Myth: Income inequality is a serious problem

Liberal myth

The increase in American income inequality over the last 30 years is a serious problem and Congress must enact legislation to reduce this disparity.

The Facts

The current income disparity is not detrimental to Americans or to the economy. It benefits workers and increases opportunity.

Lawmakers should not intervene to reduce the income inequality caused by hard-working, productive Americans earning more.

Benefits of inequality

In an economy where most wealth is not inherited but earned, increased inequality can be beneficial.

• In the United States, most wealth is earned, not inherited.
• Innovators and billionaires such as the founders of Google are creating products that greatly benefit the public and U.S. competitiveness; but their $16 billion annual income also increases the income disparity.
• There is no reason for Congress to enact legislation to decrease disparity occurring due to highly beneficial invention and innovation.

Performance pay and inequality

The number of employers using performance-based pay scales has greatly increased in the last 30 years.

• Use of this pay-scale increases income disparity because those who produce more, earn more.
• 24 percent of the increase in wage inequality between 1976 and 1993 occurred because of the increasing number of jobs that use performance-based pay.

Performance pay benefits workers because it encourages workers to become more productive and rewards their hard work by paying them more.

• More performance pay means more opportunities for hard workers to distinguish themselves and be rewarded for their efforts.

Related Heritage research

• James Sherk, “Performance-Based Pay Diving Increase in Inequality”, June 13, 2007
• James Sherk, “Analyzing Economic Mobility: Compensation Is Keeping Pace with Rising Productivity,” June 11, 2007