Tag Archives: inequality

Income Inequality Levels Rising

Thesis: Pay inequality is at exorbitant levels and something must be done to stop this rising inequality.

The income inequality in America has gotten a lot of attention and press for a few years now, so one would think that all of this negative publicity surrounding it would cause this inequality to go away. However a recently released Harvard Business School study proved that “Americans might think they know how bad inequality is, but it turns out they actually have no idea. [This study] found that Americans believe CEO’s make roughly thirty times what the average worker makes in the United States, when in actuality they are making more than 350 times the average worker.” This disparity in incomes is at historic highs, and truly sad how uninformed Americans truly are at just how high this income inequality levels have reached.

The Average annual compensation for CEO’s is by far the highest in the United States.  Supporters of this pay gap may justify this by saying that they need these levels of compensation to remain the number one innovator and country and to attract and retain the most talented and successful CEO’s and businesses. But if this argument were to hold, then the bosses of Wall Street, long considered an area where some of the most successful and smartest people go, should have some of the highest disparities between the top bosses and the average low level employee. However as the Wall Street Journal reported, “The gap between what bank CEOs and their staffs take home in pay has narrowed significantly since the financial crisis, driven mostly by a drop in compensation for the leaders of the five biggest Wall Street firms, according to a Wall Street Journal review of bank regulatory filings.” This is a good sign as the average pay for worker at the top Wall Street Banks rose to new highs, the pay of the CEO’s remained well below their 2006 pre-recession highs.

As explained later in the article, “Wall Street CEO pay “just doesn’t have the leverage that it used to because in many cases the businesses themselves don’t have the leverage,” said Todd Sirras, a managing director at Semler Brossy Consulting Group LLC.” Another possible reason for the lower ratios of CEO to average worker pay for Wall Street is that everyone on Wall Street “even middle-tier finance workers are generally well paid.” While in comparison an analysis from last year, “estimated that it takes the typical worker at both McDonald’s and Starbucks more than six months to earn what each company’s CEO makes in a single hour.”

The income inequality is still high all over America, and must start to dissipate in order to not enrage all American workers. This can be done in many ways, raising the minimum wage paid to low level employees, or lowering the pay of top CEO’s. Either way, something must be done about the widening gap between America’s ellite and the average worker.

A Crucial Factor in any Analysis of Inequality

Thesis: Properly implemented cost-of-living adjustments are often missing from analyses of inequality data, which often leads to overstated or outright incorrect results.

As the income gap between the wealthy and everybody else grows wider and wider in the United States, the search for the underlying causes has brought more and more economists, think tanks, and academics alike to analyzing data on inequality.  But, as with any statistical analysis, researchers must be careful with their underlying assumptions and variables before coming to conclusions.  One key variable that must be controlled for when comparing income levels across the country is cost of living: in different parts of the country, income levels will vary as employers must compensate labor differently based on the market they’re in, to compete with employers in lower cost of living markets.  For example, the mean annual wage of a nurse in California is $90,860 versus $67,140 in Pennsylvania (source: Bureau of Labor Statistics).  The map below, created by the Tax Foundation, provides a visualization of how cost of living varies across the country.  

$100bystateDespite the large variation in cost of living across the country, many studies seem to neglect controlling for the variable and the effect it has on nominal income.  For example, a paper written by David Autor and cited in the Wall Street Journal argues that the biggest societal factor for explaining inequality is that of education, pointing to the fact that the earnings gap between non-college educated households and those with a college education has grown at a faster pace than the gap between the 1% and the rest of the country.  But Autor’s study is missing a key piece: it doesn’t control at all for cost of living across earners.  It simply compares earnings by education level, with no regard for location – even though there is definitely a correlation between education level and cost of living.  More educated households are more likely to be located in areas like California and New England, where not only is the cost of living higher, but so are income levels as employers compensate for that cost of living.  The result is that Autor’s claims are overstated: while there is still certainly truth to his study, it is also the case that we would expect there to be a correlation between education and nominal income that is actually due simply to variation in cost of living.

On the flip side, there are cases where arguments about income inequality have been made that seem to overstate the cost of living effect.  An example that should be well known to economics students on this campus by now is the highly controversial Michigan Daily article Relative Wealth, which argues that one can be considered to be a middle class American even with an annual household income of $250,000, due to of cost of living variation.  While I won’t argue for or against the premise of this article, I will point out that Klein overestimates the degree to which higher cost of living areas dilute one’s income, and that weakens her argument.  While it is certainly true that higher major expenses (mainly rent/home prices) should correspond to a higher income in certain areas of the country, many discretionary expenses become relatively cheaper when one lives in a high cost of living area.  Goods which do not vary in price geographically (e.g. practically anything you can buy on the internet) cost a smaller portion of one’s income if they live in a higher cost of living area, giving them more purchasing power for certain goods.  This somewhat offsets the nominal wage differential of different cost of living areas.  And so those who wish to study income inequality must tread carefully: there are many confounding variables at play.  I don’t know what the best way to control for cost of living is, but those who ignore it will come to conclusions that may be over or understated.

Why does poverty still exist in the U.S. and why we fail to eliminate poverty

There are many social problems such as violence, racism, drug abuse, and other problems in today’s society. The United States government has been engaging in these problems to find proper solutions but their efforts were not successful. Among these social problems, however, poverty is one of the biggest concerns in the U.S. The share of high poverty and high-inequality proportion in the U.S is growing as it hit 37 % in 2008 from 29 % in 1989. In addition, in the United States, more than one person out of six people are suffering from poverty. Since United States is a country with abundant resources and capitals, the statistics can be seen ironic. Joseph Stiglitz, a recipient of the Nobel Memorial Prize in Economic Sciences says “poverty exists because the economic system is organized in ways that encourage the accumulation of wealth at one end and create conditions of scarcity that make poverty inevitable at the other”. He not only claims that poverty is not the result of individual action, but also mentions that poverty cannot be eliminated unless the system of our society is changed. Nevertheless, not only the government in the United States but also other nations tries to alleviate poverty through focusing on individuals, which is the most important factor that explains why they keep failing to fix the problem not knowing the exact causes.


Screen Shot 2015-02-09 at 7.53.34 PM

The social system in which we now live is capitalism. In the capitalist society, only a few people can control most of capital to generate wealth. While the people who do not have capitals are drowning in debt, capitalists are drowning in profits in the capitalist society. Thus, gap between poor and rich increases as only a few elites can accumulate most wealth. On the other hand, people who have no capital have to fight each other to get what is left to them by the elite. This eventually leads to competition that motivates companies to engage in maximizing their profits by using the cheapest labor or replacing full-time workers with part-time workers or using machines instead of humans. They also often establish companies where laws protecting companies even though working condition such as the natural environment from pollution or workers from injuries are not unenforced. Therefore, investors or people in charge of those companies can make huge benefits from these kinds of decisions. However, it also results in negative effects on millions of people who can lose their jobs or earn lower income because of actions or decisions that are made by a few elite. In addition, in today’s society, full-time job does not necessarily mean that you have decent living. This explains why there are many working couples in our society because they have no means of producing wealth by themselves without working for other people, the elites. Although they seem to make enough for their living, problems occur when they divorce, which results in many single-parent families who have to take care of themselves and their children with their insufficient income. In today’s society, there are many arguments about what factors led human beings to starve from hunger. Many economists give us one of reasons why poverty still remains in our society by explaining the capitalist system generates a gap between a few elite and people who do not have capitals which eventually leads to poverty existing all over the world.

There are many substantial elements we should consider when solving social problems. Among those elements, we should look into the factors that causes the problem. Murray argues, “Poverty is caused by failures of individual initiative and effort.” In other words, he claims that the reason why poor people are poor is because of something lacking in them such as education. However, I believe that poverty cannot be eliminated unless the system is changed. That is to say, changing the way individuals participate in society cannot be a solution to the larger question of why poverty still remains in our society. Most antipoverty programs do not focus on how systems produce poverty but they only care about changing individuals with using their limited resources. Another error of antipoverty program is that they provide poor people with welfare payments, food stamps, housing subsides, and Medicaid. Although these can alleviate poverty’s impact, these efforts will be all in vain unless they try to fix what the real problem of our system is.

Thus, we should not emphasize the importance of individuals that can affect poverty. Yet, we first have to find problems in our system and find solutions that can allow economic and other systems work well in our society.

Inequality in College Education

Feb 4th 2015



As Professor Miles briefly mention in the class today, the relationship between the education and its benefits (in other words, wealth or wages) is one of the most important issues in educational economics field. On February 3rd, Wall Street Journal talks about the gap in college graduation rates for the rich and the poor, generating another big social problem. According to a report from the University of Pennsylvania and the Pell Institute for the Study of Opportunity in Higher education, 77% of adults from the top income quartile earned at least bachelor’s degrees in 2013. It is a huge increase because there were only 40% people who got degrees in 1970. However, only 9% of people were from the lowest income bracket in 2013, being increased by 3% from the 1970.

Many people are worried about the situation because they think that “education” can be a solution for mitigating inequalities in wealth and society. “Education is one of the levers that we have in place to address income inequality. It offers the promise of achieving the American dream,” said Laura Perna, executive director of the Penn program. However, Melissa Korn, the writer of the article in Wall Street Journal, questions the fundamental reason of education. In other words, she wonders that education really improves the income inequality. “While the report focuses on college access and completion, one thing it doesn’t cover is whether there would be jobs for those students if everyone actually got a bachelor’s degree” said Neal McCluskey, associate director of the Center for Educational Freedom at the Cato Institute, a libertarian think tank.

Neal McCluskey’s idea is, at least, true in Korea. Most Koreans agree with the statement that Korea has small territory with scarce resources, which mean we only have “human resources.” Clearly, many Korean parents take care about children’s education and wish their kids get at least bachelor’s degrees. As a result, there are a lot of college graduates who cannot find their jobs, and this becomes a serious social problem in the Korean society nowadays. Increase of unemployment rate in college degree holders is a more severe problem than other unemployment rates because bachelor’s degrees usually take a lot of costs. Many young Koreans waste their time, efforts and money to take bachelor’s degree although some jobs don’t need higher educations.

I believe social pressure in Korea should be eliminated because the society should take costs a lot. Many Koreans argue that we need to change the social structure and recognition which only college graduates can get jobs. In reality, the amount of those high quality jobs is limited and other simpler jobs have hard time to be filled because many graduates avoid applying on them (they want to get “better rewards” as they get through harsh college education). The whole situation is messy and really inefficient. Of course, as Wall Street Journal mentions, no opportunities or less opportunities of education for the poor, young people make the ladder smaller, which goes up to upper class. But, I want to emphasize that too much recognition for college-level education is inefficient as well as unnecessary.