America Works: Thoughts on an Exceptional U.S. Labor Market

CHAPTER 3. Distribution Matters

 CHAPTER 3  DISTRIBUTION MATTERS Americans are traditionally less concerned about income distribution than persons in other countries. As long as wages and incomes rise for everyone, why worry that Bill Gates makes more than all the other Bills in the country taken together? Economists generally stress the fact that inequality—differences in earnings between economic activities—are an incentive to workers. High rewards in some occupations or industries signal workers to shift into those occupations or industries. Labor economists further stress that when workers do so, this eventually reduces the initial inequality. If professional wrestlers earn more than curlers, some curlers will put down their curling brooms and learn how to administer flying drop kicks and arm drags. Better yet, perhaps the curlers will form a villainous tag team that uses their brooms to beat down the good guy “faces.” The shift in supply from curling to wrestling will raise the pay in curling and reduce the pay in wrestling. Presto, the market will have reduced the inequality in pay between wrestlers and curlers. In the late 1960s, when returns to undergraduate education were high, many baby boomers invested in a college education. When they graduated, the increased supply drove down the returns. This pattern induced one young economist (me) to write about “overeducated Americans”—the baby boomer graduates whose entry into the market reduced the returns that they had expected when they chose to go to college—and to applaud the market-induced reduction in inequality.1 The long-run trend of rising real wages for everyone and of falling or stable income inequality suggested that 41 distributional issues belonged on the back burner. In any case, at the level of inequality in the 1960s and 1970s, a policy of taxing the wealthy and distributing the money to the rest of society would not have increased the income of the average worker all that much. If in 1972 the United States had placed a 10 percent surcharge on the incomes of the upper 1 percent of earners and distributed the money to the lower 80 percent, wage incomes in the lower 80 percent would have risen by 2.7 percent.2 Given that some of the higher tax would probably have lowered the pretax income of the upper 1 percent as they sought ways to avoid the taxation, the economic return to the bulk of the population would have been modest. Economists could tell their lefty friends to forget about distribution and focus on what really mattered for living standards: the rate of economic growth. The stagnation of real wages from the 1970s to the present despite healthy economic growth invalidates this facile dismissal of distributional issues. If the United States had maintained the inequality it had when I complained about inequality in Moscow in 1984—call it Ronald Reagan inequality—families in the lower 80 percent of the income distribution would have been $4,000 better off than they were in 2004, measured in 2003 dollars.3 If in 2001 the country had taxed 10 percent of the income of the upper 1 percent and distributed the money to the lower 80 percent of earners, wage incomes in the lower 80 percent would have risen by 8.3 percent— three times more than they would have in 1972.4 By the 2000s, inequality in the United States more closely resembled inequality in a developing country than in an advanced capitalist economy. Inequality Big-Time Analysts with different perspectives use different words to describe inequality. Persons on the left often refer to one form of inequality, the proportion of persons with incomes less than half the median income, as “relative poverty,” presumably because the term “poverty” suggests that something should be done to reduce it. When I worked in the late 1990s with the National Policy Association , an organization of business and labor leaders concerned with America Works 42 national economic issues, the business leaders recommended the use of the term “disparity” to refer to income differences because “inequality” had a leftist connotation. Accordingly, I called the small booklet on inequality that I wrote for the association “When Earnings Diverge,” and I used the I-word sparingly in the text. My linguistic preference, and that of most labor economists, is yet another term, “dispersion,” which has a more scientific connotation in statistics as referring to any of a set of measures of the scatter or spread...