Why Income Inequality May Actually Be a Good Sign

While there has been much angst about rising income inequality here in America—though the increase is probably far less dramatic than the surface stats would seem to indicate—we forget that the same thing has been happening in industrialized nations around the world, even ones that have very different tax systems from ours. So with that in mind, I found the results of this study on income inequality from Claudia Goldin and Lawrence Katz of Harvard University most interesting (Efcharisto—that's Greek for thank you—to Andrew Samwick at Vox Baby):

The majority of the increase in wage inequality since 1980 can be accounted for by rising educational wage differentials, just as a substantial part of the decrease in wage inequality in the earlier era can be accounted for by decreasing educational wage differentials.... Although skill-biased technological change has generated rapid growth in the relative demand for more-educated workers for at least the past century, increases in the supply of skills, from rising educational attainment of the U.S. workforce, more than kept pace for most of the twentieth century. Since 1980, however, a sharp decline in skill supply growth driven by a slowdown in the rise of educational attainment of successive U.S. born cohorts has been a major factor in the surge in educational wage differentials. Polarization set in during the late 1980s with employment shifts into high- and low-wage jobs at the expense of the middle leading to rapidly rising upper tail wage inequality but modestly falling lower tail wage inequality.

My humble take:

1) It really is all about education, both here and overseas. Advanced economies, whether America's or Denmark's, are knowledge economies. And knowledge economies reward education. Get a degree, expand your skills, and you will do just fine. (And this doesn't just mean math and science. Right-brain skills like creativity and communication pay off, too.) The unemployment rate in this country for workers with college degrees is a skimpy 2.1 percent.

Remember, two of the Golden Ages of income equality were the 1930s and 1970s, the two worst decades in the 20th century for the economy. The more educated our workforce, the more productive it will be. The secret of economic growth is getting as many people as possible to work as intelligently as possible. That's it. So it's hard to see why raising taxes and reducing rewards for the highly educated—to a great extent the same group as the so-called rich—and entrepreneurs will make our economy more productive. (It's certainly a risky strategy.) We want people to see education as the path to success. Because it is.

2) The Goldin-Katz study is about wage inequality. For total income inequality, you also have to factor in income from owning stocks and bonds. As I have pointed out before, the stock market has boomed far in excess of overall economic growth for the past quarter century. So, anyone who derives income from wages alone probably can't keep up with those who have big stock portfolios. Since 1981, U.S. gross domestic product has doubled to $11.4 trillion, while total stock market capitalization has increased 14-fold. The real economy—the one that pays wages—just isn't growing as fast as the financial economy. Indeed, the sixfold increase in CEO pay between 1980 and 2003 can, according to the research of MIT economist Xavier Gabaix, "be fully attributed to the sixfold increase in market capitalization of large U.S. companies during that period."