According to data released this week by the Census Bureau, America’s middle class continued to struggle to regain its economic footing in 2013 as its share of the nation’s total income remained effectively stagnant at historically low levels. Among the most frequently overlooked contributors to the middle class’ declining share of the economic pie is the weakening of labor unions, whose membership as a share of the national population also sat stagnant at a historic low in 2013. Strong unions are necessary to maintain a robust middle class, and if action is not taken to prevent their further erosion, the middle class’ share of America’s economic gains may continue to shrink as the nation becomes more unequal. … A number of forces are responsible for this unequal growth, including rapid globalization that undermined some middle-class wages and increasing returns to education that disproportionately increased the earnings of workers toward the top. When examining these trends, however, the role played by the decline of organized labor is often overlooked. Multiple academic studies have shown that unions help reduce economic inequality and that a significant share of the recent increase in inequality can be attributed to falling union membership. ….
From the press release:
Despite the overall improvement in the U.S. economy, a majority of Americans have a decidedly gloomy outlook on their personal financial situation and the economic future of the country heading into the midterm elections, finds the 2014 American Values Survey. Nearly 6-in-10 Americans report being in only fair (37 percent) or poor financial shape (20 percent), while roughly 4-in-10 Americans say they are in excellent (7 percent) or good (34 percent) financial shape. This assessment represents a notable drop from 2010, when half of Americans indicated they were in excellent (9 percent) or good (41 percent) financial shape.
The fifth annual look at religion, values and public policy in America from the nonpartisan Public Religion Research Institute finds that over the last year many Americans have experienced significant economic hardships, such as cutting back on meals to save money or having trouble paying a monthly bill. An Economic Insecurity Index (EII), developed by PRRI from six specific indicators of economic hardship, finds that approximately 4-in-10 Americans live in households with high (15 percent) or moderate (26 percent) levels of economic insecurity, while 6-in-10 Americans live in households with low (20 percent) or no (39 percent) reported economic insecurity….
…When it comes to specific economic and workplace policies, Americans are largely in agreement. By a margin of two to one, Americans agree that the government should do more to reduce the gap between the rich and poor (66 percent agree, 32 percent disagree). Approximately 8-in-10 (78 percent) Americans favor requiring companies to provide all full-time employees with paid leave for the birth or adoption of a child. Approximately 8-in-10 (81 percent) Americans favor requiring companies to provide all full-time employees with paid sick days if they or an immediate family member gets sick….
Do people from different countries and different backgrounds have similar preferences for how much more the rich should earn than the poor? Using survey data from 40 countries, we compare respondents’ estimates of the wages of people in different occupations – chief executive officers, cabinet ministers, and unskilled workers – to their ideals for what those wages should be. We show that ideal pay gaps between skilled and unskilled workers are significantly smaller than estimated pay gaps, and that there is consensus across countries, socioeconomic status, and political beliefs for ideal pay ratios. More over, data from 16 countries reveals that people dramatically underestimate actual pay inequality. In the United States – where underestimation was particularly pronounced – the actual pay ratio of CEO s to unskilled workers (354:1) far exceeded the estimated ratio (30 :1) which in turn far exceeded the ideal ratio (7 :1). In sum, respondents underestimate actual pay gaps, and their ideal pay gaps are even further from reality than those under estimates.
From the abstract:
This article, a call for both empirical social scientists and critical race theorists to engage with each other in careful interpretive analysis, applies sociologist Harold Garfinkel’s concept of ceremonial degradation to policies, practices, and proposals targeting low-income women of color in the United States. This article offers several examples of degradation ceremonies, including: excessive penalties and extrajudicial public shaming for women convicted of welfare fraud; mandatory drug testing of welfare recipients; high-publicity criminal prosecutions of mothers who violate school district residency requirements to enroll their children in more affluent schools; and tough criminal penalties for those who possess stolen infant formula or other necessities low-income Americans have difficulty obtaining. This article also describes some of the functions served by degradation ceremonies, including: the legitimation of material inequality, the perpetuation of social and economic myths, the policing of status quo distributions of property, and the satisfaction of the public’s emotional desire for sadomasochistic ritual. The article’s final section calls upon policy makers and scholars to acknowledge the degradation of low-income women that now occurs through policy and practice and offers broader suggestions for subverting the ceremonial degradation of the poor.
Source: Gabriel J Petek, Standard & Poor’s Ratings Direct, September 15, 2014
∙ A one-unit increase in the share of income going to the top percentile had a negative impact on tax revenue growth.
∙ We believe that structural, rather than cyclical, forces are leading to slower state tax revenue growth.
∙ From 1980 to 2011, average annual state tax revenue growth fell to 5% from 10%; meanwhile, the share of total income for the top 1% of earners doubled.
∙ State tax revenue trends have also become more volatile as progressive tax states have come to rely more heavily on capital gains from top earners.
∙ Regardless of a state’s tax structure — be it income-tax or sales-tax reliant – the pace of revenue growth is declining across the spectrum.
∙ Reasons for rising income inequality aside, the disparity is contributing to weaker tax revenue growth by weakening the rate of overall economic expansion.
∙ It’s unlikely that states can fully correct for both slower and more volatile tax revenue growth by adjusting their tax policies.
In a recent article, Standard & Poor’s Ratings Services examined income inequality in the U.S. and concluded that rising income inequality is one factor contributing to slower economic growth, and that this represents a structural, rather than a cyclical change.
Extending our analysis to public finance, we find that increasing income inequality is undermining the rate of state tax revenue growth. In addition, it is contributing to volatility in tax revenue collections.
Compared with local governments, which rely to a greater extent on property taxes, states generate the bulk of their revenue from taxes levied on current economic activity, namely personal income and consumption. Therefore, when the economy operates below its potential, state tax revenues tend to suffer. Insofar as income inequality contributes to economic output falling short of potential, it undermines the growth of states’ tax bases.
Our analysis found a negative relationship between income inequality and state tax revenue tends. When we tested the relationship by tax structure, we found the negative effect was stronger and only statistically significant in the sales tax-reliant states. The findings support our view that rising income inequality contributes to weaker tax revenue growth by undermining the rate of overall economic expansion.
In addition to slower revenue growth, Standard & Poor’s believes income inequality has tied the states’ revenue performance more closely to that of the financial markets. Reflecting this linkage, state tax revenues have become more volatile, greatly complicating the task of budgeting.
Thus, inequality appears to be a macroeconomic problem with fiscal implications for states. In other words, because it is a structural economic problem, it is unlikely that states can fully correct for it solely by adjusting their tax policies.
From the abstract:
This paper links data on establishments and individuals to analyze the role of establishments in the increase in inequality that has become a central topic in economic analysis and policy debate. It decomposes changes in the variance of ln earnings among individuals into the part due to changes in earnings among establishments and the part due to changes in earnings within-establishments and finds that much of the 1970s-2010s increase in earnings inequality results from increased dispersion of the earnings among the establishments where individuals work. It also shows that the divergence of establishment earnings occurred within and across industries and was associated with increased variance of revenues per worker. Our results direct attention to the fundamental role of establishment-level pay setting and economic adjustments in earnings inequality.
From the abstract:
What determines support among individuals for redistributive policies? Do individuals care about others when they assess the consequences of redistribution? Using data for the US from 1978 to 2010, we find that differences in redistribution preferences between the rich and the poor are high in some states and low in others. Surprisingly, this difference has a lot to do with the rich and very little to do with the poor. While support for redistribution decreases with income, the preferences of the rich are very sensitive to the level of macro-inequality, and the rich are more supportive of redistribution in unequal states than they are in more equal states. To explain this relationship, we propose a model of other-regarding preferences for redistribution, which we term “income-dependent altruism.” In making these distinctions between the poor and the rich, the arguments in this paper challenge some influential approaches to the politics of inequality.
The rise in inequality and its effects on economic mobility are defining issues for America’s future.
∙ Extreme concentrations of income and wealth pose fundamental challenges to America’s ideals of democracy and equal opportunity.
∙ Both inequality and economic mobility vary substantially by metropolitan region within the U.S
∙ Variation in inequality and mobility imply that local, state, and federal policies can have an impact
A PLAN TO RESPOND: Policy interventions can address poverty and inequality
∙ Raise the minimum wage to lift nearly one million people out of poverty.
∙ Invest in early-childhood education, which is proven to have significant beneficial effects on long-term educational attainment and earnings.
∙ Enhance the Earned Income Tax Credit to raise the incomes of working poor families.
∙ Support economic and racial integration in neighborhoods and schools.
∙ Ensure that mortgages remain broadly accessible, especially for communities of color that have experienced historical discrimination in lending.
∙ Adjust capital gains tax rates so that they are commensurate with income tax rates.
∙ Shift savings incentives from tax deductions that disproportionately benefit the wealthy into refundable tax credits that provide more equal benefits across income categories.
The Path to a Fair and Inclusive Society: Policies that Address Rising Inequality
Source: Webcast, September 10, 2014
… Now the recent book Capital in the Twenty-First Century by French economist Thomas Piketty has triggered increased media attention to the situation. It is a heavy book both in the number of pages, over 600, and in terms of the subject. It is not bedtime reading as his argument is disturbing. … My purpose in this editorial is to highlight key points for specialists in compensation management. I believe everyone who works in compensation should be aware of his conclusions. … A thread that runs through the book is how equality/inequality changed through the last century. His primary measure of inequality is the percentage of national total income going to the top decile—that is the top 10% of earners. While the United States is discussed in more depth than other countries, he tracks the trends in several countries, and the patterns are strikingly similar…
…Although Piketty does not discuss it, since 1980 there has been a significant shift in the occupational structure of the U.S. workforce and a decline of unionization. The prominent economist Joseph Stiglitz contends, “Strong unions have helped to reduce inequality, whereas weaker unions have made it easier for CEOs, sometimes working with market forces that they have helped shape, to increase it.” The strongest unions now are in the public sector where there is a convergence of lower level pay levels with the highest salaries, with the latter held down by political pressure….
…A central point of his argument is the “rise of the supermanager”—the “explosion of very high salaries.” His data show that trend dates to 1980 and is evident in the United States, Britain, Canada and Australia— although the United States is more extreme…. But it is no doubt true that executive pay and Piketty’s argument would not be a cause for concern if the compensation of the other 90% had kept pace as it did for roughly three decades after World War II…
∙ At extreme levels, income inequality can harm sustained economic growth over long periods. The U.S. is approaching that threshold.
∙ Standard & Poor’s sees extreme income inequality as a drag on long-run economic growth. We’ve reduced our 10-year U.S. growth forecast to a 2.5% rate. We expected 2.8% five years ago.
∙ With wages of a college graduate double that of a high school graduate, increasing educational attainment is an effective way to bring income inequality back to healthy levels.
∙ It also helps the U.S economy. Over the next five years, if the American workforce completed just one more year of school, the resulting productivity gains could add about $525 billion, or 2.4%, to the level of GDP, relative to the baseline.
∙ A cautious approach to reducing inequality would benefit the economy, but extreme policy measures could backfire.