Question

Case Study Assignment: Submit a paper which discusses the following questions. Has income inequality increased in the US over the past 50 years and if so, is increasing income inequality a problem for the country? Your response to the above prompt should be about three to four, typed, double spaced pages using a standard 12 point font. Your grade for this project will be based on the Signature Assessment Grading Rubric shown below.

Answer 1

Income inequality in the US has increased significantly over the years.This inequality is due to the support of free market capitalism.The reasons are --

globalization-Globalization refers to the integration of economies due to trade, information and jobs .1% global top and the middle classes of the developing economies are the ones who win due to globalization. Integration of economies with the US had large impact on income inequality.Richest 1%constitute 60 million in the world , 30 % of which are Americans..Low wage workers in Asia and other developing economies are replacing low skilled American workers.In the last 50 years the sectors of the economy providing highest employment like the restaurant sector,retailers, super markets have less profit margin , but high technology has more profit margin but employment is less.

Superstar theory-Inequality can be explained by super star theory.Super star theory is applicable to corporations and to firms which are more dominant in the industry as they are paid more than the other firms.This also explains why less income is going to workers than to owners.

Skill based technological change-Income distribution is more in favor of brains as educated and highly skilled workers are preferred due to the rapid pace of technological progress.A shift in the production technology favors skilled over unskilled workers.It is responsible for 40%of increase in inequality.

immigration of less educated workers-American born high school drop outs receive less wages as immigration of low skilled workers increases.Education is responsible for income inequality as Americans with four year college degree receive higher wages compared to those who don't have.

Less power of unions-Unions ensured that wages matched with productivity and CEO and shareholders are not highly rewarded. But with decreasing power of union this changed and CEO 's receive high salary and workers are poorly paid.So rising income at the top was achieved by crushing unions, cutting wages etc.Decline in minimum wage , international trade are also responsible for inequality.

Race and gender differences are also responsible as females receive less wages compared to males.

Income tax is an important factor in income inequality.The rate at which income is taxed as well as the progressivity of the tax system Taxes on income derived from capital affect higher income groups who own most of the capital.President Bush's veto of tax harmonization has stopped offshore tax and has been contributing to income inequality.Transfers like pensions etc reduces inequality among the lower income group.

This is a problem as it reduces economic growth,reduces income , increases household debt,increase the risk of financial crisis and deflation in the economy.