The Economics of Inequality

inequality



Lets summarize the evidence on rising inequality  found in the latest research, which is abundant because of the high level of interest among both economists and policy makers and the public. The charts come from Former adviser to Vice President Biden Jared Bernstein’s testimony before Congress, and the Center for Budget and Policy Priorities.

  • Low, middle, and high family incomes generally grew at similar rates from the late 1940s to the late 1970s, when they began to diverge.
  • Incomes grew roughly proportional to increases in productivity during this period
  • Since the latter 1970s, income grew much more quickly at the top of the income scale than at the middle or the bottom.



Source: Congressional Budget Office

1980 to the present coincides with the onset of persistent developments that analysts have identified as associated with higher levels of wage, income, and wealth inequality:

  • increased globalization, particularly import penetration global from low-wage producers;
  • greatly reduced unionization, as unions are associated with a more equitable distribution of earnings;
  • higher unemployment reduces the labor market bargaining power of most workers;
  • ongoing technological change -- automation -- increases the relative demand for more highly educated workers.
  • a lengthy decline in the quality of education
  • the decline in the real value of the minimum wage;
  • regressive changes in the tax code, particularly tax cuts, deductions and low rates on non-labor income;




Closely related to rising inequality is the split in national income between returns on capital and that paid in wage, salary or benefit compensation. Financial deregulation promoted the increase of the financial sector as a share of economic activity over the past 35 years and resulted in a large growth of  capital gains sources of income, which are even more highly concentrated at the top than  income from just high salaries.



Source: Piketty and Saez, based on IRS data

As noted in the above chart, capital incomes took a hit in the recent recession (note the 2008 downturn in the top 1 percent share at the end of the series above). But since then corporate profits as a share of national income are at their highest level in the history of these data. Conversely compensation as a share of national income is at its lowest level since the mid-1960s.




Note: Figures are for calendar year 2011, current law. Capital income includes taxable and non-taxable interest income, income from dividends, realized capital gains or losses, and imputed corporate tax liability. The cash income percentile classes used are based on the income distribution of the entire population and contain an equal number of people, not tax units.
Source: Urban Institute-Brookings Institution Tax Policy Center


The Causes of Inequality.


The most conceivable equitable economy that is still dependent on a large number of commodities, of  scarce goods and services, would seek to apply an equal standard to the quantify or quality of work. That quality and quantity of work would vary between individual workers in accordance with skill, ability, training, need, location, age, education or many other factors. But the natural inequalities and variations between persons in no way explains the virtually infinite divide between the living standards of the  top 1% of the US population and all the rest.

There are many diverse views on what constitutes an equitable society and economy, and on what really constitutes wealth. For most of our history as an industrial nation wealth has been judged in the things money can buy. And this will continue as long as commodities dominate consumption. However, there have always been other measures of wealth as well: good health, a clean and natural, green environment, access to knowledge, education, sports and culture, the ability to enjoy public goods like parks, transport, well-designed and supported housing and community plans, etc, etc. These latter forms of wealth must undoubtedly be key parts of defining a more humanistic and rich quality of life in an advanced society. But because they do not have a price, and are in general not marketable, it is difficult to compare their value with commodity wealth. Economists thus measure equity in terms of money income per unit of work. If national median income rises proportional to productivity of labor, the fundamental equity test is usually judged more or less fair. Such a trend may still contain a lot of sins of inequality, but it demonstrates, as long as it holds, that inequality is at least not getting worse.

An important question to ask is whether the “fair” record of median income growth from 1940 through 1975-80 is an exception to the tendency of capitalism as described by Marx to absolutely impoverish the working class over time; or, whether the tendency to absolute impoverishment (very plain in the period in which Marx was studying the matter, or in the latest period from 1980 to the present) is the exception, and the rule is a tendency toward greater equity.

For most of human history productivity was very slow. Until the 18th century and the beginnings of the scientific and technological revolution, the growth was barely noticeable. Since then, the long-range trend has been upward, but in a very zig-zag pattern.

Is Education the Answer?


Economist Lawrence F. Katz is perhaps the best known and regarded researcher on the subject of inequality. His article The Future of Inequality summarizes his findings and identifies a successful balance and interaction between education and technological change as the number one relationship that correlates with sustainable growth AND reductions in inequality.

In general, Katz finds that when technology leads education, inequality rises; when education leads, inequality falls. There are other variables that influence: unionization, unemployment, globalization, immigration, etc. But education is the strongest correlation even when all other variables are controlled in the statistical studies.

According to Katz, the gap between  the wages of educated and less educated workers has been growing since the early 1980s – and that change, along with the divide between labor and capital income,  has been both large and  pervasive even when the measurement is narrowed by gender, industry or occupation.

“Technological change has increased the relative demand for skilled and educated workers, while access to education  has increased the relative supply of skilled and educated individuals. And here’s the  kicker: the big variable appears to be changes in the pace of educational attainment rather  than changes in technological progress. The rise and decline of unions plays a supporting role in the story, as do immigration and outsourcing. But not much of a role. Stripped to essentials, the ebb and flow of wage inequality is all about education and technology.”


Katz goes on to quote Jan Tinbergen, the first Nobel laureate in economics on inequality:  

Inequality, he said, is the outcome of a race between education and technology. When technological advance vaults ahead of educational change, inequality generally rises. By the same token, when increases in educational attainment speed up, economic inequality often declines.



Katz has built over the years a very impressive data case for this correlation through US history, which he  concludes with an account of the recent sharp declines in US educational performance and its failure to meet the demand for larger and larger numbers of more skilled workers needed for economic relations to reproduce themselves on  a higher, and more equal and equitable, level.

In Katz’s analysis, divergence in outcomes for racial, national, and gender populations are also tracked most strongly by access, or lack of access, to education.

Katz work focuses on the impact of education on wage income disparity. It does not address the relatively much wider capital income -- i.e. wealth --- disparity combined with inordinate growth in financial services relative to other sectors of the economy since the 1970’s.

Mobility

One of the standard apologies for rising inequality coming from the austerity politics crowd is the claim that rising inequality does not matter much as long as workers have economic mobility.  Mobility is defined as the ability of an individual, family or some other group to improve (or lower) their economic status over a career, or between generations. It is obviously also closely related to broad educational opportunity, which has grown increasing out of reach for working class families as college costs have soared.

Rep. Paul Ryan (R-Wis.) declared last month in a report to the Heritage Foundation that “Class is not a fixed designation in this country. We are an upwardly mobile society with a lot of movement between income groups.”  Ryan then falsely claimed that social mobility in the United States was better than Europe, where “top-heavy welfare states have replaced the traditional aristocracies, and masses of the long-term unemployed are locked into the new lower class.”

However, the most comprehensive comparative study, done last year by the Organization for Economic Cooperation and Development, found that upward mobility from the bottom was significantly lower in the United States than in most major European countries, including Germany, Sweden, the Netherlands and Denmark. Another study, by the Institute for the Study of Labor in Germany in 2006, uses other metrics and concludes that “the U.S. appears to be exceptional in having less rather than more upward mobility.” Note also that mean mobility figures and do not fully show that racial, national and ethnic minorities mobility stands at approximately 60% of that for whites for all income ranges.



It's Not Just about access to education.

The struggles against pernicious and unsustainable forms of inequality have been the touchstone of many if not all social movements throughout US  history. The resistance to property qualifications in the US Constitution, the expansion of suffrage in waves from 1840 through the 1960’s, the Civil War and the overthrow of slavery, Women’s Suffrage, the labor upsurge of the Depression era, the Civil Rights upheaval and the entire legacy of racial and national oppressions and genocide that the working peoples of this country have suffered, and strived to discard, teach an important lesson: that no advance in educational opportunity or other major  investments in human capital  happen apart from the people lifting themselves up and breaking down class, gender, national and racial barriers that block the way.

Katz’ and other inequality research makes a singular contribution in raising the role of education and technology beyond an opinion  with a strong statistical analysis.Its defect, from a political perspective, is that the research tends to  abstract inequality in strictly numerical terms -- income in dollars -- and discard the broader economic and sociological concept of class. Its true, the term “class” is typically measured by income or wealth in virtually all social science, since it can be counted easily. However much context is lost by leaving aside Marx’s much more nuanced definition of class as ones relation to production.  The job you do, and how it gets done, plus what you get paid, is the class “signature” for Marx. Income comparisons might equate the class of a small or medium business owner, or its principle agent, with an engineer or other professional worker. But there will be important variations in outlook and social activity on a broad range of issues between these occupations, whose interests are not always aligned. Income from capital motivates a different set of interests than income from salary or wages.

Contrary perhaps to intuition, and also to some experience, Dr King’s example of the role of non-violent resistance to oppression, combined with the power of an economic boycott, showed in the era of mass media minority can win majority support, and a scrabble for crumbs by different sections of working people can be overcome. There is a non-accidental synchronicity between the expanse of education and the struggles of working people. The 1890’s and early 20th century labor and suffrage upsurges, the New Deal upheaval, and the civil rights and anti-poverty explosion of the 1960’s and all presaged expansions of the educational franchise of the people.

Education is a public good, a form of wealth whose liberating potential cannot be realized for a nation unless it is provided for all. Ultimately, Marxists submit that the most important lesson to be learned is that expansion of wealth in many kinds of public goods is the only sustainable path to undermining the class conflicts in US society which have led us to the depths of the current trough of depression, injustice, and a level of inequality that threatens the foundations of our democracy.

 

Post your comment

Comments are moderated. See guidelines here.

Comments

  • two quick thoughts:
    1. the education system should be seen as the foundation of the greater welfare state. Kids drop out of school for two primary reasons, poverty and emotional issues. Both of which are interrelated. Subsidies to poor homes are necessary for an improved education system. This means increases in spending not just for schools, but also welfare, health care (including mental health, family counseling), and housing.
    2. On the cynical side, to paraphrase, George Carlin may have said it best that the elites want us to be stupid. It is easier for them to govern us when we are uneducated. Although I am much more optimistic in US society than Carlin.
    http://www.youtube.com/watch?v=4jQT7_rVxAE

    Posted by will c, 04/10/2012 3:04pm (3 years ago)

  • Regarding the "economics of inequality" and its peaceful, just and democratic resolution/elimination, the following:

    We wish to congratulate, encourage and support all fellow humans contributing to the success of the necessary Transformation of Planet Earth, including but by no means limited to the work of the essential global OCCUPY and 99% movements. Our primary suggestion for this necessary endeavor is the serious consideration and thoughtful adoption of some form of Socioeconomic Democracy as a peaceful, just and democratic resolution of the myriad problems confronting humanity caused by the maldistribution of wealth intra- and internationally.

    Most certainly, numerous other fundamental changes are required, with some encompassing the many problems created by contemporary "money" and "banking" definitions and arrangements. The implementation of Socioeconomic Democracy will significantly help facilitate these and other necessary transformations.

    Socioeconomic Democracy is a theoretically consistent and practically implementable socioeconomic system wherein there exist both some form and amount of locally appropriate Universally Guaranteed Personal Income and some form and amount of locally appropriate Maximum Allowable Personal Wealth, with both the lower bound on personal material poverty and the upper bound on personal material wealth set and adjusted democratically by all participants of a democratic society.

    As has been demonstrated elsewhere, Socioeconomic Democracy can eliminate or significantly reduce a multitude of serious-to-deadly, but utterly unnecessary, intimately intertwined societal problems including (but by no means limited to) those familiar ones associated with: automation, computerization and robotization; budget deficits and national debts; bureaucracy; maltreatment of children; crime and punishment; development, sustainable or otherwise; ecology, environment, resources and pollution; education; the elderly; farcical "free-market" fantasies; the feminine majority; inflation; international conflict; intranational conflict; involuntary employment; involuntary unemployment; labor strife and strikes; sick medical and health care; military metamorphosis; natural disasters; pay justice; planned obsolescence; political participation; poverty; racism; sexism; so-called "offshoring" of both jobs and personal/corporate profits; unconscionable Empires; unconscious politicians; untamed technologies; and the General Welfare.

    A few, of many, relevant links:

    "A Democratic Socioeconomic Platform, in search of a Democratic Political Party"
    http://www.centersds.com/dsep.html

    Socioeconomic Democracy: An Advanced Socioeconomic System (Praeger Studies on the 21st Century, 2002)
    http://www.centersds.com/thebook.htm

    "Bibliography of Socioeconomic Democracy"
    http://www.centersds.com/biblio.htm

    "Socioeconomic Democracy: A Nonkilling, Life-Affirming and Enhancing Psycho-Politico-Socio-Economic System"
    http://www.pelicanweb.org/solisustv06n10page2robleygeorge.html

    "Introducing a Socioeconomic Democracy"
    Prepared for Pakistan Futuristics Institute Silver Jubilee Publication: 4
    Islamabad, Pakistan, 8 May 2011.
    This article includes an analysis of the many similarities and a few minor differences between Socioeconomic Democracy and Zakat, one of the Five Pillars of Islam.

    "Socioeconomic Democracy and Sustainable Development"
    http://rio20.net/en/documentos/socioeconomic-democracy-and-sustainable-development

    "Socioeconomic Democracy" forthcoming in International Journal of Science, February, 2012.
    http://issuu.com/ijosc.net/docs/ijosc-february_2012_issue

    We welcome and encourage feedback to this outreach, and look forward to working with all those interested in further peaceful development and implementation of these and other necessary changes aimed at the betterment of all humanity and the total planet.

    Robley E. George
    Director, Center for the Study of Democratic Societies
    http://www.CenterSDS.com
    Coordinador, Nonkilling Economics and Business Research Committee
    http://www.nonkilling.org/node/7

    Posted by Robley E. George, 03/08/2012 2:09pm (3 years ago)

  • For a full explanation of how income inequality is generated, and why debt makes inequality worse, see:

    http://www.econodynamics.org/sitebuildercontent/sitebuilderfiles/bullets.pdf

    Posted by Geoff Willis, 02/15/2012 2:52am (3 years ago)

  • Grandioos artikel

    Posted by chris lefebvre, 02/14/2012 10:34am (3 years ago)

RSS feed for comments on this page | RSS feed for all comments