The surprising case of the United States: Major distortion of income distribution at the expense of wage-earners and yet at the same time a chronic shortfall in savings, and a continual external deficit
Author: Patrick Artus. FLASH ECONOMICS ECONOMIC RESEARCH April 22, 2016 – No. 396
Monday 25 April 2016, by Carlos San Juan
California’s recent decision to raise the minimum wage, and the hikes in the
minimum wage advocated by Hillary Clinton and Bernie Sanders, have again
drawn attention to a very significant characteristic of the United States: the
distortion of income distribution to the detriment of wage-earners, and
widening income inequalities. In a country in which real wages increase
little, where low wages do not increase or even decline in real terms and
where, therefore, profitability is very high, we would expect a shortfall in
household demand, surplus domestic savings and therefore an external
surplus.
But the opposite is true: the United States is characterised by a chronic
external deficit, i.e. by a shortfall in domestic savings. This is due to:
• The low level of the household savings rate, which is one of
households’ responses to the sluggish growth in their income;
• The very high level of corporate investment.
The rise in low wages is perfectly justified from a viewpoint of fairness and
even economic efficiency (stimulation of household demand) in the United
States. But, given the starting point, its implementation would lead to a very
large external deficit, and therefore probably ultimately to a significant
weakening of the dollar.