Income Inequality

This week’s Econoblog from the WSJ is about income inequality. Heather Boushey is alarmed by the rise in inequality over the past couple of decades:

Over the past 30 years, we have seen inequality rise along all three dimensions — wages, incomes and wealth — and it shows no signs of slowing. As a result, income and wealth is becoming increasingly concentrated in the hands of a relatively small, elite group. Recent research by Ian Dew-Becker and Robert Gordon of Northwestern University has found that income in the top one percent (the 99th percentile) grew by 87% between 1972 and 2001, but grew by 497% in the top one hundredth of a percent (the 99.99th percentile).

Meanwhile, Russell Roberts argues that we needn’t worry so much about relative inequality, because even people at the bottom end of the income spectrum have improved their absolute standard of living:

The average poor person has a washing machine, a dryer and central air conditioning. Almost two-thirds of the poor own or have access to a car. The poor’s access to what once were luxuries has improved dramatically over the last 15 years despite pessimistic claims to the contrary. On many dimensions, even access to health care, the average poor person lives better than the wealthy of the past.

Russell is right that absolute standards of living matter. But I think that he failed to address Boushey’s point (which is fairly widely accepted by economists) that relative success matters to people, too. Understanding the causes and consequences of rising inequality is therefore important, and can not simply be glossed over by arguing that the poor are better off than they used to be.

The discussion about income inequality reminded me of a brand new working paper by Thomas Lemieux, entitled “Post-Secondary Education and Increasing Wage Inequality.” Lemieux provides some pretty good evidence that suggests that most of the rise in income inequality is due to the fact that salaries have been rising rapidly for people with advanced degrees:

[My] findings add to the growing evidence that, far from being ubiquitous, changes in wage inequality are increasingly concentrated in the very top end of the wage distribution. The paper adds to this growing literature by showing that post-secondary education plays a crucial role in explaining this phenomenon. By contrast, labor market experience, primary and secondary education, and the position of workers without postsecondary education in the wage distribution play very little role in explaining changes in the wage structure over the last 35 years… It remains to be understood, however, why post-secondary education, as opposed other observed or unobserved measures of skills, plays such a dominant role in changes in wage inequality. In a standard demand and supply model, this suggests that, for some reason, the relative demand for post-secondary education has increased dramatically over time, while the demand for other dimensions of skills hardly changed at all. Understanding why this is the case should be an important topic for future research.

An important topic, indeed.