Income Inequality

Wall Street Journal Graphic

You might have thought that the recession has caused income inequality to fall, but you would be wrong: income inequality in the United States is still rising. From the Wall Street Journal:

The inequality, though, hasn’t gone away. Rather, it’s hitting new records. As the economy bottomed out in 2009, the hourly wage of employees in the 90th pay percentile—those whose wage exceeded that of 90% of the working population—stood at $38.50, according to a new study by the Congressional Budget Office. That’s 364% more than the $8.30 an hour earned by those in the 10th percentile. A decade earlier, the difference was 332%, adjusted for inflation. The difference is more pronounced for men than women, at 383% versus 319%.

The growing gap partly reflects the effects of globalization and technological change, which help highly educated workers get more for their skills. But inequality causes a lot of problems: It can contribute to political polarization, and it raises the stakes for less wealthy consumers who want to keep the American dream alive.

Apropos of my post yesterday, it is worth pointing out that unions are one way in which through collective bargaining, workers can get a bigger share of the rents from imperfectly competitive firms. This is the narrative I have in my head of the rise of early unions during the massive industrial expansion of the US where capital intensive oligopolistic firms employed huge work forces. Unions restored balance to labor markets and caused more wealth to flow to them. But the real narrative here, as Goldin and Katz points out is the ever increasing relative returns to skilled workers. Which suggests that neither unions nor time will stop this trend and we, as a society, are going to have to decide how we want address the trend.  One way is through better educational systems, yes, but there will still be an increasing wage gap between the more and less educated.