Economics, Pethokoukis

Why the worst may be over for income inequality

Glynnis Jones / Shutterstock.com

Glynnis Jones / Shutterstock.com

First, take a look at this table:

The data, from Cornell’s (and AEI’s) Richard Burkhauser shows a huge disparity in the market income — tax unit, pre-tax, pre-transfer — of Americans over the past 30 years. But once you take into account taxes, transfers, and health benefits, much of that inequality disappears. (Also note that the story of middle-class income stagnation are crumbles.)

Still, there is the issue of just what happened to market income? And I think the answer is mainly one of technology, globalization, and education. If so, this new study on offshoring co-authored by economist Daron Acemoglu may be good news:

In the empirically more relevant case, starting from low levels, an increase in offshoring opportunities triggers a transition with falling real wages for unskilled workers in the West, skill-biased technical change and rising skill premia worldwide. However, when the extent of offshoring becomes sufficiently large, further increases in offshoring induce technical change now biased in favor of unskilled labor because offshoring closes the gap between unskilled wages in the West and the East, thus limiting the power of the price effect fueling skill-biased technical change. The unequalizing impact of offshoring is thus greatest at the beginning. Transitional dynamics reveal that offshoring and technical change are substitutes in the short run but complements in the long run. Finally, though offshoring improves the welfare of workers in the East, it may benefit or harm unskilled workers in the West depending on elasticities and the equilibrium growth rate.

Shorter: The worst might be over for unskilled workers as the wage gap between East and West narrows. Indeed, Burkhauser’s data tend to support this view. Using the market income measure, the US Gini index climbed by 0.032 to .574 in 1989 from .515 in 1979, showing sharply rising inequality. But from 1989 to 2000, the Gini index rose by just 0.009. And from 2000 to 2007 by 0.10.

2 thoughts on “Why the worst may be over for income inequality

  1. I’m not sure why you say the “worst” may be over. Income inequality seems to be inversely related to growth rates. It contracts most during recessions.

  2. Except this data series ends in 2007 so we have no idea what happened in the recession or afterward. To say the worst is over based on 5-year-old data is just silly.

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