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One of the most significant consequence of growing economic inequality is the impact on children. A recent report released by Standard & Poor states that children born into low-income households have a 45 percent chance of remaining poor as adults. However, with a college degree that number falls to 19 percent. Unfortunately, young people from low-income families are less likely to be in a position to graduate from college when compared to their affluent counterparts. These numbers demonstrate the ways that inequities are impacting multiple generations. Without the skills necessary to obtain a job in the new economy, less-educated workers are falling farther behind. The report, How Increasing Income Inequality is Dampening U.S. Economic Growth, And Possible Ways to Change the Tide, demonstrates how extreme rates of inequality in the United States can harm both low-income families and the country’s economic growth.

The gap between the rich and the poor is at a record high. The research shows that in order to prevent negative repercussions, the level of inequities in the United States needs to be addressed through policy solutions aimed at current laws governing corporate practices, tax policy and funding levels for public programs.   

According to the report, a review done by the Organisation for Economic Co-operation and Development (OECD) found that the average income of the richest 10 percent of the population in OECD Countries is nine times that of the poorest 10 percent, with a ratio of 9 to 1. However, in the United States, the ratio is much higher at 14 to 1. The U.S. Gini Coefficient, a measure of income inequality based on the relationship between shares of income and shares of the population, shows that there has been an increase of inequality of more than 20 percent since 1979. The research also indicates that the average income increased by 15.1 percent for the top one percent from 2009 to 2010, but increased by less than 1 percent for the bottom 90 percent.

These numbers are troubling – and are directly related to public policies. The high rates of inequities are a result, in part, of policies that have promoted deregulation, corporate governance and equity options in executive compensation. In addition, public programs that have primarily served low-income and poor families have been reduced. Programs that comprise the largest source of welfare spending are Social Security and Medicare – both of which are not exclusively for low-income families. As a result, while welfare spending has increased over time, it has done so without having the needed impact on inequity. In 2010, only 36 percent of transfer payments (a form of government assistance went to low-income households, compared to 54 percent in 1979. 

Tax policies have also exacerbated rates of inequity to benefit more affluent households – in 1979, top income earners were taxed at 70 percent, compared to just 35 percent in 2012. The report also attributes the stagnant federal minimum wage and the “soaring” executive compensation to worsening inequality. The minimum wage peaked in 1968 before subsequently losing purchasing power over time and has remained at $7.25 since 2009. If it had kept up with inflation, it would be almost $11 today.

This report highlights concerns that many others have outlined regarding the detriments of rising inequality in the United States. However, policymakers can improve economic opportunity by re-examining tax policies and government programs and making changes aimed at improving outcomes for people living on the lower-end of the income scale. One possible policy solution, raising the minimum wage to $10.10, has been an issue of debate at the federal level. The research shows that by raising the federal minimum wage policymakers can lift 900,000 people out of poverty and increase wages for 28 million workers. There has been progress in some states to raise their minimum wages. California, Connecticut, DC, Hawaii, Maryland, Massachusetts, and Vermont have all enacted legislation to incrementally increase the minimum wage to above $10 in their states.

For more information on reducing child poverty and increasing equity, read Results-Based Public Policy Strategies to Reduce Child Poverty.