It’s on the news. It’s mentioned extensively in many political circles. It’s being widely debated in academic circles. People, especially young, middle class people, notice it. Income inequality is everywhere today, and will continue to rise to collective consciousness as we enter the 2016 presidential election season.
“It is natural for some to make more money than others,” said Geoffrey Sanzenbacher, a professor within the economics department and research economist within the Center for Retirement Research at BC. “Some jobs require more skill and education than others, some jobs are more dangerous than others so they pay more, some jobs are less attractive than others and therefore pay more to compensate, and so forth.”
The recent surge in inequality has other factors, too. One of the most-cited reasons for this surge is globalization. “With the opening of trade, low-income workers in the developed world tend to face fierce competition from other workers of the same type in the developing world, so their incomes go down or stagnate,” Sanzenbacher said. “However, there isn’t a significant number of high income workers in developing countries to compete with high income workers in the developed world, so their wages go up.”
Another reason is that technological changes in developed countries have been largely skill-biased. “Computerization has substituted for an important part of low-income, low-skill, jobs-like automated registers at CVS and so on, but hasn’t substituted high-skill jobs that pay high salaries,” Sanzenbacher said. “This has only hurt low-income workers’ salaries.”
Then there is the explanation given by economists like Thomas Piketty, which is that capital is concentrated mostly at the top of the income distribution and the returns of capital exceed the returns of anything else. Therefore, income continuously increases for the people at the top and makes them more able to concentrate more capital. This process was significantly exacerbated by financial deregulation in the 1980s and 1990s, which led to more financial innovation and made finance much more profitable.
Now, what is this recent surge in inequality causing? Nothing good. “While some inequality is always desired in the economy, since you want to reward those who innovate, who work the hardest, and those who do a job that requires great amount of skill and preparation, too much inequality—like the one we have been experiencing these last decades—can do a lot of harm,” Sanzenbacher said. Too much income inequality over time can exacerbate inequality in opportunity. That is, a very talented person who starts in a low point in the economic system won’t be able to climb up to a higher point if that person doesn’t have a great amount of resources invested in him or her. Eventually, great talent and potential are wasted, and a lot of innovation is discouraged. “And then there is another effect, which is that inequality will give those at the very top much more lobbying power and influence, and their economic and political interests will not be aligned with those of the middle and lower classes, so it creates this imbalance in power.”
The way this affects college students is that it makes it increasingly difficult for people in the middle and lower classes to attend university. “Parental income is a great correlate on whether someone goes to college or not,” Sanzenbacher said. “With tuitions soaring and middle and lower incomes stagnant, it becomes increasingly difficult for those at the middle and bottom to go to college without taking debt.” Student loan debt is becoming a bigger and bigger problem—even for those students with loans who graduate at places like BC, who tend to find a job relatively easily, it will be a very different scenario compared to the one of their peers who graduate debt-free. “They won’t be able to buy a house as quickly, they won’t be able to save for retirement as quickly. Even if you graduate from college as a low-income student, which is in itself unlikely, you do so under circumstances that will attribute to being in a worse situation for most or probably the rest of your life,” Sanzenbacher said.
If inequality continues to rise, we’ll have a small class of people who own the great majority of things and who have almost unanimous political power, and we’ll see a great decrease in economic mobility—a fundamental feature of “the American dream.” “More people will stop trying to make it to the top because they will think it impossible. If they stop trying, you’ll see vast increases in crime, fewer people looking for jobs, fewer people innovating, which will only hurt growth and social cohesion even more,” Sanzenbacher warned. “It’ll look like the 1800s.”
More needs to be done by governments and universities to combat inequality. “It is not only investing more resources to make sure more people go to college, but also to make sure that low-income students are well-prepared to go,” Sanzenbacher said. “Many drop out of college because they come from a background that has left them ill-prepared to go.” Universities need to provide more resources to low-income students to help them adapt and deal with collegiate life, not just financial aid.
Featured Image by Margaux Eckert