A speculation on the cause of income inequality in the United States

According to the Census Bureau, the share of the Top 5% of US household is 16.8% of aggregate income in the year 1977, while their share in 2007 is 21.2%. For the Top 20%, the share of the aggregate income also grown from around 44% in 1967 to 50% in 2007. (source: http://www.census.gov/hhes/www/income/histinc/h02AR.html) At the same time we see the share of income for the top 5% and top 20% grow, the rest of the country, ie the other 80% of the population see their share of income decrease during the period 1977 to 2007. Why?

We witness two significant trends during the period 1977 to 2007, globalization and technological innovation. Let us examine what globalization do to the share of income. And let us use the clothing industry as an example. For argument sake, an employer invest $10,000 for machine, land and material, he than pay $5,000 for wages. The clothes is sold for $20,000. Hence, in this process, the labor's share is $5,000 and capital also earn $5,000. They each take 50%. After globalization, and for simplicity purpose, let's assume the employer still invest $10,000 as fixed investment. But instead of using $5,000 to hire domestic employee, the employer could spend $2,000 abroad and produce the same result. Hence, the employer can take home $8,000 on his investment while the workers abroad take $2,000. The domestic employee will went out of job and seek for employment elsewhere. And because of these excess supply of workers, the wage in the US in this industry is pressed down. The domestic worker who earned $5,000 will be willing to take $3,000 doing the same job for argument sake. As a result, the employer's share will be 70% and domestic labor share is only 30%. Although these figures are made up, it basically conclude that globalization tend to benefit the investors rather than labor. And since investors tend to be richer, we could therefore understand why the share of the income of the top 20% increase and the bottom 80% decrease.

Technological innovation pretty much paints a same picture. Automation procedure will free up labor, and extra supply of labor depress wage in general. Hence we see a similar picture as above.

This is not to say that technological innovation and globalization is bad, because both of these process tend to utilize resource better. Hence in general, standard of living will improve overall because economic output is maximize when resources are efficiently use. The problem, however, is that the distribution of income cannot be unfair for too long. Ultimately, income inequality could cause serious social problem. Policy makers should pay very close attention to the inequality figure and plan for policy before situation turns worse.