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Policy Solutions to Rising Levels of Inequality

At the very end of her book, Nickel and Dimed, author Barbara Ehrenreich writes, “If we want to reduce poverty, we have to stop doing the things that make people poor and keep them that way (2011:238).” This quote makes reducing poverty sound so simple, as though the government could pass some magical policy that would immediately fix the economy or employers could collectively decide to be fair and honest and workers would all be happy. The reality, however, is far bleaker and more complicated, and no one policy or decision is likely to “fix” the multitude of problems faced by low income workers.

Furthermore, fixing these problems without addressing the systemic issues that cause inequality in income and wages would likely make little difference in the long run. It is therefore imperative that policies be developed to fix both income inequality and the disparities between “good” and “bad” jobs. This paper will demonstrate that the increase in inequality over the last several decades occurred in large part due to changes in the institutions governing executive pay and will propose a wealth tax coupled with universal basic income (UBI) as a policy solution.

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It will then discuss the difference between good and bad jobs, arguing that access to paid sick leave is among the most polarizing characteristics, and will advocate for mandatory paid sick leave in response to this issue.

Income and earnings inequality have undoubtedly been increasing in the last fifty years in America. While median household income has, with the exception of the years directly following the great recession, steadily been increasing, from $50,300 in 1980 to $61,370 in 2017, wages have remained stagnant and the vast majority of economic gains are being made by the very rich (Morgan 2019a).

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The Gini coefficient for the United States, a simple method of determining inequality, has risen from .346 in 1979 to 0.415 in 2017, which clearly indicates that not all have benefited from the general prosperity of this time period (The World Bank 2019). The biggest gains made by any group have been made by the top 1% of earners, whose share in income rose from 9% in the 1960s to 17% in 2000. This trend is also reflected in the income share held by the top decile of earners, which has increased by around ten percentage points in the same period (Piketty and Saez 2006:201).

Economists have proposed numerous theories about the causes of this dramatic shift in the distribution of income. Claudia Goldin and Lawrence Katz argue that this shift, at its core, is due to changes in educational achievement patterns and technology (Goldin and Katz 2009:28). They propose that the relatively low rate of inequality during the mid-1900s was due to the general increase in educational attainment, which increased the supply of educated workers in the market. This influx caused competition for wages to remain high and inequality to remain low. However, in the 1980s, when the rate of increasing educational achievement slowed, competition decreased and inequality in wages between college-educated and uneducated workers swelled. This decrease in supply was coupled with an increase in the demand for technologically skilled workers, which further fueled the rising inequality (Goldin and Katz 2009:28-31). Economists call this phenomenon skill-biased technological change (SBTC) (Lemieux 2007:22).

While Goldin and Katz’s argument seems to make sense, it has several major flaws. Firstly, if SBTC were to blame for increasing inequality, all developed countries would have experienced some degree of increase in inequality over this period, which is not the case. Several countries, notably France and Japan, experienced the same technological revolution in the 1980s and 1990s, but not the subsequent increase in income inequality (Piketty and Saez 2006:203-204). Furthermore, the timeline of changes in income inequality does not line up with the notion of SBTC. The greatest growth in inequality occurred during the 1980s and slowed in the subsequent two decades, whereas the computer revolution did not reach its peak until the 1990s (Lemieux 2007:25). If SBTC were the main cause of increasing inequality, the largest shifts in inequality would coincide with the largest shifts in technology. Finally, a Hamilton Project study found that increasing educational attainment of men between ages 25 and 64 by giving one in ten of these men a bachelor’s degree had little effect on overall income inequality (Hershbein, Kearney, and Summers 2015:2). If increasing education has such a little impact on overall inequality, education, and therefore SBTC, is likely not the root cause of the issue.

Since the majority of gains in income shares has occurred at the top of the distribution, a more likely cause is the changes in wage setting institutions for earners at the top end of the distribution, specifically social norms regarding salary setting for top executives. Thomas Lemieux argues that CEOs receive pay from more sources than simply their salaries, including stock options and bonuses, which are supposedly related to the success of the company (2007:35). This argument reflects SBTC in that it relies on the notion that CEOs are now in great demand, and they must be compensated for their enormous contributions to the success of their companies. However, according to Joseph Stiglitz, this is not the case, and increased salaries for CEOs is not correlated to increased profitability when comparisons are drawn among similar companies (2016:141). Furthermore, increased CEO pay is not likely due to increased international competition for CEOs, since most large corporations have domestic CEOs (Morgan 2019b). The most likely cause is, therefore, simply a shift in the norms around salary setting. This also explains the disparities in inequality between the United States and other countries, like France and Japan, where pay setting norms have not significantly shifted.

Since most income inequality has its root at the top of the income distribution and pay setting norms are difficult to legislate, the simplest policy solution is to implement a wealth tax, the revenue from which would be used to fund a universal basic income program (UBI) for all Americans falling under a certain income threshold. Similar to the plans proposed by many politicians, the wealth tax would tax all income over fifty million dollars at a much steeper rate and impose a new progressive tax on this income specifically. In an op-ed for Financial Times, Thomas Piketty argues that a wealth tax is one of the only plausible ways to keep inequality under control and allow people born into less fortunate circumstances to eventually achieve financial stability (2014).

Additionally, using the revenue to pay for UBI would further decrease inequality, since it would directly redistribute wealth from those who least need it to those who may not be able to live in any semblance of comfort without it. An ideal policy would also include encouraged but non-mandatory financial management classes for individuals receiving UBI, which would take place at local community centers or schools, with childcare onsite to encourage participation from those who otherwise could not afford it. In addition to decreasing income inequality, UBI coupled with the knowledge of how to manage one’s money could provide families with sufficient income to begin to accumulate wealth by investing or saving for retirement or college. Wealth accumulation, in turn, would allow families to experience more stability in the long run and would increase the likelihood of upward intergenerational mobility.

One common rebuttal to UBI is that it would discourage workplace participation in favor of laziness (Continetti 2019). However, in a study in which families in seven states were given UBI, work effort decreased only slightly and other factors like educational attainment, time spent searching for a job, and time spent with family, increased dramatically. Furthermore, these families did not significantly change their spending habits, indicating that the money coming from UBI was not being wasted. While increased discretionary time and educational achievement may not immediately be reflected in GDP, all are signs of long-term economic stability (Lowrey 2018). UBI funded by a wealth tax is a policy that would clearly lead to a decrease in inequality, as income shifts directly from the richest Americans to those at the very bottom of the distribution.

In addition to the easily observable and quantifiable disparity in income, there is a more qualitative distinction between “good” and “bad” jobs. This division is based largely on intangible qualities of jobs including stability of work, opportunities for on-the-job training, ability to determine hours, and benefits packages (health insurance, paid family/sick leave, etc.) (Morgan 2019c). Most, if not all, of the jobs Barbara Ehrenreich worked in Nickel and Dimed fall in the category of “bad” jobs, in that they lacked stability, benefits packages, and, in many cases, basic human dignity. One of the most striking examples Ehrenreich describes is when her coworker at “The Maids” works through nausea, dizziness, and ultimately a possibly broken ankle because, ostensibly, she has no paid sick leave or health insurance and no way of providing food to her children if she isn’t paid (2001:97,110).

Ehrenreich’s anecdote is supported by empirical data as well. According to the Center for American Progress, while the vast majority of workers in the top decile (92%) have access to paid sick days, only 31% of lowest decile workers have the same advantage. Furthermore, the inequality is particularly dramatic across racial lines, with workers of color being the least likely to receive any access to paid sick days (Boesch 2018). Inability to miss work to receive treatment for ailments or injuries also logically decreases overall productivity, as injuries and illnesses compound over time, sometimes limiting the types of work one can even perform. It seems that the clear policy solution is to mandate paid sick days.

Federally mandating paid sick days should, according to research, be beneficial not only to workers (especially low wage workers) but also to the economy as a whole. Logically, a federal mandate would even out the inequality in who has access to paid sick leave by requiring employers to provide paid sick leave to all employees, regardless of race, gender, or medical status. Furthermore, paid sick leave would allow ill workers to stay home from work without fear of losing vital pay, which would increase the overall health of the working population, especially as it pertains to retail workers, food workers, or anyone else who regularly comes into contact with the general public. One common misconception is that paid sick days for everyone would be a hindrance to economic growth and would cause employers to lay off workers.

However, cities where mandatory paid sick days policies have already been implemented, specifically San Francisco and Washington, D.C., have experienced the exact opposite, seeing economic growth and general prosperity. Some argue that mandating paid sick days is unnecessary and is a decision that should remain in the hands of employers. However, over 34 million people are ineligible for even a single day of paid sick leave, indicating that workers cannot rely on employers to guarantee their welfare is considered over the bottom line (Paid Sick Days Fact Sheet). Since requiring paid sick days is beneficial to individuals and the general public and does not cause economic harm, it seems like an obvious choice to start to eliminate the divide between good and bad jobs.

This paper has argued that the best policy solutions to rising levels of inequality and the huge disparities between good and bad jobs are a wealth tax to fund universal basic income and mandating paid sick leave. While these policies are certainly not complete solutions to the multitude of problems facing low wage workers, their implementation would likely lead to decreasing inequality in income, access to healthcare, and possibly even long-term wealth. Perhaps implementing policies like these is the first step toward creating a market in which we “stop doing the things that make people poor and keep them that way (Ehrenreich 2011:238).”

References

  1. Boesch, Diana. 2018. “The Uneven Expansion of Access to Paid Sick Days.” Center for American Progress. August 30.(2018/08/30/457309/uneven-expansion-access-paid-sick-days/)
  2. Continetti, Matthew. 2019. “A UBI Would Undermine Work.” National Review, July 25.
  3. Ehrenreich, Barbara. 2001. Nickel and Dimed. New York, NY: Picador.
  4. Goldin, Claudia and Lawrence F. Katz. 2009. “The Future of Inequality.” Milken Institute Review Q3: 26-33.
  5. Hershbein, Brad, Melissa S. Kearney, and Lawrence H. Summers. 2015. Increasing Education:
  6. What it Will and Will Not Do for Earnings and Earnings Inequality. The Hamilton Project. Washington, D.C.: Brookings. September.
  7. Lemieux, Thomas. 2008. “The Changing Nature of Wage Inequality.” Journal of Population Economic 21(1): 21-48.
  8. Lowrey, Annie. 2018. “Smart Money: Why the World Should Embrace Universal Basic Income.” The Globe and Mail, July 13.
  9. Morgan, Barbara. 2019a. “Trends in Earnings and Income Inequality.” Presented at JohnsHopkins, September 5, Baltimore. Retrieved September 30, 2019 (jhu.edu/webapps/blackboard/content/listContent.jsp?course_id=_188834_1&content_id=_7046796_1&mode=reset)
  10. Morgan, Barbara. 2019b. “Some Causes of Earnings Inequality, Economic Perspective.”
  11. Presented at Johns Hopkins, September 12, Baltimore. Retrieved September 30, 2019
  12. (Morgan, Barbara. 2019c. “Good Jobs, Bad Jobs.” Presented at Johns Hopkins, September 19,
  13. Baltimore. Retrieved September 30, 2019 (blackboard/content/listContent.jsp?course_id=_188834_1&content_id=_7046796_1&mode=reset)
  14. National Partnership for Women & Families. October 2018. “Paid Sick Days: Busting Common
  15. Myths with Facts and Evidence.” Retrieved October 1, 2019. (Piketty, Thomas and Emmanuel Saez. 2006. “The Evolution of Top Incomes: A Historical and International Perspective.” American Economic Review 96(2): 200-205.
  16. Piketty, Thomas. 2014. “Save Capitalism from the Capitalists by Taxing Wealth.” Financial Times, March 28.
  17. Stiglitz, Joseph E. 2016. “Inequality and Economic Growth.” Pp. 134-149 in Rethinking
  18. Capitalism: Economics and Policy for Sustainable and Inclusive Growth, edited by Michael Jacobs and Mariana Mazzucato. Chichester, United Kingdom: Blackwell.
  19. The World Bank. 2019. “GINI Index (World Bank Estimate) – United States.” Retrieved October 1, 2019 (locations=US&start=1979&view=chart)

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Policy Solutions to Rising Levels of Inequality. (2019, Dec 11). Retrieved from http://studymoose.com/policy-solutions-to-rising-levels-of-inequality-essay

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