Measuring Income Inequality and Its Impact on US Economy - Essay Sample

Introduction

Income inequality is a common phenomenon in modern society. It is primarily orchestrated by such factors as differences in education, region, race, as well as gender among others. The presence of inequality in income in society may influence different areas such as economy, education, crime, life expectancy, and standards of living. This paper seeks to analyze how a country may measure its income inequality as well as the analysis of the impact of income inequality on the United States' economy. The paper will also examine the gap between the American citizens with a higher degree versus those without it, which includes explaining the rationale behind the widening gap between the two groups segregated through education. The paper also seeks to evaluate whether an increase in higher education opportunities reduces the inequalities. More importantly, the paper provides numerous recommendations relating to lowering the inequalities in income through promoting education.

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Measurement of Income Inequality

A clearer understanding of how income inequality measurement is critical in the examination of the consequences and nature of income inequality. Different inequality measures may be utilized in illustrating inequality between and within different groups in society. The decile dispersion is considered to be the simplest method that can be used in the measurement of inequality. In this method, the population of a given country is sorted from the poorest to the richest, which helps in showing the percentage of income (or expenditure) that can be attributed to every quintile (fifth) or decile (tenth) of the population (Solt, 2019). Despite being popular and easy to measure, the decile dispersion is regarded as a crude inequality measure, which explains why most experts may prefer other measures of inequality in a country.

Other important measures of inequality for nations are, among others, the Luxembourg Income Study (LIS) and the World Income Inequality Database. The former is utilized in determining the income inequality statistics, particularly when the country is small, wealthy, and has a low population. Conversely, the World Income Inequality Database (WIID) is a measure that plays a central role in providing complete income inequality statistics (Solt, 2019). However, this measure has a limitation in that it is hard to make comparisons of income data for a given country (Solt, 2019).

Gini coefficient is largely preferred as an income inequality measure, which provides the range of zero to one, with 0 implying perfect equality and one implying perfect inequality. In terms of per capita expenditures, the typical Gini coefficient range is 0.3 to 0.5 (Darkwah, Nortey, & Lotsi, 2016). The Gini coefficient is obtained from Lorenz Curve that is utilized in sorting the population of a country from the poorest to the richest. The Lorenz curve is critical in depicting the population's cumulative proportion and the expenditure's (or incomes) cumulative proportion on the horizontal axis and the vertical axis, respectively (Darkwah, et al., 2016). The use of the Gini coefficient measure has its pros and cons. The pros include mean independence, population size independence, and symmetry. The cons of the Gini coefficient relate to how it is difficult to break it down towards displaying the underlying inequality sources. In addition, the Gini coefficient is a very sensitive measure, particularly if changes in distribution are experienced (Darkwah, et al., 2016).

Other methods that may be utilized in measuring the income inequalities in a country are Standardized World Income Inequality Database SWIID), a Pen's parade, Theil's Indexes, and Theil's T. the SWIID measure plays a central role in providing Gini coefficient (Solt, 2019). From 1960, the SWIID has shown evidence of income inequality among more than 176 countries based on net and gross income (Solt, 2019). Income-based measures such as education and health distribution may also be utilized in the measurement of a country's inequalities based on income. However, such methods are less developed, which implies that they may be ineffective in measuring income-based inequality (Solt, 2019).

Effect of Income Inequality on U.S. Economy

A wide body of research has been advanced towards measuring the impact of income-based inequality on the economy. Research evidence has revealed that there exists a significant correlation between the rate of unemployment and the rate of change of share of wages (Bargain et al., 2015). Inequality and unemployment have a close relationship, with unemployment being considered as the reason while inequality becoming an outcome. The implication is that continued unemployment for successive cycles leads to inequality in income. Many scholars and researchers have agreed that unemployment is a critical cause of economic inequality among many less developed and developing economies across the globe.

Economic reports have indicated that economic reforms and labor markets' deregulation have played significant roles in increasing unemployment and economic inequality. The increase in the technological advancements and usage has contributed to the shrinking of employment opportunities. This has tremendously aggravated the inequality problem in many countries, including the United States (Bargain et al., 2015). Therefore, it is critical to point out that the problem of wage disparity has significantly contributed to the increased inequality among various societal levels. The employment gap can be attributed to the wider income gap experienced between the rich and the poor. Research evidence has revealed that the employment rate gap between the low-income earners and high-income earners in the United States has widened over the last few decades (Bargain et al., 2015). As a consequence, the low-income earners and the poor have been exposed to a "Great Depression," with the rich and high-income earners nearing full employment (Strauss, 2011).

An International Monetary Fund (IMF) report sought to assess the causes and impacts of the increase in inequality in various countries. The report asserted that although inequality has the potential of posing negative problems in society, there is a need for governments to express concerns about its impact on the growth of economy (Dabla-Norris, Kochhar, Suphaphiphat,, Ricka, & Tsounta 2015). The report provided an estimation that when the income share of the top 20 percent of the population increases by a one percentage point, the economic growth declined by 0.08 percentage points across five years. However, increasing the income share of the bottom 20 percent of the population is capable of substantially boosting economic growth (Dabla-Norris et al., 2015).

Numerous scholars have indicated that inequality has the capacity of depressing economic growth while leaving society with minimal resources for allocation. Inequality is also associated with social pain and harm, in which multiple studies showing that higher inequality levels in the United States have led to increased criminal behavior in some parts of the nation (Dabla-Norris et al., 2015). The negative economic implications of inequality reduce the potential of paychecks. Many economists hold the belief that as a way of maximizing income and wealth for all, it is important to implement meaningful checks on income inequality and wealth distribution. Economic statistics in the United States have indicated that the increase in inequality in income was attributed to a 5 percent decline in the cumulative GDP per capita between 1990 and 2010 (Bargain et al., 2015).

According to findings by the Organization for Economic Cooperation and Development (OECD), eroding education opportunities is the primary way through which inequality has been able to influence growth. The children who suffer the largest are the ones coming from poor socio-economic backgrounds as they tend to miss on tremendously critical education opportunities that are capable of allowing them to gain vital skills to become successful in life (Dabla-Norris et al., 2015). The lack of education among the children makes them less effective in employment, which is associated with lower wages. The outcome is that the population that is less-skilled contributes minimally to the economy.

Education Gap (People With Degree vs. Those Without)

The education gap is inevitable in any society. The level of education largely determines the income level earned by an individual. College degrees have boasted a key economic activity, particularly relating to the fact that they earn higher wages to the holders compared to those without. A 2002 study conducted by Per Census Bureau indicated that the individuals with Bachelor's degrees earned approximately $2.7 million on average across their lifespan (Carnevale, Cheah, & Rose, 2011). This amount was about 75 percent more than the average earnings of a high school graduate throughout their lifetime (Abdullah, Doucouliagos, & Manning, 2015).

Recent research studies have revealed that the college education premium has grown to as high as $2.8 million (Abdullah et al., 2015). Earnings are capable of varying based on such demographics as gender, occupation, type of degree, as well as age. Even if two individuals are working on the same occupation with identical job descriptions, the one with more education earns more. This is an indication that education plays a central role in dictating the level of earning of an individual. Previous research has revealed that truck drivers with high school qualifications earn $1.5 million across their lifetime compared to the $1.3 earned by those without the high school qualification (Abdullah et al., 2015).

Undoubtedly, there exists a significant relationship between the level of education and income earned. Higher income levels translate to higher incomes earned. Research shows that individuals holding professional degrees are capable of earning six times as much as individuals who lack a high school level attainment (Strauss, 2011). Individuals with low attainment of education exhibit minimal stability between depressions and recessions. Conversely, those with higher attainment of education are capable of enjoying wealthy as well as projects that give them greater opportunities for further growth. This category of people only experiences mild recessions (Strauss, 2011).

Inequality Gap Based on Education

Education is a major factor contributing to income inequality in society. Previous research has shown that the gap in earnings between the educated workers and those who have less education has widened in recent decades (Abdullah et al., 2015). The difference may be evidenced through the standard relationship between demand and supply. Studies have suggested that due to increased advancements in technology, organizations have raised their demand for educated and skilled employees. This attribute has led to a decline in the supply of more-educated workforce. The shortage of educated workforce, therefore, can be used in explaining the widening income educated-less educated gap in the U.S. workforce. A recent study has shown that the share of individuals with a college education in the workforce has increased at a slower pace since the 1990s (Abdullah et al., 2015). The implication is that if the United States continues under-producing workers with higher levels of education, there is a risk of having a wider gap in income inequality between the two groups segregated through education.

Many economists have presented the argument that the "skill-based technological change" (SBTC) conce...