SOCIAL INDICATORS 2007
Economic status is usually cast in terms of income and wealth. When we talk about economic justice, we usually have one of two things in mind. First, we are asking if people have sufficient resources. Second, we are asking how income and wealth are distributed throughout society. Two critical factors in these matters are employment and inflation.
Employment and Inflation
Whether we are self-employed or are employed by others, employment is a fundamental necessity for economic survival for all but a few. Low unemployment is a sign of economic health. The question is how low should unemployment be? Full employment is not possible because at any given moment people are leaving jobs in search of new ones while others are entering employment for the first time. Then there are those who are chronically unemployed. The problem is that if the employment rate gets too high, a labor shortage ensues and employers began offering higher wages to attract qualified workers. Businesses raise prices to compensate for the increased wages. The workers must pay higher prices for goods and services, so they seek even higher wages, thus creating a cycle of inflation. As long as consumer confidence remains high about the future the cycle continues upward.
As wages escalate, businesses begin to automate and find labor saving options to avoid more hiring and paying increasing wages. This eventually leads to a reduction in jobs and labor becomes cheaper because there are more laborers looking for work. Consumers become more anxious about spending and businesses lose revenue. They cut more workers. Some businesses close or scale back, which means less competition for the the remaining businesses. It soon reaches a point where employers opt to hire workers again because their wages are relatively cheaper and the employers believe they can expand sales again. The upward spiral begins again. There are other complexities involved but this interaction of inflation and unemployment is at the core of the business cycle.
What have been the recent trends with unemployment and inflation?
The Unemployment rate and the inflation rate have been trending lower since the early 1980s. Unemployment was 4.6% at the end of 2006. Some economic experts believe that 5% unemployment is an optimal level, striking a balance between overheating the job market and leaving too many people without work. Inflation has hovered around a modest 3% over the past decade. Recent decades have been very stable.
The Gini Index is a measure of income inequality. The index ranks income distributions from 0 to 1 where 0 equals equality and 1 equals inequality. Gini indexes had been calculated for families from 1947 until recently in the US. However, household income is now the preferred indicator and that data is available only from 1967 to present.
The Gini Index declined slowly over the 1950s and 1960s until it reached .388 in 1968. Based on earlier data for the entire century, I suspect 1968 was the low point of the century. Over the past four decades the rate has climbed to .470 in 2006. That is an increase of 20% (although the numbers are not considered comparable after 1993.). Many attribute the rising inequality to the tax cuts implemented by Ronald Reagan in 1981. However, the rise in the Gini index began earlier:
Some estimates suggest the rate of poverty in the United States in 1939 was more than 40%. This would certainly have given a high Gini Index. We also know that the Gini Index fell rather steadily from the end of World War II until 1968. The Gini index fluctuated near the 1968 level until 1974. The rate began to grow in 1975 and continued at a very steady pace until early 1992, set back only by the 1980 and 1990 recessions. If not for the recession and economic woes of the mid-1970s, the origin of the increase might have been as far back as 1968. The calculation methods for the Gini Index were revised in 1993 and indexes after that date are not strictly comparable with previous years. Since 1993 the annual growth rate has been similar to the growth rate prior to the Reagan-Bush years.
So why did the Gini Index contract and then grow? Frankly, I don’t think anyone knows with certainty. It appears that changes in taxation were not a primary factor.
- After the 1964 Kennedy tax cut, inequality continued to decline for the next four years before leveling off in following years.
- Ronald Regan cut taxes in 1981 and the inequality kept increasing through the 1980s at or above the same rate it started in 1975.
- Bill Clinton raised taxes and inequality kept growing, although at a slower rate.
- George W. Bush cut taxes and inequality grew only slightly more than under Clinton.
There is no doubt that taxation has an impact on distributive inequality but it is also clear that a host of other factors are involved as well. There is also a possibility that some of the increase is misleading due to changes in the size of American households.
The average numbre of persons per household shrank from 3.14 to 2.57 from 1970-2006. (Census Bureau) Why is this important? Imagine a home with two working parents making a combined income of $100,000. Their daughter gets her first job after completing college making $30,000 a year and moves out of the house, thus creating a new household. Family income has increased by 30% to $130,000 dollars. However, this income is now spread across two households for an average household income of $65,000. That is a 35% decrease in household income. There has been a growing trend of single adults living indepenedently. Similarly, take a poverty-level single-mother home where a 19 year old daughter becomes a single mom. She moves out of her mother's household to form her own household so she can take advantage of government benefits. The number of households over which income is spread expands once again.
All this is to say the measuring distribution is not as straightforward as it may seem. However, we must also ask what importance should be given to distribution of income over other factors. Distribution can not be examined apart from the question of economic mobility.