Economic news flash: Inequality is complex

NationalPost.com – FinancialPost/FPComment
May 13, 2011.   William Watson

Like just about everybody else, it seems, the OECD is interested in inequality. It hosted a forum on the subject last week and has a new inequality study coming out later this year. In the backgrounder to the conference it published a number of tables and charts, a selection from one of which is reproduced at right.

The chart shows the growth rate of real incomes in both the top 10th and bottom 10th of the income distribution in a number of OECD countries over the last 25 years. Not surprisingly (that’s why we’re having all these conferences and studies), in most countries income grew more in the top decile than in the bottom. There were exceptions — France here, also Belgium, Chile, Greece, Ireland, Portugal, Spain and Turkey in the full sample of 27 countries — but in most places growth was more rapid at the top than at the bottom of the income distribution. Across the OECD, it averaged 1.4% per year at the bottom, 2% at the top. Canada’s numbers were 0.9 and 1.6, the United States’ 0.5 and 1.9.

Note that this is not a case of “the rich getting richer and the poor getting poor.” Except in Japan and Israel, the poor didn’t actually do worse. Almost everywhere there was growth at the bottom. But incomes at the top grew more quickly than incomes at the bottom. In effect, the rich were pulling away.

You can imagine where this is going. Neo-liberal economic policies — deregulation, free trade, fiscal conservatism (yes, that would be neo-liberal conservatism) — are rewriting the post-war economic and social contract at the expense of the poor and to the benefit of the rich. Add in financial chicanery by giant banks and investment companies and corporate control of most of the world’s governments, but especially the U.S. Congress, and you have a conspiracy theory worthy of the NDP shadow cabinet.

Except that that’s not where the OECD takes the data. It’s true that globalization may be playing a part. Standard trade theory says rich countries’ high-skilled workers and poor countries’ less-skilled workers, which groups the respective regions have in relative abundance, should benefit most from trade. That’s consistent with increased incomes for already high-income skilled workers in the OECD’s rich countries.

Technology also plays a role — in fact, a greater role than trade if the consensus of studies is to be believed. People who can handle the new technology on which most production is based are increasingly in demand and in many cases such brain (as opposed to brawn) workers are already well paid, so paying them even more only widens the income gap.

But the computer revolution isn’t really the stuff of conspiracy (unless you think Al Gore and the U.S. Defense Department were in cahoots to screw workers) and it’s hardly surprising that an economic revolution should rearrange the income distribution. The first Industrial Revolution’s switchover from agriculture to manufacturing shook things up, too.

But beyond that, there’s just not much for conspiracy theorists to work with. The oldest conspiracy theory of all — capital versus labour — doesn’t achieve traction. On average across the OECD, only 7% of the household income being looked at comes from capital (in the form of interest or capital gains). The great bulk of income, and therefore the source of the great bulk of income inequality, is from wages and salaries.

Changes in household size do seem to be part of the problem. In most countries, there are fewer people per household. Across the OECD, the number of households with only one head has risen from 15% to 20% of the total. In calculating households’ real income, the statisticians try to factor in the economies of scale families enjoy. (Kids are cheaper by the dozen, yes, but also by twos and threes.) If more families are smaller and therefore not enjoying such economies of scale, more are going to be poorer. Why more families are smaller probably has more to do with changes in divorce laws and women’s participation in the labour market than with neo-liberalism or even neo-conservatism. So-called traditional conservatives didn’t like such changes.

It’s not only family breakup that’s causing trouble. Something called “assortative mating” also seems to blame. More than in the past, the same kinds of people — or at least people with similar earning power — are marrying each other. Doctors increasingly marry other doctors, rather than nurses. Today, 40% of couples in which both partners work have similar incomes, compared with only 33% in the 1980s. If rich people are more inclined to hook up with other rich people than formerly, that tilts family incomes in the direction of greater inequality. Some studies suggest most of the increase in inequality in the United States, where people worry most about inequality, is due to demographic changes of this sort. Ronald Reagan, Margaret Thatcher and Milton Friedman had nothing to do with it.

It’s also the case that the wives of top earners have experienced greater employment growth than the wives of lower earners. When that happens, family income grows more quickly at the top than at the bottom. Again, that’s not the result of neo-anything.

As mentioned, the OECD has another inequality study coming out this year. It’s bound to conclude that inequality is complicated. And that conclusion seems bound not to make it into the public debate.

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1 Comment

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