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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.

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