Saturday, September 13, 2008


People often blame unrestrained capitalism for income inequality.  Nordic countries, however, have free labor markets and free trade but low inequality; while both capitalist England and regulated France have relatively high inequality.  A better fit is the portion of high school dropouts; the more people fail to graduate high school, the greater the inequality.  

A pair of articles suggest that differing educational attainment is the source of higher American inequality.  The returns to education have risen in tandem with technology, but educational attainment has stagnated, resulting in an education gap.  This happened during a period in which the global workforce expanded to include more women and the ex-Leftist countries, pushing down the wages of unskilled labor relative to skilled labor and capital.  So the problem is that people can't complete school despite financial incentives.  And the reasons for that vary from poor teaching, bad family environments, culture, and the fact that many people don't like school. 

A contrary argument, that inequality is explained by lowering labor barganing power, begs the question.  It also relies on basically two data points, one in which there was high competition and skimy compensation (recently) and another (after WWII) in which unions extorted highly profitable firms facing low competition.  It doesn't look like unions are a great way to raise wages looking forward; just look at highly unionized industries today.

Education is the big issue, but many people complain about gains going to the top 1%.  This is the philosophy behind Obama's economic plan: The economy's basically fine, but the richest make too much money.  Some of this gain is the superstar effect, that top performers can reach a wide audience.  Much of this went to the finance industry, but obviously this compensation is down sharply.  Some of this is also tied up with the fact that small businesses are increasingly registering as individuals to avoid the double taxation of corporate taxes; first at one of the highest corporate tax rate in the world, and then again as capital gains.  

Mobility is a bigger concern than inequality, as lower mobility hurts people while greater inequality makes them more insecure at parties.  As for this notion that concentrated wealth destroys politics, it seems to me that political interest groups--against abortion, immigration, or what have you--are more powerful at mobilizing votes and getting legislation passed than the "monied class" as a whole.  The broader narrative on mobility is that the American Dream is dying and America is worse than Europe in this regard.

I've been a bit skeptical about this conclusion.  Some papers reviewed by Tyler Cowen argue that mobility has both been constant over time, that there is some correlation of wealth between generations, and much of that comes from transmitting values of hard work and savings.  Another interesting point of view, which I never thought of, is that mobility between income groups is going to be easier in relatively egalitarian societies because the gradients between brackets is lower.  The relevant measure ought to be income mobility, measuring how much people can gain in absolute income, and that is higher in America.  It's harder, for one, for immigrants to get ahead in Europe due to limits on hours worked.  I'm not sure how to interpret changes in mobility over time, but my gut tells me that it's easy today for educated people and more difficult for uneducated people.  

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