Living Economics

Income Distribution
In the U. S., the top income group has been gaining relative to the rest of the population due to globalization, but the belief in upward mobility is still strong.

If the household size is the same and every family earns the same income, then the percentage of income will match the percentage of households. But such an income distribution profile (Gini coefficient) is more of an ideal than a reality.

The U.S. has prided itself to be a land of the middle class because the percentage of income in the middle more or less matches the percentage of households, even though the top income group has always earned a disproportionately large share of the total income. But of late, the top income group has been gaining at the expense of both the middle and the bottom income classes.

Income can be derived from capital or labor. Since most of the capital is likely to be owned by the top income group, their share of the total income depends on the relative scarcity of labor relative to capital. Labor has been scarce relative to capital in the U.S. Combining more abundant capital with scarcer labor has led to higher output per unit labor. Thus, the potential for greater labor share of the total income pie existed. But still the relatively large laborís share did not come about without bitter fights from organized labor.

Of late, this relative scarcity of middle class labor has been compromised by the offshoring of jobs to lower-labor-cost countries aided partly by the Internet and digital technology. The globalization of the labor market has weakened the bargaining power of labor relative to capital in the U.S.. As a result, company profits have reached record levels as a share of GDP. The offshoring of middle-class jobs not only weakens the bargaining power of labor unions by depleting its ranks; it also takes out the middle rungs of the career ladder for the domestic labor market (see The Truncated Job Ladder).

Wages for jobs at the bottom that have never been unionized are also kept low by the influx of illegal immigrants.

The same technological revolution that squeezes the middle class due to offshoring also benefits those at the top. While digital technology enlarges that labor pool from low-cost countries, the global audience created by digital technology fattens the paycheck of top sportsmen and entertainers (see The Economics of Superstars). The global demand for scarce talented chief executives likewise enhances their bargaining power. The gain of the top income group is thus a combination of the relative scarcity of human and financial capital relative to labor in the globalized market.

People might accept income inequality if they believe in the possibility of income mobility. Thus, even amidst strong evidence that intergenerational income position is more inheritable in the U.S. than other developed countries, more Americans than ever believe in the possibility of upward mobility.

  • Economist. 6/17/2006. "The rich, the poor and the growing gap between them."
  • Business Week. 6/30/2003. "Land of less opportunity."
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