Term Paper on "Growth and Inequality"

Term Paper 10 pages (3195 words) Sources: 1+

[EXCERPT] . . . .

The forces that drive globalization are allowing jobs to be offshored by the hundreds of thousands. Some have argued that offshoring has not had much negative effect on the number of jobs, but when you offshore jobs for unskilled workers who once would have earned union wages, you are lowering the median wage for U.S. workers (Maclay, 2014).

Technological changes have also changed the composition of the labor force. Automation has made many manufacturing jobs obsolete, the result again creating a higher level of competition among unskilled or low-skilled workers for the jobs that remain. There has been a rise in service industry jobs, and these pay less. Further, there has been erosion without unions in benefits, something that also lowers the standard of living for American workers.

All of this implies that perhaps inequality is inevitable. Lowering protections for workers -- whether those protections be unions or the social safety net -- brings the market for workers closer to perfect competition, a condition were profits are not possible. Trade liberalization, technology and the discussed domestic factors all contribute to an environment where not only is there greater competition in the U.S. For jobs, but Americans are increasingly competing against workers from other countries for the same work. Invariably, this will mean that median wages in the U.S. -- and other developed countries -- will tend towards the global mean. The U.S. might still control global profits because of its capital markets, and that would explain why the disconnect between profits and wages is growing.

Does it Matter?

It is a valid question to ask if rising inequality is of any consequence. First, a case that in the long run it does not. Workers who find their positions eliminated are obviously going to suffer a decline in income, and when this happens quickly due to rapidly-changing technology and global economic conditions, the result is predictable. But in the long run, people will adjust. If the old ways of making money are unreliable, younger generations will find their own ways to make money. Americans are still education, have access to the world's biggest market, and they still have access to capital. It is still possible, therefore, to have upward mobility; people just will not have it without marketable skills. The shift in the labor force will take time to occur, and in that time there will be many, millions, whose earnings potential is suppressed. Also, over time, Americans will come to realize that they have the freedom to buy stocks, and earn wealth the same way that the proverbial 1% does, by investing capital. This is not an option for all people, but when the economy transitions from manufacturing to services and investing, people will slowly figure that out and prioritize those activities. A shift in the education system would have make this happen faster -- it's hard to Americans to adjust to an investment and service when they are financially illiterate and generally being prepared in schools for a 20th century economy.

Another argument, however, is that rising inequality very much matters. The fact that Americans have seen stagnating real wages for forty years, without any real backlash, is a testament to the fact that most Americans actually live pretty well. But should the time come when they can no longer be complacent and cozy, they will rise up. Political and social instability is a natural consequence when people are having trouble putting a roof over their heads or food on their tables. At this point, there are a number of cultural factors that have allowed inequality to fester unchecked, but when the inequality starts to affect people who are not conditioned to accept it, there will be backlash.

Inequality also matters because it affects America's ability to compete in the world. Michael Porter argues that corporations need to have a clear, defined strategy for competing -- either as a cost leader or a differentiated player (Tanwar, 2013). . Countries are no different. The U.S. is clearly a differentiated player at present, being the major driver of the world's economy, with great education capabilities and the world's innovation hub. To maintain this advantage, the U.S. not only maintains laws that promote entrepreneurship, but it has an educated populace. The problem is that inequality makes it difficult for many Americans to get a good education, on account of the high cost in the U.S. Already, the U.S. imports a lot of knowledge workers in order to sustain its power. At some point, however, other countries will compete better for top workers, and the failures of the U.S. To develop its own mid-range talent will become more apparent.

Lastly, inequality matters because the human outcomes are negative. Those who are in the "have-not" economy suffer adverse health consequences including increased morbidity, mortality and level of depressive symptoms (Fiscella & Franks, 2000). These effects are faced most strongly by at-risk groups: children, minorities, single parents among them. The issue of inequality, while easy to understand economically, ends up being a human issue when poverty results in a lack of upward mobility, and has strongly negative outcomes associated with it.

Future Directions

The trends that have fuelled the rising inequality in the U.S. are ongoing. Certainly, the numerator in the equation is going nowhere. There is no appetite, when politicians have for the past forty years enacted policies that favor the wealthy, to change rules that will curtail their ability to earn more money. The extent to which they are taking that money from the pockets of workers is debatable -- there are other factors at work in a globalized economy -- but there seems to be little relief on the horizon for workers. When unions were the driving force for the American worker, they were doing it at the top end. The UAW worked the country's biggest industry, and had the strongest unions, so they had the best deals. Everybody else was affected by that, and other workers benefitted from deals that the autoworkers signed. Today, most of the discourse is about the minimum wage. In some cases, the minimum wage increase has been significant, and more jurisdictions, at least in progressive areas, are seeking higher minimum wages. But higher minimum wages, pushing up on the average wage from the bottom, are not going to be as powerful as the contracts the UAW signed as far as moving the needle for the average worker. At the low end, there will be some compression, meaning that some workers will get raises to accommodate for the higher minimum wage, but many will not. A theoretical $15/hr minimum wage will result in an increase for someone currently making $14/hr, but not for someone making $24/hr. That compression means that minimum wages are not a powerful tool for improving the lot of the middle class.

And the minimum wage is the biggest hope right now for the middle class. But part of the problem for the average American is that while wages have stagnated, people need more (expensive) education to earn those wages. Further, they need more money to buy a house, and fuel costs are higher. Global trade has kept the cost of some consumer goods down, but this has not applied to big ticket items like houses, fuel, and health care. This does not bode well for the middle class. If anything inequality is going to get worse. Should it get to the point where people become angry, only then might the political class start changing their approach to policy.

Conclusions

The evidence that inequality in the U.S. is increasing is overwhelming. The high end of income earners are getting richer at an incredible rate. At the low end, real wages have barely changed, increasing just 7.7% in the past fifty years. For the average American worker, this rising inequality is a threat. This matters because there are negative health consequences to inequality. It also matters because eventually social change -- marked by a period of instability -- will occur when people realize that they simply do not have any real socioeconomic mobility in life. Thus, inequality should be an issue not only for the American people, but for the political class as well. It is alarming, and the fact that it has not been met with strong action thus far is actually quite amazing. Inequality is not going away as long as the conditions that breed it still exist. Economically, there is not much standing in the way between the American worker and a state of perfect competition, where they earn only enough to meet their basic needs. Such a state would be the ultimate in inequality, but that is the direction our current policies are taking us.

References

Brzozowski, M., Gervais, M., Klein, P. & Suzuki, M. (2009). Consumption, income, and wealth inequality in Canada. University of Minnesota. Retrieved March 14, 2015 from http://www.econ.umn.edu/~fperri/papers/canada2.pdf

DeSilver, D. (2014). For most workers, real wages have barely budged for decades. Pew Research Center. Retrieved… READ MORE

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