An Empirical Analysis Of Economic Inequality Evolution In The U.S From 1970-2012

Global economic inequality today is deteriorating. In the U.S., inequality has increased dramatically since the early 1980s. The income gap between the richest 1% and the bottom 99% kept widening after economic stagnation in 1970s. It is important to note that even though the initial gap was measured as one percentage, the gap was significant in real dollar terms. As indicated by the Gini coefficient, the earning inequality in the U.S is among the highest in industrial countries.The causes for inequality are a combination of various forces, which includes the advance of technology, especially skilled-biased technology changes, institutional changes like the decline in labor union forces, and fall in the real value of minimum wage, and the impact of globalization. Against this background, the process of identifying the determinants of inequality from a complex cluster of factors is essential to policy making.This thesis mainly discusses the issue of economic inequality based on the empirical and theoretical findings of U.S. from the reference period of 1970 to 2012. The results highlight the severity of inequality in the U.S. By extrapolating data from CPS, PSID and SCF, the thesis identifies several determinants of inequality, both in terms of income inequality and wealth inequality. Based on the findings, the thesis provides policy recommendations for alleviating inequality.With the application of the analytical models, the thesis discusses the recent trend of inequality development, and identifies its sources from the perspectives of income and wealth. The major determinates which have been identified in this thesis are:share of old people, unemployment rate, employment rate, share of government spending, saving behavior, intergenerational transfers, and fluctuations in stock and real estate markets. The results from theoretical and empirical studies suggest that in order to reduce inequality, government needs to improve the share of redistribution to the poor people in various forms, while at the same time it should maintain a balance between equity and efficiency.This thesis fills the gap that previous studies in this area did not jointly examine the effects caused by income inequality and wealth inequality. Moreover, the analytical model employed here has not been used in the U.S context to test the Kuznets inverted-U Curve hypothesis. It will provide extra empirical evidence for or against the hypothesis. In addition, the data used in this thesis is the latest As far as I know, there is no up-to-date research focusing on the determinants of inequality using the most recent data. It is worthwhile to see whether there are any changes on inequality and its causes in recent years and further analyze the reasons, so that government can formulate new policies to tackle the problem accordingly.However, this thesis is still limited in both regards of methods and contents; there is still much left for future studies in this area. Due to the limitation of the analytical model and data, the thesis cannot make a definitive conclusion on the validity of Kuznets’ hypothesis of inverted-U Shape Curve, nor can it evaluate the accurate quantitative correlation between inequality and variables discussed here. Considerable work still needs to be done to better understand the quantitative importance of each factor in determining inequality.