Income Distribution

Income distribution, the apportionment of total national income among all the individuals and families in a country, is an issue closely tied to the way business operates within a society. In any market economy, it is business that generates most personal income, not only through wages and benefits but through interest, dividends, and stock appreciation as well. Therefore the distribution of income is a central concern of business ethics, for evaluating both the fairness of particular business practices and the overall contribution of business to the well-being of society.

Income distribution is generally measured in one of two ways. The simpler way is to divide a society's total income into segments, such as tenths or fifths, based on either per capita or family income. These slices can then be compared with one another at either a given point in time or over an extended period. Thus one can compare, for example, how much income growth the top 10% experienced over a decade compared with the bottom 60%. A more mathematically sophisticated measure is the Gini coefficient, which gives a single number indicating the income distribution of an entire society. This coefficient ranges from 0 (perfect equality) to 1 (all income is received by a single individual), and it is especially useful for comparing distributions between nations.

The social and economic significance of income distribution depends on its interaction with other trends regarding a particular society, especially changes in the absolute level of average or median income. Increasing disparity is less significant in an environment in which most individuals are experiencing growing incomes compared with a situation where median income stagnates or even declines since the latter situation is more likely to weaken social solidarity and political unity.

Over the past generation, the United States has experienced this second, more contentious, set of circumstances. According to the Census Bureau, the Gini coefficient for the United States, which held fairly stable at about 0.40 between 1967 and 1977, has risen steadily since then and hit 0.46 in 2000. Furthermore, figures compiled by the World Bank put American society at the high end of income inequality among industrialized nations. U.S. income is more unevenly distributed than income in Japan, Korea, Taiwan, Australia, Canada, all of Europe (including Turkey), and India, though it does remain a more equal distribution than in China, Hong Kong, and Singapore and a number of poorer countries.

This rising inequality in income distribution in the United States coincides with the nation's weakest generation of average income growth. Until the mid-1970s average compensation tended to track increases in productivity over time. During the postwar generation [Page 1116]between 1947 and 1973, for example, both productivity and average family income grew 103% in inflationadjusted dollars. In contrast, between 1973 and 2003, productivity grew 71%, while family income increased only 22%. Furthermore, according to figures compiled by the Department of Labor, average hourly compensation (adjusted for inflation) has actually declined slightly since 1973 for the four fifths of the population not working in professional or managerial occupations.

Some have argued that tracking compensation over time produces unduly pessimistic results because income numbers do not adequately capture the improved quality of life that comes from innovation. This argument, however, fails to recognize how important innovation has been throughout almost all of American history and how it has traditionally occurred side by side with wage increases. The postwar generation not only doubled its pay but also saw the introduction of television, transistors, commercial jets, home air conditioning, plastics, new medical treatments, and a variety of other product breakthroughs. It would be difficult to argue that a business sector that generates new products but does not share the financial gains from productivity improvements with most of its employees contributes as much to society as a business sector that does both.

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