Note: This post is an excerpt from The History of Economic Inequality in Illinois: 1850-2014 [PDF], published and released by the Illinois Economic Policy Institute on March 4, 2016.
Although Illinois cannot completely counter national trends, the state and local governments can take steps to reduce income inequality and wealth inequality. There are at least ten potential solutions to reduce inequality in the state.
1. Facilitate union organizing. Unions increase wages for lower- and middle-income workers, reducing inequality (Schmitt, 2008). The long-term decline of union density in Illinois has been strongly associated with increased inequality. By encouraging union membership, mandating that employers post a “protected concerted activities” notice in workplace, and avoiding ideological pushes for a “right-to-work” law, Illinois can make it easier for workers to unionize.
2. Improve the quality of public infrastructure. Economic activity depends on quality infrastructure. Transportation infrastructure improvements allow businesses to efficiently bring their product to market, improve worker-to-firm connectivity, reduce transportation costs, and boost economic activity. In addition, the construction jobs directly created by infrastructure investments are well-paying, middle-class jobs in Illinois. Economic research publicized by the International Monetary Fund (IMF) finds that “better infrastructure, both quality and quantity, promotes income equality” (Seneviratne & Sun, 2013).
3. Increase investment in public education, especially early childhood education and higher education. Economic inequities are the byproduct of inequalities of opportunity. Investments in education can increase economic mobility, boost productivity, and raise the employment rate (Manzo & Bruno, 2015; Heckman & Mosso, 2014). More state funding for public colleges and universities can reduce the sticker prices of tuition, lowering costs and increasing access for poor and middle-income college students.
4. Support worker training programs. Globalization and the polarization of occupations into high-skilled professions and low-skilled jobs have both made training more important than ever. By retraining workers for the jobs that employers demand, Illinois can reduce income inequality in the state. A 2012 evaluation of registered apprenticeship programs finds that workers participating in an apprenticeship program earn $123,906 more in compensation over their careers than nonparticipants (Reed et al., 2012)
5. Raise the minimum wage and index it to inflation. Illinois’ minimum wage was last raised in 2010 to $8.25 an hour. This wage floor, if it had been adjusted for inflation, would be $9.15 in 2016 dollars. Previous research finds that a $10 minimum wage would not only restore the purchasing power of the minimum wage, but would increase labor income for Illinois workers by $1.9 to $2.3 billion for intended beneficiaries, reducing income inequality. The $10 minimum wage could subsequently be indexed annually for inflation, expanded to cover employers with two or more employees, and extended to tipped employees (Manzo & Bruno, 2014).
6. Implement a progressive income tax. Illinois currently has the 5th-most unfair tax system in the country (ITEP, 2015). Among the regressive characteristics are a flat personal income tax and a lack of refundable child tax credits. As a result of the current system, the Bottom 20 Percent of non-elderly taxpayers pay 13.2 percent of their incomes in state and local taxes while the Top 1 Percent in Illinois pays just 4.6 percent of their incomes to state and local governments (ITEP, 2015). Income taxes could be raised on rich households and lowered for poor and middle-class families to fix the state budget as well as improve funding for antipoverty programs. This measure would require an amendment to the Illinois Constitution.
7. Expand the earned income tax credit (EITC). The EITC reduces tax liabilities for workers based on income level, thus incentivizing work and benefiting the lowest-paid employees most (Marr et al., 2015). The state’s earned income credit could be augmented to improve tax fairness. Illinois currently matches 10 percent of the federal credit. The Institute for Illinois’ Fiscal Sustainability recommends that Illinois increase its earned income credit to 15 percent of the federal amount (Civic Federation, 2016).
8. Crack down on employee misclassification. Employers who misclassify workers avoid paying payroll taxes and other forms of employee compensation, such as health insurance and workers’ comp – which increases proprietor incomes. Meanwhile, workers lose earnings that would otherwise be owed to them. Thus, the rise in employee misclassification has contributed to income inequality (Carré, 2015). Expanding coverage under labor and employment law to workers who are misclassified as “independent contractors” would reduce the capital-labor divide in Illinois.
9. Relax zoning restrictions. Many local zoning regulations artificially increase housing costs and rents by limiting the housing stock. The high price of housing has particularly adverse impacts on low-income families. Easing up on zoning restrictions could lower rents and home values, reducing property wealth inequality (Furman, 2015).
10. End residential segregation. Higher levels of racial residential segregation are associated with reduced levels of intergenerational economic mobility (Powell, 2014). Inequality at the top of the distribution correlates with more segregation of the rich, further isolating the poor (Watson, 2009). Steps to reduce racial segregation can help lower racial income inequality.
Each of these options is a policy solution that Illinois or any other state could enact to reduce economic inequality. Significant reductions in income inequality and wealth inequality, however, will require action at a national level by Congress, the Executive Branch, and the Federal Reserve System.
Frank Manzo IV is the Policy Director of the Illinois Economic Policy Institute (ILEPI). Visit ILEPI at www.illinoisepi.org or follow ILEPI on Twitter @illinoisEPI. This post is part of the “Frankonomics” series.