How important is income inequality?

Much of today’s debates about our society, public policy, and politics is being driven by one factor, income inequality.  Income inequality is the term recognizing the differences in incomes earned by individuals.  Obviously, it is impossible for everyone to earn the same income, so income inequality will always be a reality.  But, what can vary is the degree to which incomes vary between people.  Today’s column looks at the current status of income inequality, how it has recently changed, and forecasts for its future.  Then, using this information, you can decide how important income inequality is to our current debates.

While income inequality has always been with us, it has fluctuated.  Modern data beginning in the 1960s show several trends.  From the 1960s to the early 1980s income inequality in the country dropped.  Then, income inequality trended upward from the early 1980s to the early 1990s. For the next several years until the early 2000s income inequality was relatively stable.  Since then, income inequality has slowly moved higher.  The current level is the highest for the modern period since the 1960s.  Hence, it is reasonable for people to point to income inequality as a big issue in the country.

The logical question for readers to ask is, what has been behind the ups and downs of income inequality?   In the late 1960s and the 1970s a strong economy with competition for labor resulted in rising wages and reduced income inequality.  Next, in the 1980s and early 1990s income inequality rose due to technological improvements and increased globalization that decreased the hiring of US workers.  For most of the 1990s a strong economy kept income inequality relatively stable. 

Now, since the turn of the century, income inequality has again risen, with technology replacing workers and declines in unionization being determining factors.  But there are also demographic impacts on income inequality, in particular the decline in work among some younger individuals and the reduction in marriage, which often creates two-earner households and hence higher incomes.

Income inequality is not unique to our country.  For example, on the North American continent, Canada has lower income inequality than the US, but Mexico has higher income inequality than our country.  Income inequality also varies among US states.  Currently, New York, Connecticut, Louisiana, California, and Florida have the highest income inequality, while Alaska and Utah have the lowest income inequality.  As with many sate comparisons, North Carolina’s income inequality is in the middle of the state rankings.

The federal government tries to moderate income inequality through a variety of supplemental income programs it operates.  Currently, the federal government spends a total of $1.2 trillion annually on these programs.

Tax policy is another way to moderate income inequality.  For many decades the federal government has used tax rates to reduce income equality.  Specifically, federal tax rates are higher for households with higher incomes.  This is accomplished by dividing a household’s income into segments, with a different tax rate applied to each segment.  Lower segments of a household’s income are taxed at lower rates, and higher segments are taxed a higher rates.

Of course, education and training are keys to individuals earning a good salary.  So ultimately, the availability of accessible and affordable education options are essential to addressing income inequality.   Data show significant movement of individuals lifting themselves from lower salaried jobs to higher salaried jobs using education and training.

It’s important to remember that income inequality will likely not disappear.  Our job market is large and complicated, with skill needs varying. Many complex skills require workers to obtain significant and expensive training.  Companies pay these workers more to motivate individuals to use time and money to acquire the skills.   

We are entering a period where new technology is being introduced, specifically, artificial intelligence, or AI for short.  There is already a debate among economists about how AI will impact income inequality.  As indicated above, in the past when new technology was introduced, income inequality typically increased. 

But some economists think this time will be different, and income inequality will drop.  The reason is the nature of AI. Past technologies have substituted for physical skills, thereby reducing the need for workers using their physical skills, hence reducing their pay.  AI is different.  It is a technology that will substitute for cognitive skills – “brain power” for short.  The need for workers with  high levels of skilled training, who are paid higher incomes, could decrease.  And when the need for workers falls, typically their salaries also fall. As a result, we may be entering a new era of income inequality.

Income inequality exists in all economies, and likely always will.  The question is the degree of income inequality a society will tolerate. In our country we have government income support and a tax system that moderates income inequality. We also observe  upward mobility of many workers in jobs over time.  But the advent of AI may have different impacts on income inequality than previous new technologies.  Hence, we may be entering a new kind of income inequality. Will it be better or worse than past income inequality?  We’ll have to wait to decide.

Walden is a William Neal Reynolds Distinguished Professor Emeritus at North Carolina State University.