Why do some people enjoy much higher incomes than others? That is one of the first questions to arise when people look at income distribution statistics, such as those for the United States, that show some households earning 10 or 20 times as much as other households.
The answer isn’t simple. Let’s start with sources for income in general. In a pure free-market economy, income depends on control of resources. If you can work, you can receive wages. If you own land, you can get rent. If you own capital, you can get interest, dividends or profits. And if you don’t have any resources, you are condemned, like Blanche DuBois, to dependence on the kindness of strangers.
No country in the world is pure free-market economy like the one described above. But personal earnings from labor, capital and land still make up the bulk of most household income.
Most households include someone who can work. Ownership of rental property and financial capital generally is less evenly distributed. Concentration of such wealth in a few hands skews rent, interest and dividends toward a few fortunate households.
But the general pattern of land and financial capital ownership has changed little in the U.S. over the past 50 years. If anything, it has become somewhat more even as the percentage of families that own their own homes has risen and participation in 401(k) plans and mutual funds became more widespread. So unevenly distributed of physical and financial wealth is still a source of uneven incomes in the U.S., but not a factor making it more skewed.
What, then, are the causes? Here is a quick review of commonly cited reasons.
Divorce. The increase in divorce from the mid-1960s onward meant that many single households with two potential earners became two separate households with one earner each. Divorce increases the number of households without increasing earnings. Wives usually end up with the children and usually come out worse in both income and net worth than men do. This is an important cause of child poverty and increased inequality.
CEO compensation. The multimillion-dollar compensation packages bestowed on corporate CEOs certainly catch the eye. The ratio of earnings of top executives compared with average employees widened considerably in the last 20 years and is higher in the U.S. than in virtually all other industrialized countries.
Die-hard conservative economists argue that such compensation merely reflects these CEO’s contribution to shareholder value. Most others believe that there is a market failure here, in that the people who set executive salaries are more influenced by the executives than by shareholders. But most don’t see a simple way to correct the problem.
Consensus? These high salaries do contribute slightly to growing income inequality, but much less than most people believe.
Assortative mating. This is a fancy term for the phenomenon of smart, capable men and women marrying each other. The effect of this on income distribution results from changing opportunities for women in the past 40 years. Traditionally, many women did not work outside of the home when they had children. If they did, occupations such as teaching and nursing were about as good as educated women could do. Now they can be doctors, lawyers, CPAs, programmers and mutual fund managers.
In the past, wives of high-income men were less likely to work than average; now they are more likely to do so. Much research shows that the union of highly educated, high-earning men and women is the principal reason for the increase in earnings share of the top 30 percent of all households. Most economists think this is the principal reason for increasing inequality, but the general public does not pay much attention.
International trade. This is the favorite culprit for labor unions and many liberals. Economists generally like trade and only grudgingly concede that it may contribute to income inequality. Trade benefits society as a whole as well as most consumers. But it is pretty clear that increased trade has affected low-skilled workers.
Over the past 30 years, the earnings gap between those with a high school education or less and those with post-high technical training or college has widened considerably. Low-education earnings have stagnated or fallen. Import competition undoubtedly plays a part.
Decline in unionization and erosion of the minimum wage. These are frequently cited by unions and liberals, and derided by conservatives as sources of increasing inequality. The percentage of the labor force that is unionized has dropped steadily. The real value of the minimum wage was lower through the 1980s and 1990s.
Economists’ opinions on the effects of these changes vary widely. Few concede more than a minor role for higher minimum wages in reducing inequality. It is hard to separate the effects of declining union membership from those of the increasing value of education. It is easy to get into chicken and egg arguments about cause and effect. What is clear is that physical strength and manual labor have slipped in importance compared to conceptual skills and mental ability.
© 2000 Edward Lotterman
Chanarambie Consulting, Inc.