Skyrocketing income and wealth inequality have received considerable attention recently. The gap between the richest and poorest households in the U.S. is now the largest it has been in the last five decades. Since 1978, CEO compensation has increased by 940%, compared to only 12% for typical workers. In Maine, the richest 5% of households have average incomes roughly 10 times as large as the bottom 20% of households.
Moreover, racial inequality compounds these problems for people of color in Maine. The Maine Center for Economic Policy’s 2019 State of Working Maine shows that jobs held by workers of color offer poorer working conditions, fewer benefits and less predictable schedules.
But just looking at overall levels of inequality doesn’t tell the whole story. Researchers from Columbia University and the London School of Economics found that low-income Americans have literally been paying higher prices as a result of rising inequality.
The culprit behind this hidden tax on poor Americans is what the authors refer to as “inflation inequality.” Drawing on government data and price data from retail stores, these researchers found that the prices of products purchased by those at the bottom of the income ladder rose faster than the prices of products purchased by those at the top. This means that inflation rises faster for low-income families. Such changes may seem small, but they “compound over time, wedging apart the welfare of struggling households and flourishing ones.”
How does this actually play out? Think of it this way: While you’re walking through the produce section at the supermarket, certain products are typically more expensive than others — think organic kale versus conventional iceberg lettuce. Thrifty shoppers are more likely to buy the cheaper option. But what the researchers found is that over the past several years, the price of cheaper options like conventional iceberg have increased at a faster rate than the price of products like organic kale.
Why has this happened? The authors suggest that companies increasingly cater to families with high incomes, which drives down prices of the types of products those individuals purchase. In contrast, “poor families face prices and price changes that are ‘business as usual.’”
Inflation inequality means that policymakers likely underestimate the number of people living in poverty. Taking the researchers’ adjusted inflation index into account would mean that 3.2 million more Americans would be classified as living in poverty in 2018, and that real household income for the bottom quarter of households declined by 7% since 2004.
The problem is even worse as a result of wage stagnation. Between 1979 and 2013, the hourly wages of middle-wage workers were stagnant, rising just 6% (less than 0.2& per year) and the wages of low-wage workers actually fell by 5%. When these forces are viewed in tandem, you quickly realize just how damaging inequality has been to millions of Americans.
What can be done about this? First, legislators in Augusta need to constantly update social policies helping low-income Mainers to reflect new economic conditions, such as rising inflation. Cornell political scientist Suzanne Mettler’s research shows that just like cars and houses, policies need periodic upkeep to remain effective.
For example, policymakers should continue Maine’s positive efforts to increase the state’s minimum wage laws. With the state’s minimum wage increasing from $11 to $12 in January, policymakers should continue to assess how forces like inflation inequality eat into such increases and index wages accordingly moving forward.
They should resist polemic charges that minimum wage increases will doom the business community. Such critiques are not grounded in evidence. More than 80% of business executives support a higher minimum wage, and 67% of small business owners support higher minimum wages and inflation indexes. There is extensive economic research showing that higher wages increase worker productivity, reduce employee turnover, and reduce absenteeism, which lead to more efficient and productive business operations.
Given that more people are likely living in poverty than official measures indicate, legislators could adjust eligibility criteria to make assistance available to more people, thus aiding those feeling the effects of inflation inequality.
The real takeaway here is to recognize that even during a period of low unemployment and stock market expansion, many Mainers are still struggling to get by. The benefits of economic growth are not widely shared and racial inequality consistently leaves Maine’s workers of color even further behind. It’s important for lawmakers to look beyond macroeconomic indicators of economic improvement and design and update policies to accurately address low-income Mainers’ needs.
Ryan LaRochelle is a lecturer at the Cohen Institute for Leadership and Public Service at the University of Maine. He is a member of the Scholars Strategy Network, which brings together scholars across the country to address public challenges and their policy implications and co-leader of the Maine Scholars Strategy Network’s Working Group on Social Policy and the Safety Net. This column reflects his views and experience and does not speak on behalf of the university. Members’ columns appear monthly.
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