Employment and Income

Section IV

Income Distribution

Recognition: This material is revised material that was collected on income by my Sp 08 ECO304L class. Credit goes to Upahar Sood, Sameer Ramani, Devin McIntosh, and members of Phillip Tau, Mathew Putterman, and Robert Taylor's groups.

From 1947 - 1968, the census bureau had recorded a steady decrease in the percentage of income inequality in the United States. This represents the growth of the so called middle class. What has happened since 1967 is that the incomes of the highest income precentile have been increasing at a much faster rate that the rest of society. Consider the figure below: The line labeled 95/50 shows the ratio of the income the top 95 percentile relative to the 50% percentile (essentially top income group to the middle of the pack). Specifically, in 1967, the 95th percentile of household income was 2.6 times higher than the 50th percentile, and by 2005, it was 3.6 times higher. From 1973 to 2005, real hourly wages of those in the 90th percentile—where most people have college or advanced degrees—rose by 30% or more. The line 50/20 shows the ratio of the incomes of the 50 percentile relative to the 20 percentile (essentially middle to bottom). During this period, real wages of the lowest earners—the 10th percentile—actually rose somewhat faster than those in the middle of the distribution.The consequence was that wage inequality among those in the bottom half of the distribution, which had been widening throughout the 1980s, diminished during the 1990s. At the same time, real wages at the upper end continued to soar.

With the increase in productivity in 1995 back to its historic levels we would expect an increase in wages for all people and this is reflected in the following table

Causes: Today we have downward pressure on wages and salaries from two sources; illegal aliens and outsourcing.

·      Economists have pointed to three particularly important drivers of the recent trends in income inequality: offshoring and immigration, both of which are related to globalization trends, and technological advances that favor skilled workers (often referred to as "skill-biased technological change" or SBTC).

·      Offshoring could help explain the stagnation of wages at the middle of the income distribution, while immigration could push down wages at the bottom. SBTC could help account for the surge in income at the top of the distribution.

• At the same time, changes in living arrangements have occurred that tend to exacerbate differences in household incomes. Increases in divorces and separations, increases in births out of wedlock, and the increasing age at first marriage may have all led to a shift away from traditionally higher income married-couple households and toward typically lower-income single-parent and nonfamily households. Also, the increasing tendency for men with higher-than-average earnings to marry women with higher-than-average earnings may have contributed to widening the gap between high-income and low income households.
• A major factor about income at the top is the fact that wealth in the US is concentrated.  The top 1% own 34.3%, the top 10% own 71% and the bottom 40% own less than 1%.  Since 1980 we have had a business revival and the Dow Jones has soared from less than 900 in 1980 to over 10,000 today.  Income from assets has increased correspondingly.

Illegal Aliens:

(Members of Phillip Tau and Matt Puttermans’ groups)

According to a 2006 article in BusinessWeek, “undocumented immigrants account for about 4.9% of the civilian labor force, or 7.2 million workers out of a total U.S. labor force of 148 million” (McNatt & Benassi).  Other estimates show that there are around 11 million undocumented workers in United States, while there are about 20 million illegal aliens.  Many people consider the illegal immigrants to be taking jobs that American citizens refuse to do, but this isn’t entirely true. Prior to the passing of the Immigration Bill of 1965, all of the jobs that illegal immigrants now have, were held by mainly America workers. After this, corporations began to favor the foreign born workers because they could pay them to work at much lower rates. 

As the graph below will show, undocumented workers tend to concentrate in a few common professions, such as cooks, construction, housekeeping, grounds keeping, and finally agriculture.

Probably the most important impact of the surge of illegal immigrants, aside from the physical aspect of taking jobs, has been the effect the undocumented workers have had on driving down wages of legal and native workers in the same occupations.  The Seattle Post-Intelligencer reported findings from George Borjas’s research that, “immigrants who entered the country between 1980 and 2000 lowered wages of native-born workers by an average of 3.7 percent.”  Even if native workers wanted these minimum wage jobs, how can they compete with a business that pays the undocumented workers LESS than the minimum wage? The illegal immigrants can’t complain to anyone concerning their wages for fear of deportation, thus many businesses pay just enough to get productive work from these immigrants.  Furthermore, according to the Charleston Post & Courier, “Businesses that operate with legal workforces cannot compete against those with illegal workforces in bidding on contracts” (McConnell & Campsen).

The fact is, the American workers will do the work that illegal immigrants do now for fair wages and benefits, but they won’t allow themselves to be exploited like the illegal aliens. Many of these jobs that are taken, end up hurting the lower class American workers. On top of that, it also hurts the rest of American workers because American taxpayers are providing the “illegal immigrants with welfare, free education, and free medical care and housing assistance, amenities which cost over 26.4 billion dollars (2002).”  The cost of “illegal immigration in 2004 in California alone was 9 billion dollars,” coming out of taxpayer’s money. Another aspect of the illegal alien problem is the numbers crowding prisons, as “33% of our prison population is composed of non-citizens.” Illegal immigration has been a long-debated issue, however no conclusion has been reached for certain party’s benefit from the exploitation. The question of how to stop illegal immigration is still out there and the problem just keeps growing if Congress does not do anything. The main component of Congress’s seemingly powerless grip on the issue is that big business lobbyists have actually weakened efforts for anti-illegal laws in the workforce. Senator Glenn McConnell and Senator Chip Campsen wrote an article on how the Senate attempted to revise a bill that would have decreased illegal immigration in our country. The bill was not passed, and the Senators claim, “…it seems that the major problems our opponents had with our amendment is that they would be effective in stemming illegal immigration…” The state Chamber of Commerce and its lobbyists worked against the amendment and their pressure worked. So business lobbyists are actually halting the answer to stop illegal immigration, and our lawmakers fold under the pressure of big business, as the Senators claimed. However some businesses have taken efforts to stop the hiring of illegal aliens. The Southwest California Business Alliance has a website with business listings available the public to view businesses that hire legal citizens. Kevin Jeffries, chairman of the Republican Party of Riverside County, says that this “has the potential to grow to county, state and maybe even nationwide levels.” However, businesses still look to lower costs and cheap labor is a very efficient way to do it. Until there are incentives for businesses not to hire illegal immigrants, the problem of illegal immigration seems unsolvable. Although there are steps taken in the right direction to curb illegal immigration, this next election shall decide the future of this issue.

Up the food chain and outsourcing:

(Robert Taylor’s groups)

 Up the Food Chain & Outsourcing

The decreased significance on location along with more technically capable workers overseas, both because of communication advances, has made the outsourcing of middle class jobs increasingly feasible in recent years. In the past few years there has been an increase in job transfers overseas in occupations that were thought to be immune to outsourcing like call centers, data management, and accounting sectors (Barrera, 2004). The vast and recent improvements in the communication industry have made the transfer of these jobs possible. Additionally, the advances in communication have created more technically capable and computer savvy workers overseas, a monopoly the US and other developed countries once possessed (Barrera, 2004). Because there are now more technically capable workers overseas, it makes it easier to transfer jobs outside of US borders. Although advances in communications make outsourcing jobs more appealing, developed countries are torn between globalizing trade and preventing outsourcing to keep jobs domestic. While until now we have simply discussed how the outsourcing of middle-class jobs has been made possible, it is also important to consider the implications of such a phenomenon. While outsourcing middle-class jobs may lower costs for firms and boost other aspects of our economy (for example, GDP), Dr. William Raynor, Professor of Finance at the State University of New York (SUNY) at Delhi, explains that this very process has also contributed to a smaller number of available jobs for middle-class Americans (Raynor 2003). What jobs are left tend to yield lower average incomes; Dr. Paul Craig Roberts explains that “Only a few of the 116,000 private sector jobs created in October provide good incomes... the remainder of the 116,000 new jobs consist of temps, retail trade, telephone marketing, and fund raising, administrative and waste services, and private education and health services” (Raynor, 2003). The best explanation for this worrisome trend is simply that American firms intent on competing in the global market almost invariably do everything in their power to reduce costs, often “punishing workers and retirees in order to sell their output at the lowest possible prices” (Raynor, 2003). The outsourcing of jobs is merely one way to accomplish this. One direct effect the outsourcing of jobs has had is that the rich are becoming richer as the poor get poorer. A simple explanation for this is that “rich people can easily take advantage of what is happening overseas, while poor people may not even have knowledge of such possibilities;” in other words, the gap between rich and poor widens because the rich have better access to “investment” opportunities, such as outsourcing overseas, than do poorer people. (Brinley, 2005) This access point that the rich have into the opportunities of outsourcing jobs provides them with access to lower salary costs, fewer insurance requirements, and less government regulations. All of those factors contribute to a company’s bottom line and if they can cut costs by outsourcing those jobs to other countries, the countries will capitalize on those cost cutting options. The wealth of the world is increasingly being concentrated in the top one percent of the income holders due to outsourcing.

Some interesting sites to surf for the change in the income distribution are: