Income Inequality: Some Research

Nobody is (or should be) arguing that rising income inequality is anything but an existential problem in the US. It has increased markedly since bottoming in the late 1960’s, and has become a political football as both “sides” try to codify into policy their own “theories” (usually wrong) regarding the cause.

Rule One: If you want to solve a problem, understand the cause of the problem first. (Seems obvious…. but not if you’re a politician or a politico with a political axe to grind.)

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Unsurprisingly, about that same time (the early-70’s) was when real hourly wage in the US peaked.

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One can easily see the problem here. Unfortunately, solutions are harder to come by, and often deal more with political mythology than reality. To that end, the NY Times had an interesting article today by Jonathan Rothwell, who is a senior economist at Gallup, and contains some research from a book that he is researching on the topic.

I’ll let the interested read the article (linked below) for themselves. My purpose today is simply to summarize. He makes constant reference to the following chart, which shows how the share of the national income earned by the top 1% of earners has growtn from 11% in 1980 to 20% today, an increase of 81%.

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I wasn’t too crazy about the above chart, since it dealt in absolutes rather than growth, so here’s the same charted out in a normalized manner, growth relative to start:

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So, Russia and the US have the worst problems with income inequality; the darker the color, the larger the % of the national income going to the top 1%. That said, five nations have had greater increases in income inequality over the last 38 years than the US; Russia, Britain, China, Sweden, and Taiwan.

Rothwell starts out by dispelling some of the more popular theories which some hold concerning the cause of income inequality. (Please note here that income inequality is not the same as wealth disparity, although obviously income inequality over time can contribute to wealth disparity.)

Factors which do not correlate to income inequality:

  1. Amount of International Trade. This (sort of) dispels the far-left and far-right thought that the amount of international trade accounts for inequality. (I say “sort of” because I suspect there’s a bit more to the story here, but the numbers are the numbers.)
  2. The Information Age. Generally associated by most parties with inequality, high rates of invention and innovation (measured by patent application) are associated with greater equality, not inequality.
  3. Unionization. Although lower levels of unionization in the US are often blamed for inequality by the political left, no correlation was found between the growth in inequality and the level of unionization.
  4. Immigration. Often blamed by the political right for inequality, high levels of immigration are associated with more equality, not inequality.
  5. CEO and Managerial Compensation. Rothwell points out that the US top wage earners have fewer top executives than in other countries.

So, what gives?

Rothwell finds that the cause is disproportionate compensation concentrated in three industries; professional services, financial services, and health care. So, regarding health care, it’s not that the CEO’s of hospitals and pharmas and supply companies make too much, it’s that we compensate our doctors and nurses and other medical professionals at rates which are far above other countries. If the rate of pay for professionals in those three areas was the same as in other nations, our 1% share of income would look more like Canada or Germany.

And, in these industries, he and others find that regulation which defends those high pay rates (by limiting competition) to be the culprit.

All in all, an interesting read.

https://www.nytimes.com/2017/11/17/upshot/income-inequality-united-states.html

Written by

Data Driven Econophile. Muslim, USA born. Been “woke” 2x: 1st, when I realized the world isn’t fair; 2nd, when I realized the “woke” people are full of shit.

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