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Economics For Beginners: Income Inequality

Updated on April 5, 2014

For all of the talk "experts" are doing about wealth inequality, I've yet to hear one of them come up with a viable solution, mostly because all of the ones I've seen have failed to accurately identify the real problem. In this article, I'll share with you the real cause of wealth inequality, and why it's gotten so bad over the last few years. I'll also give you the solution for solving it, although most of you won't like it.

So, without further ado…

What Is Wealth Inequality?

It’s kinda hard to have a serious discussion about a problem when people have different ideas about what the problem actually is. When you talk about “Wealth Inequality”, most people are actually talking about Income Inequality (which is a real problem); actual Wealth Inequality is the disparity between the top and bottom of the economic scale. For instance:

  • The top 1% (which, in the interests of full disclosure, I am a member of) holds roughly 40 - 50% of the wealth in America.
  • The bottom 50% holds roughly 2 – 6%.
  • The rest is spread among what remains of the middle class, the area between 51 – 99% of the population.

Now, while Wealth Inequality is real, and pronounced, it’s neither a “bad thing”, nor is it the real problem. There has always been Wealth Inequality, and there will always be Wealth Inequality, that’s simply the way it is. Wealth isn’t a Zero-Sum Game however, so just because one person’s wealth increases, that doesn’t mean that another’s has to decrease. I’ll talk more about this later.

Protesting Income Inequality

Source: John Kwasnik, CC:BY, via Flickr
Source: John Kwasnik, CC:BY, via Flickr

The Real Cause Of Wealth Inequality

As I mentioned above, the real problem is Income Inequality, not Wealth Inequality. Back in 1992, Bill Clinton’s campaign had, as one of their three tenants, a simple phrase: “The economy, stupid”. When it comes to Income Inequality, I want you to remember a slightly different version: “Jobs, stupid”. Forget everything else you’ve heard about “corporate greed” or “the 1%”; the real reason for Income Inequality is jobs, plain and simple. Specifically the lack thereof.

How Does A Lack Of Jobs Cause Income Inequality?

Anyone who knows me, or has read any of my work on the subject, knows that there is one fundamental, inescapable, inviolable “law “of economics: Supply & Demand. If the Economic Gods really did exist, their names would be Supply and Demand. When people talk about the “invisible hand of the market”, Supply and Demand are its fingers.

The reason I’m trying to drive home the importance of Supply and Demand, is because the real cause of Income Inequality isn’t the lack of jobs, it’s the resulting surplus of workers.

If you've read my article: Economics For Beginners: Supply And Demand, then you know that when the supply of a thing increases, and demand remains unchanged, then the price of that thing will decrease.

Since the Great Recession, there has been a surplus of workers creating, what is essentially, a buyer’s market for labor. Companies no longer have to compete for workers; workers are now competing for jobs—any jobs, even the low paying jobs. This means companies can hire and fire at will in nearly every industry, and most importantly, do so at a substantial discount because there is such a surplus of available labor.

This condition allows them to pare down their workforce to get the best possible quality, for the lowest possible price; it’s a simple function of the market, and there is nothing inherently “evil” or malicious about it, it’s simply the way the market works. It’s no different than a consumer shopping around for the best deal on specific product or service.

Source: Dyl86, CC:BY, via Flickr
Source: Dyl86, CC:BY, via Flickr

I Still Don’t See How This Leads To Income Inequality?

As I said earlier, the Law of Supply and Demand tells us that when the supply of a thing exceeds its demand, the price of that thing will decrease; in this case labor is the “thing”. The current supply of labor (available workers) far exceeds its demand (number of jobs available), thus the price of labor (wages) has fallen.

Since we want to increase wages, there are only two things we can do: either increase the demand for labor (number of jobs available), or reduce the supply of labor (available workers); that’s it.

Now I know some of you are out there right now saying: “But Shawn, that’s why we need to increase the minimum wage, to make up for the difference”. The problem with that theory however, and one that some people love to conveniently overlook, is that, while the Government can certainly mandate wages, it can’t mandate employment.

I’ve explained how supply influences demand to affect prices, well that works both ways, meaning that prices also influence demand, which affects supply. Remember the example I just gave you: When supply exceeds demand, prices fall, well the reverse is also true: when price exceeds demand, supply increases.

Raising the price of labor (the minimum wage), decreases its demand (layoffs and terminations), and leads to an increase in supply (unemployment). If the Minimum Wage didn’t impact employment (as some would have you believe), then why not have a $50 Minimum Wage? Why not $100? The answer is, of course, our old friend the Law of Supply & Demand.

I Think I See Where This Is Going, And You’re Right, I Don’t Like It!

I told you earlier that there were only two ways to raise wages: increase the demand for labor, or reduce the supply of available workers. Increasing the demand for labor (i.e. creating jobs) is out of the hands of the Government, since it’s not the one actually creating jobs; all that’s left for the Government, is to decrease the available supply of workers.

Here’s the part that you’re not going to like. The fastest and most effective way to do that would be to abolish the minimum wage. Go ahead and scream, I’ll give you a minute.

How In The World Would Abolishing The Minimum Wage Solve Income Inequality?

Remember what I told you earlier: “the real cause of Income Inequality isn’t the lack of jobs, it’s the resulting surplus of workers”. Abolishing the Minimum Wage would eliminate that surplus. Businesses would hire more people in order to increase productivity. This would “dry up” the labor force trough and mean that businesses would no longer have the flexibility with their employees that they have now. Enter the Law of Supply and Demand.

See, as the demand for workers increases, the supply would decrease, meaning that the price of labor (wages) would increase. Funny how that works, huh?

This is a pretty common concept that everyone has experience with, yet when it’s applied to wages people freak out. Don’t believe me? Have you ever bought something that was on sale? Why do you think companies discount products? They do it to increase demand: both for the product, and their store. Do you think people shop at Walmart because they like it more than other stores? No, they shop there because things are cheaper.

It’s the same with labor: if you reduce the price, you’ll boost demand.

Wait A Minute, Abolishing The Minimum Wage Won’t Matter-- Unless…

Yep, I’m afraid so. Remember earlier when we were talking about the minimum wage, and I told you that it wouldn’t work because the Government “can’t mandate employment”, well, that too, works both ways. See, many of those who are unemployed are relying on the Government for support. If they go to work, they’d lose some (or all) of that support, so it’s not in their best interests to take a job, especially a low paying job. So how then do you fix that?

Not only would the Government have to abolish the minimum wage, but it would also have to discontinue all welfare for anyone physically able to work. No more food stamps, no more housing assistance, no more anything. You would have to drive people back into the labor force, and the only way to do that would be by removing their ability to survive off of the Government.

Take a deep breath, it gets worse...

Even the most conservative estimates say that, for wages to hit equilibrium, and then start to rise, would take anywhere from 36 – 50 months (3 – 5 years), and that during that time, there would be nothing short of an economic catastrophe; essentially we’d be sending the country into another Great Depression.

Respect The Hoff

Source: Alexander Johmann, CC:BY-SA, via Flickr
Source: Alexander Johmann, CC:BY-SA, via Flickr

Another Depression!?! What In The Name Of David Hasselhoff Are You Thinking!?!

I never said that fixing Income Inequality was going to be easy; anyone who tells you that there is an easy solution is lying to you. The good news, however, is that we would come out on the other end of that Depression in much better shape as a Nation.

This is a problem that was created by a lot of people, from both parties, over a long period of time, and the longer we let it go, the harder and more painful it will be to solve.

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  • Shawn McIntyre profile image
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    Shawn McIntyre 3 years ago from Orlando, FL.

    @Mel Carriere

    I certainly can't argue with the rampant Corporate-Cronyism in politics today; yet another reason my head almost exploded over the (what is, in hindsight, unsurprising) McCutcheon Decision.

  • Mel Carriere profile image

    Mel Carriere 3 years ago from San Diego California

    Anti collusion laws are rarely, if ever enforced. The heads of most federal agencies are corporate stooges who either have or will land a cushy corporate position once their term is up. Once again it has been a delight reading your work because my own views were once a lot like yours but have since been tempered by the real world.

  • Shawn McIntyre profile image
    Author

    Shawn McIntyre 3 years ago from Orlando, FL.

    @Mel Carriere Thanks for taking the time to read my article. It's always great to hear from people with differing opinions.

    Comparing the current economic climate to turn of the century (1900's I'm assuming you meant) America doesn't really work. America was a very, very different place back then. There was no Department of Labor, no Occupational Safety and Health Administration (OSHA), no Federal Trade Commission, no Clayton act, and while there were Unions and collective bargaining, they were comparatively ineffectual to their late century counterparts.

    As for Corporations acting out of the "goodness of their hearts", that too wouldn't come into play. As anyone who's ever taken Game Theory will tell you, the "Prisoner's Dilemma" would preclude that kind of scenario, and assuming it didn't, Anti-Collusion laws would.

  • Mel Carriere profile image

    Mel Carriere 3 years ago from San Diego California

    All of this has been tried, and resulted in the tenements and sweat shops of the turn of the century. Employers will literally pay people pennies per hours if we leave wages up to the goodness of their hearts. The corporate model is the real culprit. Corporations have no social conscience, and will take whatever action is necessary to improve the shareholder stake. If slave labor were still legal, they would take that action as well. I don't see how your ideas work in a real world. Perfect laissez faire doesn't work. All the same, you are entitled to your interesting ideas and I salute you for expressing your opinion on a controversial topic.

  • Shawn McIntyre profile image
    Author

    Shawn McIntyre 3 years ago from Orlando, FL.

    @heidithorne Thanks for taking the time to read my article =)

    Tech does render a lot of jobs obsolete, but it also creates a lot of jobs; many times it creates more than it eliminates.

    As for "qualified workers" and education, that's a sore subject for me. Until we make students the focus of our educational system, instead of teachers, and more specifically, teachers unions, then we're never going to be able to compete. Instead of demanding results and holding teachers accountable when those results are not produced, the Government decided to cave to the teacher's union and "dumb down" curriculum in an effort to juice the numbers.

    Let me get off my soapbox on that one...

  • heidithorne profile image

    Heidi Thorne 3 years ago from Chicago Area

    Oh, Shawn! What a great explanation for the situation. One of the things that people STILL fail to realize is that the technological age has made many jobs obsolete. Those jobs are never coming back and will continue to add to the worker surplus.

    On a contradictory note, there are usually thousands of jobs that go unfilled because we don't have a surplus of QUALIFIED workers. Education, and specifically vocational and career education, needs to be addressed to help fill the gaps and shift the surplus into employment.

    Population control also could be part of this discussion. Many couples in the past (even as recently as the 20th century) would have kids to become workers in the family business or farm. Again, technology has stepped in to make that ancient mindset obsolete. But controlling family size opens up a whole 'nother philosophical can of worms that society isn't ready to address.

    Great hub. Voted up and shared!