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Income Distribution in the American Economy

According to the U. S. Census (2006), the average household income is $46,000 per annum. Each income group is divided into quintiles where the bottom 20% make under $18,500/year while the top quintile starts at $88,000/year. While the gap in income between the top and bottom is quite wide, there is a sizeable middle class, which many fear is shrinking. With the cost of living rising much faster than wages, this may very well be the case. Just ten years ago, $46,000 would have been considered a good living, but today, one is just getting by as tax rates rose with inflation.

Nominal income sounds much better than it is. While 1,000,000 pesos might sound like a lot of money, looking at economic indicators such as the cost of living and the strength of the currency will tell a much different story. The rich get richer while the poor get poorer. There is much truth in this old cliche. “Economists who study the income distribution nearly all agree that it has grown more unequal in recent years. They have traced the origins of growing income disparities to the changes that have taken place in the economy and society.

Because of the uncertainty over the causes of growing income inequality, there is much debate over what to do about it—or, for that matter, whether the worry that has been associated with it is justified. ” Real wages for low skilled workers are falling more sharply than those of skilled technical workers. Over all, real wages have fallen much since the 1970’s. While numerical incomes are rising higher than ever, the purchasing power of the individual has been markedly reduced.

During the post-war era up until the 1970’s, one income can comfortably support a family of four. Now, both parents must work outside the home, clip coupons, and buy in bulk just to get by. According to MIT economists Tanzi and Chu, “Research within the United States strongly suggests that the reasons for the increased inequality are multiple and lie largely with factors like technology, beyond the direct purview of the government. Changes in technologies have increased the skill premium.

Real wages of low-skilled workers have actually decreased in the United States. In a world of perfect markets, there would be a self-correcting mechanism, the increased wage differential would provide incentives for more individuals to acquire the requisite skills. ” Of course, as the future rushes in on us, more education is required for the same jobs twenty years ago, and chances are, the salary is not that much higher than it was twenty years ago, especially when compared to the cost of living.

The American government has attempted to remedy this inequality by promoting the system of progressive taxation—the more money an individual makes, a larger percentage he must pay to Uncle Sam. This money is supposed to help poor families, senior citizens, and the disabled achieve a livable income, of which the definition rises every year, yet governments are often quite slow to adjust the criteria for poverty rates. Real wages are most important in the context of analyzing a single economy.

If only nominal wages are taken into account, the casual observer would simply conclude that people were much worse off back then. Twenty to fifty years ago, wages were much lower than they are today, however, the cost of living was also much lower. Taking inflation into account will help with accurately assessing the true health of the economy. As an economic index, real wages are instrumental in analyzing income distribution, purchasing power, etc

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