Outten & Golden: Empowering Employees in the Workplace

Posts Tagged ‘income gap’

Income Inequality Is off the Charts. Can Local Policies Make a Difference?

Wednesday, December 28th, 2016

The income gap between the classes is growing at a startling pace in the United States. In 1980, the top 1 percent earned on average 27 times more than workers in the bottom 50 percent. Today, they earn 81 times more.

The widening gap is “due to a boom in capital income,” according to research by French economist Thomas Piketty. That means the rich are living off of their wealth rather than investing it in businesses that create jobs, as Republican, supply-side economics predicts they would do.

Piketty played a pivotal role in pushing income inequality to the center of public discussions in 2013 with his book, Capital in the Twenty-First Century. In a new working paper, he and his co-authors report that the average national income per adult grew by 61 percent in the United States between 1980 and 2014. But only the highest earners benefited from that growth.

For those in the top 1 percent, income rose 205 percent. Meanwhile, the average pre-tax income of the bottom 50 percent of workers was basically unchanged, stagnating “at about $16,000 per adult after adjusting for inflation,” the paper reads.

It notes that this trend has important political consequences: “An economy that fails to deliver growth for half of its people for an entire generation is bound to generate discontent with the status quo and a rejection of establishment politics.”

But the authors also note that the trend is not inevitable or irreversible. In France, for example, the bottom 50 percent of pre-tax income grew by about the same rate—32 percent—as the overall national income per adult from 1980 to 2014.

The difference? In the United States, “the stagnation of bottom 50 percent of incomes and the upsurge in the top 1 percent coincided with drastically reduced progressive taxation, widespread deregulation of industries and services, particularly the financial services industry, weakened unions, and an eroding minimum wage,” the paper reads.

Piketty and Portland

President-elect Donald Trump’s administration promises at least four years of policies that will expand the gap in earnings. But a few glimmers of hope are emerging at the local level.

The city council of Portland, Oregon, for example, recently approved a tax on public companies that pay executives more than 100 times the median pay of workers. The surtax will increase corporate income tax by 10 percent if executive pay is less than 250 times the median pay for workers, and by 25 percent if it’s 250 and over. The tax could potentially affect more than 500 companies and raise between $2.5 million and $3.5 million per year.

The council cited Piketty’s Capital in the Twenty-First Century in the ordinance creating the tax. Steve Novick, the city commissioner behind it, recently wrote that “the dramatic growth of inequality has been fueled by very high compensation of a few managers at big corporations, as illustrated by the fact that 60 to 70 percent of people in the top 0.1 percent of income in the United States are highly paid executives at large firms.”

Novick said that he liked the idea when he first heard about it because it’s “the closest thing I’d seen to a tax on inequality itself.” He also said that “extreme economic inequality is—next to global warming—the biggest problem we have in our society.”

Investing in children

There is also hopeful news in the educational realm. James Heckman, a Nobel Laureate in economics at the University of Chicago who has spent much of his career studying inequality and early childhood education, recently published a paper that lays out the results of a long-term study.

In “The Life-cycle Benefits of an Influential Early Childhood Program,” Heckman and others report that high-quality programs for children from birth to age 5 have long-term positive effects across a range of metrics, including health, IQ, participation in crime, quality of life and labor income.

Predictably, perhaps, the effects of the programs weren’t limited to children. High-quality early childhood education also allowed mothers “to enter the workforce and increase earnings while their children gained the foundational skills to make them more productive in the future workforce,” a summary of the paper reads.

“While the costs of comprehensive early childhood education are high, the rate of return of [high-quality programs] imply that these costs are good investments. Every dollar spent on high quality, birth-to-five programs for disadvantaged children delivers a 13% per annum return on investment.”

The research is important because early childhood education has bipartisan support. Over the summer, the Learning Policy Institute released a report that highlighted best practices from four states that have successful early childhood education programs. Two of them—Michigan and North Carolina—are swing states in national politics. The others are Washington and a solidly red state, West Virginia.

Although it isn’t a substitute for other policy tools to address inequality, like progressive taxes, early childhood education has strong bipartisan support because it produces measurable payoffs for both children and the economy. One study found, for example, that the economic benefit of closing the educational achievement gaps between children of different classes would be $70 billion each year.

Early childhood education fosters an “increasingly productive workforce that will boost economic growth, provide budgetary savings at the state and federal levels, and lead to reductions in future generations’ involvement with the criminal justice system,” the Economic Policy Institute recently noted. “These benefits will, of course, materialize only in coming decades when today’s children have grown up. But the research is clear that they will materialize—and when they do, they are permanent.”

This blog originally appeared at inthesetimes.com on December 26, 2016. Reprinted with permission.

Theo Anderson, an In These Times staff writer, is writing a book about the historical and contemporary influence of pragmatism on American politics. He has a Ph.D. in American history from Yale University and teaches history and literature seminars at the Newberry Library in Chicago.

More Evidence on Why Inequality Matters

Monday, May 23rd, 2016

William SpriggsThe evidence has mounted, and is clearly accepted, that extreme income inequality has grown in the United States over the past 40 years—and by extreme income inequality, I mean a huge imbalance in income growth favoring the top 1% of the population. This is extreme because it is large enough and sufficiently imbalanced growth that it must force a rethinking of economic policies.

Too much of the debate has been taken up on wage disparities between high-tech workers and low-wage service workers, between those who program the robots and those displaced by them. All those debates are limited to understanding the stagnant income growth within those in the bottom 90% of the income distribution. In net terms, those workers have gained nothing.

Unfortunately, however, that framework continues to dominate the global consensus debating solutions to the rising inequality, whether it is from the International Monetary Fund or the Organization for Economic Cooperation and Development, pillars of the so-called troika of policy centers that define neoliberal consensus on best practices for national policy. And, the concerns about inequality echo through the World Bank and the World Economic Forum.

Recent research is pointing to a new direction of understanding why inequality hurts growth. It is based on micro-economic evidence of firm-level success and points to why policies aimed at reversing income inequality are in the interests of businesses at the firm level. By exploiting new big data, economists are modelling a different challenge that inequality creates.

Last year, Simon Gilchrist and Egon Zakrajšek looked at differences in pricing behavior of firms during the recovery from the 2008 recession and uncovered that firms live and die based on their customer base. Growth of the firm is reliant on growth of their customer base. Firms that face stagnant customer base growth and loss of customer base then live or die on the availability of credit and their liquidity. Those firms are fragile. A downturn like 2008 means they face the strongest headwinds, their customer base freezes or shrinks as their incomes fall and their lack of credit from the financial collapse can easily mean they fail, or struggle to hold on by raising prices to their remaining customers.

The macro-economic implications are clear. If the bottom 90% of the income distribution rises by only 0.7%, then there will be a lot of firms facing no growth in their customer base. Another new study this week confirms that. Xavier Jaravel shows that those with low incomes consistently buy the same products year to year. This follows basic economic rationality. Consumers with the same income, assuming fixed tastes and preferences, should be observed buying the same things over time. Having revealed their preferences for goods, if their incomes don’t change, their preferences should also be stable over time. In business terms, they do not present themselves as new customers. So, firms do not chase them. These same consumers, therefore, do not realize any gains from “competitive” markets, fighting through prices to win dominance over new products. Instead, the firms that serve the poor are the firms Gilchrest and Zakrejšek point out must survive on raising prices to hold onto their total revenue during tough times.

The rich, Jaravel found, on the other hand, face great competition for them among firms chasing expanding customer bases. In short, the rich are not poor people with more money. They do have different tastes; as economic theory suggests, rising incomes change people’s tastes and preferences. Economists, in fact, label some goods as inferior goods because as incomes rise, demand for them falls; the rich buy foie gras, not baloney, craft beers, not Bud Light. When firms chase those customers, they compete, and the benefit is falling prices for those goods.

So, there are two distortions that hurt growth when income grows so unequally. First, if income grows equally, then the 127 million American consumer units (households and families that buy things) all become potential new customers. Firms would then chase them, and the competitive dynamics of the market would create new opportunities to grow or create businesses. But, when only 1% have rising incomes, that is a growth of 1.2 million potential new customers. That is a vastly smaller set of opportunities for firms to grow.

Second, it is a limited set of tastes and preferences to go after; it is a market that lacks the scale for creating large numbers of jobs and production efficiencies that come from a mass market of 127 million new customers. This hurts productivity growth, as more jobs are created and aimed at smaller scale production.

So, rather than ask individual firms, “What would a $15-an-hour wage mean in paying their workers?” firms should be asked, “What would a 100-fold increase in their customer base mean?” Most firms are more concerned about the latter, without an understanding of ways to make that happen. But, if the economy is to grow, be dynamic and benefit workers and companies both, companies need to think about what policies make growth more equal.

This blog originally appeared in aflcio.org on May 20, 2016.  Reprinted with permission.

William E. Spriggs is the Chief Economist for AFL-CIO. His is also a Professor at Howard University. Follow Spriggs on Twitter: @WSpriggs.

 

Your Rights Job Survival The Issues Features Resources About This Blog