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Thursday, January 19, 2006

Will Recent Trends Toward Increasing Inequality Persist?

David Wessel of the WSJ takes a look at inequality:

Is Inequality Over Wages Worsening?, Capital, by David Wesel, WSJ (Free Link): A distinguishing feature of the U.S. economy of the past quarter-century is a sharp increase in economic inequality. No matter how you slice the data, very well-paid folks have done better than the rest. But what changed the U.S. economy around 1980? Do those forces persist? Can or should government resist? Is computer technology the culprit? Is better education the answer? Start with a couple of facts:

About 11% of income (and that's not counting capital gains) went to the best-off ½% of Americans in 2002; 25 years earlier, they got 5.25%, according to ... Berkeley economist Emmanuel Saez. Workers at the 90th percentile ... earned 4.5 times as much as those in the 10th percentile in 2004; 25 years earlier, they were earning 3.5 times as much, according to ... Harvard economist Lawrence Katz. ...Although economic growth in the past few years has been robust and productivity has surged, wages of typical workers in the middle aren't rising. Where's the money going?

The big story isn't that capital and profits are squeezing labor and wages, say Northwestern University economists Robert Gordon and Ian Dew-Becker. Labor's share has been shrinking ..., but its slice of the pie hasn't changed much in the past 20 years. ... For the past 40 years, they conclude, "only the top 10% of the income distribution enjoyed a growth rate of real ... income ... above the average rate of economy-wide productivity growth."

There's more than one puzzle here. One is at the very top, where CEOs, rap stars and ballplayers work. Why do team owners and companies pay so much? ...[S]uperstars make more than ever because, as a result of technology and globalization, they play on a larger stage, and the value of employing No. 1 or No. 2, instead of No. 25 or No. 30, has soared.

But few Americans are in that economic stratosphere. Roughly 90% of full-time workers earn less than $90,000 a year. What about them? In the 1980s, wages of $90,000-a-year workers ... pulled away from workers at the middle, and wages of those in the middle pulled away from workers at the bottom. The consensus diagnosis: Computer technology changed the workplace and made employers prize and pay more for skill and education.

The 1990s were different. Nearly all workers did better than they did in the 1980s -- even those at the bottom... And inequality wasn't as simple to diagnose. The $90,000-a-year crowd continued to do better than men and women in the middle, but the gap between the middle and the bottom didn't keep widening. Looking at all that, the best minds in labor economics differ on whether the 1990s and early 2000s are best seen as a continuation of the 1980s inequality trend (Harvard's Mr. Katz) or an end to it (Berkeley's David Card.) ...

Mr. Card and like-minded scholars say: The ... widening of inequality in the 1980s reflected a one-time change in attitudes and rules, and isn't going to get wider. ... If their analysis is right, the only way to restrain inequality is to tamper with the market by raising the minimum wage or lifting taxes at the top (which isn't to say all these scholars advocate either).

Mr. Katz and his crowd counter ... In the 1980s, technology whacked ... those at the bottom whose jobs were easily automated or shipped overseas. And it helped those who leveraged computers to be more productive. In the 1990s, ... those whose work was made more valuable by computers saw wages and job prospects grow. But the same goes for many low-wage workers who work for those at the top -- janitors, waiters, gardeners, home-health aides and massage therapists. The losers are in the middle, those ... threatened by the increasing sophistication of computers and workers overseas. If these scholars are right, then the answer is to restructure American schools so they prepare workers for jobs for which technology is either a wage booster or irrelevant ...

    Posted by on Thursday, January 19, 2006 at 12:12 AM in Economics, Income Distribution | Permalink  TrackBack (0)  Comments (21)

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