ECONOMICS 1: Policy to Address Income Inequalities in the US

This report provides an analysis of income inequality in the United States, highlighting the widening gap between the rich and the poor. The paper proposes a policy centered around a fair minimum wage to address this issue. The report examines the current state of income inequality, citing factors s...Read More

ECONOMICS 1
Policy to Address Income Inequalities
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ECONOMICS 2
Introduction
Income inequality is referred to as a situation where the concentration of income
or wealth is in the hands of a few people in an area. In simple terms, it is the gap
between the poor or low-income earners and the rich. Most studies indicate that poor
people have become poorer whereas the rich have become richer. For the purpose of
this paper, we shall make an analysis of income inequality in the United States. Further,
we shall propose a policy that can be adopted to address the extent of income
inequality in the U.S (Gabaix et al 2016).
Statement of the problem
In United States, the level of income inequality has been high whereby the rich
people have got richer and the poor have continued being poor. Within 1963 and 2016,
it is indicated that the middle families had doubled their wealth to average and families
in the top ten percent had more 5 times their wealth. After the Great Recession in the
United States, the entire trend of income inequality has accelerated. Between 2008 and
2014, the income levels of those people within the top one percent grew very fats as
compared to the income of the rest ninety-nine percent of the people in forty-three
states. The high rate of income inequality in the United States is attributed to a number
of factors such as reduced tax rates for the rich people in America, loss of
manufacturing jobs, age stagnation for salary-earning Americans and many others.
Also, the high demand for skilled labor may also be the issue behind income inequality.
In this case, it is known that various companies in the United States are focusing on
hiring the specialized skills in different fields that is to say; healthcare and engineering.
This leads to automation or cuts in other activities, pushing down the workers' wages in

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jobs which are not competitive. In United States, income inequality has continued to hit
harder as compared to others, with terrible wage gaps among African America,
Hispanics and Women in the United States. According to the research by Heathcote et
al (2010), "women of all races and ethnicities were paid an average 81.8% of the
salaries paid to men in 2017." In the history of the United States, this was considered
as the narrowest. In the United States, it is indicated that white men are continuing to
earn more wages as compared to other groups of people such as the Hispanics and
black Americans (Gabaix et al2016).
Policy Proposal
Definition of the policy to reduce income inequality in the United States
In order to reduce the level of income inequality in the United States, the
government is supposed to ensure workers are paid a fair minimum wage. In this case,
all workers in the United States are supposed to earn a fair wage so as to ensure the
level of income inequality reduces. The lower wages don't only hurt workers but also
affects the society at large (Hubmer et al 2017). By raising the minimum wage, workers
can be in the position to share the economic growth of the nations. Notably, the "Fair
Minimum Wage Act of 2013 (S. 460)" would aid in increasing the minimum wage up to
$10. 20 per hour. If the minimum wage is implemented, it can raise the wage of workers
to at least $10.20 per hour. This means that at least 4.6 million people of the United
States will be in the position to lift from poverty (Glover et al 2017).
Currently, the minimum wage of all workers in the United States is $7.25 per hour
according to the Federal minimum wage. However, some states in the United States

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have a different minimum wage which is at least higher. To note, if the minimum wage
rate of any state or city is higher compared to the federal minimum wage, employers are
therefore expected to pay their workers a higher amount. In 2017, the United States
Department of Labor announced that the minimum wage rate should be raised to
atleast$10.35 every hour. The order was intended to be paid to all workers in
connection or doing work with federal contracts (Fella and Nardi 2017).
Figure 1: Current minimum wage rate of some states in the U.S by January 1, 2019
Source: https://www.statista.com/statistics/238997/minimum-wage-by-us-state/
The economic theory supports the implementation of the policy.
The economic theory of the legal minimum wage is used by most economists to
analyze the minimum wage rate in the United States. The theory explains that the
implementation of the minimum wage rate by the government is a law that prohibits

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employers hiring workers at a lower wage rate as compared to the fixed rate in the law.
The theory indicates that all wages should be made according to the minimum wage
rate set by the law and any disrespect of the law is an offense (Fagereng et al 2016).
The likely benefit (or not) as a result of your policy
If the minimum wage rate is implemented, it will benefit both the workers and
employers. The policy will be helpful in the following ways; first, it will help in reducing
the level of income inequality amount the workers in the United States. In addition, all
worker will earn the same wage as long as the hours worked are equal. Also,
discrimination at work will no longer be an issue as workers will only be paid according
to hours, not color or sex (Benhabib et al2017).
Second, the minimum wage rate will motivate workers as minimum working
hours are set. Therefore, workers will not be overexploited by some bosses who pay
fewer wages to their workers and yet they work over time.Also, the worker's quality will
improve hence increasing the productivity of the companies. This will improve both the
income of the workers and their bosses (Benhabib and Bisin 2016).
Third, this policy does not cost the government as it does not invest in money,
this policy only and only affects the private sector in the United States. However, the
private sector will not be affected because their productivity will improve as workers will
be in the position to work for the set time (Herkenhoff 2013). In addition, the private
sector will no longer be cheated by workers who would not perform their work
effectively, but since wages are according to time, workers will be forced to work hard in

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the set time and additional hours. Therefore, increased time and wage for the workers
will benefit both the companies and the workers (Bayer and Charles 2017).
However, some companies may oppose the minimum wage rate because of
various reasons such as; higher costs incurred in paying the worker's wage. In this
case, most companies believe that it will be costly to pay workers $10.20 per hour
because some workers may not be productive as compared to the wage paid to them.
Also, employers may think that by implementing a minimum wage, workers will be so
reluctant to do work as compared to when payments are made depending on the
amount of work done by an individual (Bach et al 2016).
Relevant evidence about similar policies or similar situation
The policy of minimum wage is supported by various scholars or studies, for
example, the "Joint Economic Committee/ Democrats, by Senator Amy Klobuchar, vice
chair" which explains that all workers need to be given a chance to earn a good wage.
In addition, the article illustrates that "The real value of the minimum wage is now lower
than it was in 1968." The article also indicates that “If the minimum wage were raised to
$10.10 per hour, 4.6 million Americans could be lifted out of poverty” (Attanasio and
Pistaferri 2016).

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References
Attanasio, O. P., and . Pistaferri,l.2016: “Consumption Inequality,” Journal of Economic
Perspectives, 30(2), 3–28.
Bach, L., L. E. Calvet, and P. Sodini. 2016: “Rich Pickings? Risk, Return, and Skill in the
Portfolios of the Wealthy,” Discussion Paper 11734, Centre for Economic Policy
Research
Bayer, P., and K. K. Charles. 2017: “Divergent Paths: A New Perspective on Earnings
Differences Between Black and White Men Since 1940,” The Quarterly Journal of
Economics
Benhabib, J., A. Bisin, and M. Luo. 2017: “Earnings Inequality and Other Determinants
of Wealth Inequality,” American Economic Review, 107(5), 593–97
Benhabib, J., and A. Basin. 2016: “Skewed Wealth Distributions: Theory and Empirics,”
Working Paper 21924, National Bureau of Economic Research.
Fagereng, A., L. Guiso, D. Malacrino, and L. Pistaferri. 2016: “Heterogeneity and
Persistence in Returns to Wealth,” Discussion paper,
Fella, G., and M. De Nardi. 2017: “Saving and Wealth Inequality,” Review of Economic
Dynamics
Gabaix, X., J.-M. Lasry, P.-L. Lions, and B. Moll. 2016: “The dynamics of inequality,”
Econometrica, 84(6), 2071–2111
Glover, A., J. Heathcote, D. Krueger, and J.-V. Rıos-Rull. 2017: “Intergenerational
Redistribution in the Great Recession,”

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Heathcote, J., F. Perri, and G. L. Violante. 2010: “Unequal we stand: An empirical
analysis of economic inequality in the United States, 1967-2006,” Review of Economic
Dynamics, 13(1), 15–51
Herkenhoff, K. F. 2013: “The impact of consumer credit access on unemployment,”
University of California Los Angeles mimeo
Hubmer, J., P. Krusell, and A. A. Smith. 2017: “The Historical Evolution of the Wealth
Distribution: A Quantitative-Theoretic Investigation,” Working paper.