When President Barack Obama gives his State of the Union address Tuesday, it is widely expected that he will focus on income inequality, making it a top-of-the-agenda item for this year and the remainder of his term. In his December speech hosted by the Center for American Progress, the president likely offered a preview of his message as he argued that a strong middle class helps drive economic growth:
We need to dispel the myth that the goals of growing the economy and reducing inequality are necessarily in conflict, when they should actually work in concert. We know from our history that our economy grows best from the middle out, when growth is more widely shared. And we know that beyond a certain level of inequality, growth actually slows altogether.
As the consensus to build an economy that works for everyone and not just the wealthy grows, we believe that there are a few key policies that the president should call for that would begin to roll back income inequality in both the short and long term. While these policies by no means represent all that must be done to address inequality—such as protecting workers’ rights on the job, improving regulation of financial markets, and limiting the corrosive influence of money in politics, to name a few—they represent new, common-sense approaches that could enjoy broad support and help restore an economy that works for everyone.
1. Raise the minimum wage to $10.10 per hour
One of the most direct and efficient ways to address inequality is to raise the federal minimum wage. While average workers’ wages have remained stagnant, the pay for those at the top has skyrocketed. Today, CEOs make 273 times more than average workers do—a differential that is more than 10 times larger today than it was 50 years ago. From 1968 to 2012, the American economy grew tremendously, driven in large part by a 124 percent increase in worker productivity. If the minimum wage had kept pace, it would be close to $22 per hour. Yet the minimum wage has not even kept up with inflation and is actually almost a third lower in value than it was in 1968—contributing directly to rising levels of income inequality. Raising the federal minimum wage from $7.25 to $10.10 per hour and indexing it to inflation would directly or indirectly raise the wages of 28 million workers, who would receive $35 billion in extra wages. Furthermore, polling shows that voters of both parties overwhelmingly support raising the minimum wage to $10.10.
But raising the minimum wage is not just a matter of fairness or a means of combating inequality; it is also needed to jumpstart our economy. Increasing the minimum wage would put money in the pockets of workers, who are likely to spend that money immediately at businesses in their communities. This boost in demand for goods and services will help stimulate the economy. The money then gets funneled back to employers who would need to hire more staff to keep up with the demand. Empirical research shows that raising the minimum wage, far from causing increased unemployment, will actually boost the economy and generate a virtuous cycle of increasing prosperity. If all low-wage workers earn more, virtually every American business would have more customers, and every taxpayer would have to spend less on poverty programs. Just as importantly, research shows that a higher minimum wage could positively affect economic growth by inducing more human-capital development, which can also help lower income inequality.
2. Increase access to high-quality preschool
Low-income children are falling behind before they even step foot into kindergarten and can be months or even years behind their peers developmentally. Researchers estimate that half of the achievement gap in high school can be attributed to children’s experiences before age 5. Differences between children emerge early, leading to large gaps in key skills such as vocabulary. Preschool programs can help children gain four months of additional learning, and the highest-quality programs have been shown to help children gain an additional year of learning. Children who attend high-quality preschools have positive outcomes throughout their lifetime: They are more likely to graduate from high school, attend college, and earn higher wages as adults.
In 2013, CAP proposed allowing all families to voluntarily send their children to two years of high-quality public preschool. Congress has since introduced bipartisan legislation, and 40 states already have preschool programs in their states, with conservative administrations in states such as Oklahoma and Georgia leading the way. Also last year, Republican governors in Michigan and Alabama championed new investments in preschool despite difficult fiscal constraints. In her former role as president of the U.S. Chamber of Commerce Foundation, Margaret Spellings stated that:
Business leaders strongly believe that investments in high-quality early learning for children from birth to age 5 yield high returns, not only in the lives of children but for our nation—including long-term educational, social, and economic benefits, from increased earnings and tax revenues to breaking the cycle of poverty.
Offering universal access to high-quality early education can ensure that all children, regardless of their background, start on a more level playing field, thereby combating inequality for the next generation of Americans. This approach, which has broad support, will give all children more of a fair shot to realize the American Dream by working hard and playing by the rules. It will also better prepare our workforce for the challenges of the 21st-century global economy.
3. Expand apprenticeships
Apprenticeships—an “earn-while-you-learn” form of paid worker training—have been shown to significantly boost workers’ lifetime wages and create pathways to well-paying careers for unemployed young workers—without incurring student debt. Many countries already rely on apprenticeships as a central tool for developing a competitive workforce, but the training model is largely unfamiliar to Americans. Apprenticeships benefit workers by connecting them with a paid job, raising their lifetime wages, and offering a postsecondary education with little or no debt. Unlike most interns, apprentices are paid employees who earn a paycheck for their work. Researchers have found that workers who complete an apprenticeship earn an average of $300,000 more in wages and benefits than comparable job seekers in their lifetime. And because they can often earn college credit for their coursework and on-the-job training, apprentices gain debt-free education at a time when the average student-loan debt for the class of 2012 is more than $29,000.
At the same time, employers who sponsor apprentices gain skilled workers, reduce employee turnover, and improve productivity. Apprenticeships can help businesses address skilled-labor shortages at a time when many employers are reporting that they cannot find skilled workers to fill jobs. In the United States, 98 percent of businesses sponsoring apprenticeships report that they would recommend them, and researchers in Canada found that Canadian employers receive a benefit of $1.47 for every $1 spent on apprenticeship training. There are a number of steps that Congress can take—and others that can be accomplished through executive action—that could help expand the use of apprenticeships in the United States.
Apprenticeships offer another option for individuals to upgrade their skills—hence their future earnings, without the need for student debt. At a time when the wage premium on postsecondary education is large, apprenticeships can be a more accessible pathway to a stronger economic future for millions of Americans and can ultimately lower levels of inequality.
4. Offer universal paid family leave
Income inequality directly contributes to the disparate abilities of parents to care for their children and provide them with the kind of living environment most conducive to healthy growth, success in school, and success in the workplace. Not only can wealthier parents afford high-quality child care and private pre-K, but they also disproportionately have access to flexible schedules, paid leave, and paid sick days through their employers. Their children benefit from more parental time, which translates into larger vocabularies, more attention to schooling and homework, greater attendance at parent-teacher conferences, and more and better health care.
Yet even though we know that parental time and attention is critically important for children’s educational and economic outcomes, America is the only industrialized nation that does not guarantee mothers paid time off to care for a new child. Today, only 12 percent of workers have paid family leave through their employers, and low-wage workers are six times less likely to have access to paid family leave as high-income earners. In addition, women of color are disproportionately affected; they are just as likely to work as white women but are less likely to have access to benefits such as paid leave.
Offering universal paid family leave would help prevent inequality from persisting across generations. The Family and Medical Insurance Leave Act, or FAMILY Act, would provide up to 12 weeks of paid leave each year to workers for a medical condition, the birth or adoption of a new child, or the serious illness of a family member. During that time, workers could receive two-thirds of their monthly wages—up to $1,000 per week. Workers would pay into this system, with an average contribution of about $2 per week per worker from their paycheck.
5. Allow Americans to refinance their student debt
Student-loan debt has overtaken credit card debt and has now eclipsed $1 trillion. Yet the majority of federally backed student debt is at an interest rate higher than 6 percent. In contrast, the government can borrow money at a much lower cost, meaning that many students are paying two to three times the federal rate. Allowing students to refinance their student loans would boost the likelihood of repayment, freeing up income that could be spent in other sectors and alleviating inequality by lowering the effective cost for low-income individuals to attend college. A 2013 CAP analysis found that just refinancing federal student loans with an interest rate above 5 percent would have resulted in a savings of $14 billion for individual borrowers in 2013 and would have pumped $21 billion into the economy in the first year alone.
In recent years, college graduates’ wages have been increasingly pulling away from the wages of individuals who only have a high school degree. This makes college access more critical than ever to improving economic mobility for Americans. Yet high levels of student debt can become a long-term impediment for low- and middle-income families: Graduates saddled with large monthly loan payments have to delay buying a home, are left with fewer job choices, and experience lower levels of economic stability as a result.
6. Improve retirement security
Economic inequality continues into retirement. About half of all workers do not have a retirement plan at work, and those who do have a 401(k) have only accumulated enough money to give them a monthly retirement payment of about $575 on average. Consequently, accounting firm Ernst & Young estimated that 59 percent of new middle-class retirees will outlive their savings. Furthermore, traditional defined-benefit pensions—a staple of good, middle-class jobs a generation ago—have become a rarity. The tax code also reinforces inequality in retirement; its upside-down-pyramid shape offers larger incentives for those at the top to save—even though they are already more likely to do so—and relatively little help for those at the bottom. Specifically, personal contributions to qualified retirement accounts receive a tax deduction, meaning that those in the top tax bracket, for example, receive 39.6 cents back for every dollar they save while those in the 10 percent tax bracket receive 10 cents back for every dollar they save.
However, CAP has proposed a low-cost solution that meets the needs of workers and businesses: The Secure, Accessible, Flexible, and Efficient, or SAFE, Retirement Plan would automatically enroll workers in a collective defined-contribution plan, offer low fees and professional fund management, collectively pool participants’ assets, and turn these assets into lifetime payments in retirement at a low cost. Additionally, a Universal Savings Credit, which would replace all existing deductions with a new flat tax credit based on their contributions to a savings account, would flip the upside-down pyramid of tax benefits to better help low- and middle-income families save for retirement.
While there is no silver bullet to instantly reverse decades-long trends in rising inequality, there are common-sense policies with broad support that together can help put America back on the right path toward an economy that works for all. Adopting the six policies outlined here would go a long way to increase the wages of workers today, help all children start on a more level playing field, make skills training and postsecondary education more widely accessible, and ensure that all Americans can retire with dignity.
Ben Olinsky is a Senior Fellow at the Center for American Progress.
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Senior Vice President, Structural Reform and Governance; Senior Fellow