Much has and continues to be written about income inequality in our country. In a December 2013 speech former President Barack Obama called income inequality the "defining challenge of our time." My personal belief is that financial knowledge inequality is part of the income inequality problem. In this post I will share my thoughts on this very important subject.
Investopia defines income inequality as the “extreme disparity of income distributions with a high concentration of income usually in the hands of a small percentage of a population. When income inequality occurs, there is a large gap between the wealth of one population segment compared to another. There can be varying types of income disparity segregation and analysis used to understand income inequality.” Overall, income inequality simply refers to the fact that different people earn different amounts of money. Understanding exactly why this happens is not as clear as you would think.
Over the past 30 years, income inequality has increased in our country, as income has flowed unequally to those at the very top of the income spectrum. As you read, economic literature it largely points to several major causes for falling wages for most Americans and rising income inequality. These include the disruptive impact on jobs from the introduction of new technologies; the need for people to be reeducated or retrained to secure jobs in the new economy; the negative impact of foreign trade including the exporting of jobs to other countries (with China being the leading example) and, lastly, our governmental policies that set the ground rules under which businesses operate. The problem you see in the literature is definitively assigning specific amounts of blame to each of these factors. Which has contributed most to the problem? It is not clear in my view.
I do believe, however, that a contributing factor to income inequality is financial knowledge inequality. In my posts and books, I have written that in our country we require more formal training to secure a driver’s license than we do to financially manage our lives. In fact, today only 19 states mandate a personal finance course be taken prior to graduating high school.
How can people decide which jobs to pursue, properly weigh the cost/benefit of getting an education or preparing for a trade, work to make ends meet and navigate the economic ins and outs of our economy without a firm financial knowledge foundation? How can they decide to join a union or take new courses to allow them to use new technologies without understanding the financial ramifications of their decisions? I just don’t believe people can be successful without knowing how money works.
Summary
The main explanations for income inequality show the difficulty in pointing to one cause of inequality over others. In my view, income inequality has no one single root cause. I do believe, however, that having a solid grasp of financial concepts and practices is essential for economic success. In our complex and ever-changing world education is the building block we must all possess to be as financially successful as possible.
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