum wage was raised and the unemployment rate for the following year.  Is there a correlation between the two as most economists believe?

Date when minimum wage was raised Wage Rate Unemployment rate for year enacted Unemployment Rate the following year
Jan. 25, 1950 from $0.40 to $0.75 5.3 3.3
March 1, 1956 $1.00 4.1 4.3
Sept. 3, 1961 $1.15 6.7 5.5
Sept.3, 1963 $1.25 5.7 5.2
Feb. 1, 1967 $1.40 3.8 3.6
Feb. 1, 1968 $1.60 3.6 3.5
May 1, 1974 $2.00 5.6 8.5
Jan. 1, 1975 $2.10 8.5 7.7
Jan. 1, 1976 $2.30 7.7 7.1
Jan. 1, 1978 $2.65 6.1 5.8
Jan. 1, 1979 $2.90 5.8 7.1
Jan. 1, 1980 $3.10 7.1 7.6
Jan. 1, 1981 $3.35 7.6 9.7
April 1, 1990 $3.80 5.6 6.8
April 1, 1991 $4.25 6.8 7.5
Oct. 1, 1996 $4.75 5.4 4.9
Sept. 1, 1997 $5.15 4.9 4.5
July 24, 2007 $5.85 4.6 5.8
July 24, 2008 $6.55 5.8 9.3
July 24, 2009 $7.25 9.3 9.6

Source:  U.S. Department of Labor:  http://www.dol.gov/esa/minwage/chart.htm and http://data.bls.gov/PDQ/servlet/SurveyOutputServlet?data_tool=latest_numbers&series_id=LNU04000000&years_

option=all_years&periods_option=specific_periods&periods=Annual+Data

1.  Impact on Employment When Cities Raised the Minimum Wage  (Chart like the one above)

2.  How the New Minimum Wage Will Affect State Minimum Wages

3.  Graph Showing the Declining Value of the Minimum Wage

4.  What Would the Minimum Wage Be If It Kept Up With Inflation?

5.  Most Minimum Wage Workers Are Not Teenagers

6.  Increasing Minimum Wage Can Create Jobs

7.  Average Age of Minimum Wage Worker Is…

Wages

Along with safety, wages is one of the most important components in a worker’s life. How have worker’s wages fared with new changes in the American economy and to the economic decline of the past decade?  The research indicates not well. According to a recent report by the Economic Policy Institute, the failure of the economy to provide a living wage to a majority of its workers has created a decade of stagnation. The main problem is that workers have not seen wage increases to match their productivity increases. While wages are stagnant or declining for most workers, corporate profits are at all time highs.

The Economic Policy Institute’s paper’s  key findings include:

  • According to every major data source, the vast majority of U.S. workers—including white-collar and blue-collar workers and those with and without a college degree—have endured more than a decade of wage stagnation. Wage growth has significantly underperformed productivity growth regardless of occupation, gender, race/ethnicity, or education level.
  • During the Great Recession and its aftermath (i.e., between 2007 and 2012), wages fell for the entire bottom 70 percent of the wage distribution, despite productivity growth of 7.7 percent.
  • Weak wage growth predates the Great Recession. Between 2000 and 2007, the median worker saw wage growth of just 2.6 percent, despite productivity growth of 16.0 percent, while the 20th percentile worker saw wage growth of just 1.0 percent and the 80th percentile worker saw wage growth of just 4.6 percent.
  • The weak wage growth over 2000–2007, combined with the wage losses for most workers from 2007 to 2012, mean that between 2000 and 2012, wages were flat or declined for the entire bottom 60 percent of the wage distribution (despite productivity growing by nearly 25 percent over this period).
  • Wage growth in the very early part of the 2000–2012 period, between 2000 and 2002, was still being bolstered by momentum from the strong wage growth of the late 1990s. Between 2002 and 2012, wages were stagnant or declined for the entire bottom 70 percent of the wage distribution. In other words, the vast majority of wage earners have already experienced a lost decade, one where real wages were either flat or in decline.
  • This lost decade for wages comes on the heels of decades of inadequate wage growth. For virtually the entire period since 1979 (with the one exception being the strong wage growth of the late 1990s), wage growth for most workers has been weak. The median worker saw an increase of just 5.0 percent between 1979 and 2012, despite productivity growth of 74.5 percent—while the 20th percentile worker saw wage erosion of 0.4 percent and the 80th percentile worker saw wage growth of just 17.5 percent.

 

wagegap2

wagegap1

According to a 2014 report by the Social Security Administration, in 2013 50 percent of all American workers made less than $28,031, and 39 percent of all American workers made less than $20,000.  If you worked a full-time job at $10 an hour all year long with two weeks off, you would make $20,000. Median pay in 2013 was just $28,031.02.  That means that 50 percent of American workers made less than that number, and 50 percent of American workers made more than that number. Average pay for 2013 was $43,041 — down $79 from the previous year when measured in 2013 dollars. Worse, average pay fell $508 below the 2007 level.  Flat or declining average pay is a major reason so many Americans feel that the Great Recession never ended for them. A severe job shortage compounds that misery not just for workers but also for businesses trying to profit from selling goods and services.  Our politicians have stood by as millions upon millions of good paying jobs have been shipped out of the country.  Millions of other middle class jobs have been lost to technology.  This has resulted in intense competition for the middle class jobs that remain, which has had the affect of driving down wages.

According to a new study by the Russell Sage Foundation, the inflation-adjusted net worth for the typical household was $87,992 in 2003. Ten years later, it was only $56,335, or a 36% decline.

1.  2014 Continues a 35 Year Trend of Wage Stagnation

2.  Workers Forced to Train Their Replacements for Cheaper H-1b Visa Workers (60 Minutes)

3.  If the Economy Keeps Improving, Then How Come Wages Haven’t Gone Up?

Income Distribution

Anyone familiar with United States history knows that our country has experienced enormous economic growth.  But income has not been distributed evenly, and many Americans have been left far behind.  Remember in earlier discussions, it was mentioned that one of the roles of government to was try to ensure equity for its citizens.  This section should help students understand the struggle for economic equity in our society.

In order to understand income distribution, one first has to understand how the government categorizes its information.  The Census Bureau divides the population into quintiles.  Each quintile represents 20% of the population, thus there are 5 quintiles.  Your income in a year places you in a quintile.  Bill Gates would find himself in the highest quintile (top 20%), someone living near the poverty line would find him/herself in the lowest quintile (bottom 20%).  The middle class would find themselves in the middle three quintiles. How have Americans been doing?  According to  researcher Edward Wolff (pdf), only the top 5 percent of American families increased their percentage of the country’s total household net worth from 1983 to 2007. So unless you make $160,000 or more, your household value has decreased, percentage-wise, over the last 25 years.  The table below shows the percentages of total income before taxes received by each fifth of American families in 1970 and 2014.

Income Rank                            1970                        2014

Lowest fifth                                4.1%                               3.1%

Second fifth                              10.8%                            8.2%

Third fifth                                 17.4%                            14.3%

Fourth fifth                               24.5%                           23.2%

Highest fifth                              43.3%                          51.2%

source:  U.S. Bureau of the Census,  http://www.census.gov/hheswww/income/income.html

 

 

The statistics put out by the Census Bureau each year seem to indicate a pattern.  Over the last few decades, the rich in the United States have gotten richer, and the poor have seen their incomes decline.  Keep in mind that this is a positive economic statement.  Why incomes gaps have widened is where normative statements come in.  It is up to you as a student, to decide if the statistics on income distribution represent a social problem for our country.  Use the link below to discover more about income inequality in the United States.

1.  Top 1% Capture 93% of Income Gains in 2010

2.  Income Inequality and Poverty: A Comparison Between the United States and OECD Countries

3.  Record US Income Gap Widening

4.  The Rich Are Winning the US Class War

5.  Income Growth Graph From 1979 – 2007

6.  Graph Showing Change in Pre-Tax Income from 1979-2005

7.  Income Inequality Graphs March/April 2011 Issue of Motherjones

8.  Income Inequality Info

9.  Tales of Overworked Americans

10.  Increase in Gini coefficents Around the World

11.  Wisconsin Median Income Declines

12.  21 CEO’s Get “Golden Parachute” of over $100 Million Each

13.  Inequality.org

14.  The “L Curve” : A Virtual Tour of Income Inequality

15.  Graph Showing Profits at All-Time High, While Wages at All-Time Low

16.  The Walton Family Wealth is Equal to the Bottom 42 Percent of Americans Combined

17.  Wisconsin Income Gap Widening Faster Than Nation as a Whole

18.  The United States of Inequality  (article with map)

19.  The Super Wealthy Are Preparing For Doomsday

 

Sources of Income Inequality

Income inequality in the United States decreased from the 1930’s to the 1970’s.  Then starting in the 1980’s, income inequality has increased.  Why?  Economists cite many varied reasons for the gap in incomes.  Age is one determinant.  Older workers with more education and work experience generally make more money than younger workers.  Another factor is differences in human capital.  Talent and intelligence is not equally distributed amongst all members of society.  Inheritance is another important factor.  When individuals inherit cash, stocks, homes, or land, it makes it easier to generate income and to improve on one’s human capital.  Finally, discrimination can influence income inequality.  If particular groups (women, minority workers) are denied access to education, training, and jobs, then inequality will be passed on from generation to generation.

The factors listed above are constants that contribute to inequality in every generation.  What are some of the factors that have contributed to the increase in inequality over the past few decades?  They are:

1)  Changes in tax law.  Over the past few decades tax laws have been changed to reduce the amount of taxes that the wealthy pay.  Many of these taxes are regressive in nature and have produced a tax shift from the wealthy to the poor. Over the past few decades, effective tax rates on US corporations and the richest 1% have fallen by about a third.

2)  Decline in manufacturing jobs.  Many in the middle and working classes worked at manufacturing jobs that paid well enough to support a family.  Because of free market trade policies, many of these jobs have left to lower wage countries.

3)  Decline in union jobs.  As was mentioned above, union jobs typically pay more than non-union jobs.  This is related to the decline in manufacturing jobs. Since 1970, the percentage of private sector workers in unions has fallen from 29% to 7%

4)  Increase in illegal immigration.  The past few decades has seen a spike in the number of illegal immigrants to the United States.  This has had the affect of creating a surplus of workers, which depresses wages for middle and lower class workers.

5)  A minimum wage that has not kept paced with inflation.  Workers who collect a minimum wage have seen their purchasing power decline.

“We have to tolerate the inequality as a way to achieve greater prosperity and opportunity for all,” Brian Griffiths, who was a special adviser to former British Prime Minister Margaret Thatcher, said October 20, 2009 at a panel discussion at St. Paul’s Cathedral in London. The panel’s discussion topic was, “What is the place of morality in the marketplace?” The financial industry  awarded itself a record $140 billion in total compensation for 2009. Goldman, Sachs all by itself  passed out $23 billion in bonuses.

Income inequality in the US is no accident.  It has conscious, deliberate origins, to be found in the policy initiatives of corporate America since the late 1970s, and the willingness of the politicians Corporate America elects in Congress, Presidents, and at State levels—Democrat and Republican alike—to  implement those policy initiatives.

There’s the tax restructuring in favor of the rich and their businesses,  free trade agreements and offshoring, the erosion of the real minimum wage, the dismantling of real pensions and employer contributions to healthcare, the shift from full time permanent jobs to part time and temp work, the destruction of unions and higher paying union jobs, the displacing of higher paid jobs with technology, substitution of credit for lack of wage growth, failure to invest in the US by corporate America, etc…That’s why jobs, real wages, and incomes for the vast majority of American households have stagnated at best, and declined in real terms for most.

Many sociologists and economics also point to structural inequality. Take for example the case of sea-front property in the French Riviera. As demand for these properties rises, perhaps from rich foreigners seeking a refuge for their funds, the value of sea frontage will be bid up. The current owners will get rents from their ownership of this fixed factor. Their wealth will go up and their ability to command purchasing power in the economy will rise correspondingly. But the actual physical input to production has not increased. All else constant, national output will not rise; there will only be a pure distributional effect.

Intergenerational transmission of inequality is more than simple inheritance of physical and financial wealth. Income inequality across parents, due to inequality of income from physical and financial capital on the one hand, and inequality due to inequality of human capital (skills and knowledge) on the other, is translated into inequality of financial and human capital of the next generation. Human capital inequality perpetuates itself through intergenerational transmission just as wealth inequality caused by financial wealth perpetuates itself.

1. Unequal America: Causes and consequences of the wide—and growing—gap between rich and poor

2.  The Key to Rebuilding Workers’ Power: Unrig the Rules

3.  Increasing CEO Pay As a Source of Income Gap Widening

4.  Us vs. Them:  Graphs on Income Inequality

5.  How Entitlements for the Rich Cheat the Rest of Us

6.  Three Rich Treasury Secretaries Laugh It Up Over Income Inequality

7. Wealth of the World’s 62 Richest People Equals that of the Poorest 3.6 Billion

Effects of Income Inequality

lorenz

Economists use the Lorenz Curve to graph income inequality.  The Lorenz Curve graphs the cumulative percentage of income against the cumulative percentage of households.  A straight line would indicate equality.  The more a line is curved, the greater the income inequality.   A sample Lorenz Curve is shown below.

We can have democracy in this country, or we can have great wealth concentrated in the hands of a few, but we can’t have both.” Louis D. Brandeis

Who owns financial assets such as stocks and bonds in corporations tells us who has a direct claim to the income generated by capital. Here is the distribution of financial asset holdings across the wealth distribution. This is from the 2010 Survey of Consumer Finances:

whoownesfinancialwealth

Poverty

Poverty is a relative concept.  Someone who might be considered middle class in a developing country, might be considered poor in a developed nation.  Yet, despite its relativity, poverty is a problem faced by all nations on earth.  The information below should help understand the issues facing individuals and countries alike concerning poverty.

Poverty in the United States

As stated above, poverty is a relative concept.  What represents a minimum living standard in one country, would not represent a minimum living standard in another.  The United States tries to deal with the problem of relativity the best it can.  The government, through the Department of Agriculture,  has developed tool called the  poverty line to measure poverty in the United States.  The Department of Agriculture  bases their estimates on the assumption that poor families spend one-third of their incomes on food.  Each year it calculates the minimum food budget for a family of four for one week and then multiplies it by 52 for the weeks of the year, and then triples that figure to get the official poverty line.  Click on the link below to access statistics from the US Census Bureau on the poverty guidelines.

THE 2017 HHS POVERTY GUIDELINES: One Version of the [U.S.] Federal Poverty Measure

 

Once the poverty line has been established, then the poverty rate can be found by dividing the number of poor people by the number of people in the country.  The poverty rate declined during the 1960’s and 1970’s but went back up during the recessions of the 1980’s and early 1990’s. Since the economic crisis of 2008 began, poverty rates have increased to record numbers. Click on the link below for information about poverty in the United States.

1. Poverty: 2013 Highlights  (US Census Bureau)

2. Living Wage is Good for Business, Employers Say

3. Poverty in the United States

4.  US Poverty Data Only Tells Half the Story

5.   Poverty and Food Insecurity Rates for Rock County

6.   America’s Poor:  Map of Poverty in America

7.  Numbers of Poor Maybe Be Millions Higher

8.  New Obama Poverty Measure Lowers Poverty in Most States

Societies around the world have made attempts to deal with poverty, usually through a set of government programs.  In the United States there have been a number of government programs created to deal with the problem of poverty.  For someone to qualify for an antipoverty program, they must first past a means test.  This is a requirement that a family’s income not exceed a certain level.  Below is a brief description of some of the antipoverty programs.

Social Security.  This a program geared mainly for the elderly or surviving family members. Workers may retire between the ages of 65 and 67 and receive full benefits, or at age 62 and receive partial benefits.

Unemployment Compensation.   This government program pays income for a short time period to workers who have recently become unemployed.

Temporary Assistance to Needy Families (TANF).  Benefits for this program vary from state to state.  The federal government, does however, restrict benefits for no longer than sixty months.

1.  A Critical Look at TANF

Food Stamps.   This government program began in 1964 and administered by state governments.  It is one of the more heavily criticized components of the American welfare system.  A food stamp recipient may exchange food stamps or coupons for needed goods, such as food.

1.  How Big Banks and Large Corporations Profit From the Food Stamp Program

Medicaid.   A government program that provides medical services to poor people under the age of 65 that have passed a means test.

Housing Assistance.  The federal government, through the Department of Housing and Urban Development (HUD), has a number of programs to provide affordable housing to poor people.

Poverty Around the World

Just as poverty in the United States is relative, so is poverty around the world.  There are many definitions and debates about the number of poor in the world. One of the leading sources for information on poverty around the world is the World Bank.  The World Bank distinguishes between two types of poverty.

Extreme Poverty.  This category refers to people who live on an income of $1.25 per day.  The World Bank estimates that in the year 2011, roughly 1 billion people were living in extreme poverty. People in this category cannot meet basic needs for survival.  There is little or no access to education, health care, safe drinking water or sanitation.  Most people in this category live in a rudimentary shelter with few possessions and are chronically hungry. A country as a whole is deemed to suffer from extreme poverty if the proportion of the population in extreme is at least 25 percent of the total population.

Relative Poverty.  This category is defined as a household income level below a given proportion of average national income. Most of the poor in developed countries like the United States, fall into this category.  These people are poor relative to the high income earners in their society.  They have enough income to meet their daily needs, and perhaps a little extra for a few goods or services.  But they still do not have access to quality health care, education, and other cultural goods that would allow them upward social mobility.

So what can be done about income inequality and poverty?  There are many economists and other people in society who believe in the bumper sticker below:

incomeequality

 

   actionMovies Relevant to This Unit

Below are a list of movies that exhibit economic concepts learned in this unit.

 

1.  Inequality for All  by Robert Reich   A documentary that follows former U.S. Labor Secretary Robert Reich as he looks to raise awareness of the country’s widening economic gap.

2.  Elysium.  In the year 2154, the very wealthy live on a man-made space station while the rest of the population resides on a ruined Earth.

 

books03 Books Relevant to This Unit

Below are a list of books that exhibit sociological concepts learned in this unit.

1.  The Spirit Level: Why Greater Equality Makes Societies Stronger (Bloomsbury Press, 2009), Richard Wilkinson and Kate Pickett have documented the numerous studies that correlate inequality with shorter life expectancies, increased disease and health problems, and even higher murder rates. These effects are attributed to the stress of “relative deprivation” — trying to survive in a community where economic, educational and health care disadvantages persist in an otherwise prosperous environment.

 

2.  Wealth and Democracy  by Kevin Phillips

3.  Capital in the Twenty-First Century by Thomas Piketty   Piketty, arguably the world’s leading expert on income and wealth inequality, does more than document the growing concentration of income in the hands of a small economic elite. He also makes a powerful case that we’re on the way back to ‘patrimonial capitalism,’ in which the commanding heights of the economy are dominated not just by wealth, but also by inherited wealth, in which birth matters more than effort and talent.

 

Bibliography

 

Parkin, Michael      2000  Economics (5th Edition)  New York:   Addison- Wesley

Slavin, Stephen L.      1999   Economics  (5th Edition)   New York:   Irwin McGraw-Hill

Taylor, John B.

2001 Economics.  Boston: Houghton Mifflin Company

Tregarthen, Timothy.

2000 Economics (2nd Edition) New York:  Worth Publishers

Tucker, Irvin B.         1995  Survey of Economics   New York:  West Publishing Company

1 Lawrence Mishel and Matthew Walters, “The State of Working America”.  Economic Policy Institute

2  Lawrence Mishel and Matthew Walters, “The State of Working America”.  Economic Policy Institute

3 Employment Policy Foundation, “Financial Outcomes in Union and Non-Union Workplaces,” Issue Backgrounder, March 14, 2003

 

2 Smith, Adam   “The Wealth of Nations”  page 95

Copyright ©2007, 2014 Glenn Hoffarth All Rights Reserved

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