In a December 2013 speech, President Obama stated:
"... a dangerous and growing inequality and lack of upward mobility that has jeopardized middle-class America’s basic bargain -- that if you work hard, you have a chance to get ahead. I believe this is the defining challenge of our time..."
Income inequality represents the difference in incomes between the very wealthy and the poor. Upward mobility is the ability of people at lower income levels to move up to higher income levels. Some people refer to it as "social mobility" since people can (and do) move both up and down between income levels. Both economic concepts measure the health of groups.
This is not a new issue. In 2011, Indiana Governor Mitch Daniels said:
"... upward mobility from the bottom is the crux of the American promise.”
Call it what you want: American promise... American dream... America, the land of opportunity. To understand if the dream, promise, and opportunity are still possible, you have to understand these economic concepts.
Recently, the Brookings Institute recently released a report about income inequality. The report used the "95/20 ratio" statistic:
"This figure represents the income at which a household earns more than 95 percent of all other households, divided by the income at which a household earns more than only 20 percent of all other households. In other words, it represents the distance between a household that just cracks the top 5 percent by income, and one that just falls into the bottom 20 percent."
Income inequality is important not solely because the U.S. President mentioned it, but also because:
"Obama’s speech followed a series of municipal elections in November 2013 in which inequality figured prominently as a campaign issue. Foremost among these was in New York City... Similar themes were sounded in the successful campaigns and first days in office of Marty Walsh in Boston, Ed Murray in Seattle, and Betsy Hodges in Minneapolis. The “Google Bus” in San Francisco’s Mission District has shone a spotlight on growing economic divisions within that city."
The Brookings report concluded:
"The latest U.S. Census Bureau data confirm that, overall, big cities remain more unequal places by income than the rest of the country. Across the 50 largest U.S. cities in 2012, the 95/20 ratio was 10.8, compared to 9.1 for the country as a whole. The higher level of inequality in big cities reflects that, compared to national averages, big-city rich households are somewhat richer ($196,000 versus $192,000), and big-city poor households are somewhat poorer ($18,100 versus $21,000)."
The specific cities where income inequality is worse:
"The big cities with the highest 95/20 ratios in 2012 were Atlanta, San Francisco, Miami, and Boston. In each of these cities, a household at the 95th percentile of the income distribution earned at least 15 times the income of a household at the 20th percentile. In Atlanta, for instance, the richest 5 percent of households earned more than $280,000, while the poorest 20 percent earned less than $15,000. In another six cities (Washington, D.C., New York, Oakland, Chicago, Los Angeles, and Baltimore), the 95/20 ratio exceeded 12. Overall, 31 of the 50 largest U.S. cities exhibited a higher level of income inequality than the national average."
A second measure of income inequality is the comparison of CEO pay to average workers' pay in companies. In 2012, CNN Money analyzed the differences in pay for the largest (Fortune 50) companies:
"With a staggering total compensation package of $378 million for 2011, Apple's Tim Cook takes the cake for the highest Fortune 50 CEO-to-typical-worker pay ratio. Indeed, it takes 6,258 typical Apple worker salaries to match Cook's total pay. On the opposite side of the spectrum, the ratio for Berkshire Hathaway's Warren Buffett was 11-to-1. Overall, most CEOs took home an average 379 staffers' worth in base pay..."
In this analysis, the CEO/workers pay ratio ranged from a low about 25 to more than 1,000. The ratio was more than 500 at Apple, Walmart, Target, and McKesson. The main conclusion: the CEO/workers pay ratio averaged 379. And, a CEO/worker ratio of 379 is far, far greater than a 95/20 ratio of 15 or 10. Very high CEO/worker pay ratios make it easier for people to demand increases in the minimum wage rate. Very high CEO/worker pay ratios indicate that the increases are easily affordable.
A third way to look at income inequality is to look at how incomes have changed over time. The Economic Policy Institute (EPI) did just that when it analyzed income growth in the United States:
"On average, income in the United States grew 36.9% between 1979 and 2007."
So, the total income for everyone in the United States went up. That's good, right? Nope. You have to dig deeper. Some people in the United States did far better than others:
"The top 1% snared a disproportionate share of that growth—53.9%. So their massive income growth far eclipsed income growth of the bottom 99%, whose raise was meager when you divide it over three decades."
Since the last recession, some people in the United States did far better than others:
"The top 1% is recovering, but the bottom 99%'s income has actually gone down in the so-called recovery."
So, it's been a recovery for a tiny few, and a continuing disaster for mostly everyone else. At the EPI site, you can use the interactive features to view income growth in the state where you live.
You can view all of these measures of income inequality as indicators of whether things are getting better or worse. Rising income inequality means things are getting worse for most people... better for the few people at the highest income levels, and worse for everyone else at lower income levels. If trickle-down economics (a/k/a "Reaganomics") worked, then everyone would benefit, not only a tiny few.