"The top 1 percent income earners in the United States hit a new high last year, according to the latest data from the U.S. Internal Revenue Service. The bottom 99 percent of income earners registered the best real income growth (after factoring in inflation) in 17 years, but the top one percent did even better. The latest IRS data show that incomes for the bottom 99 percent of families grew by 3.9 percent over 2014 levels, the best annual growth rate since 1998, but incomes for those families in the top 1 percent of earners grew even faster, by 7.7 percent, over the same period."It is important to note that this is factoring in cash income only, so transfers or taxes are not included. Income inequality continues to get a lot of attention, both in the form of "tax the rich" campaigns and a push for a $15 minimum wage. I have generally thought that a big part of the problem is due to wage stagnation in the labor market. With so much slack in the past decade, there has been very little growth in wages. As unemployment has declined and wages have increased, however, the political pressure for higher wages and increased taxes hasn't subsided. Saez and his colleague Thomas Piketty have been critical in drawing attention to income inequality. Again from the Equitable Growth post:
"Timely statistics on economic inequality are key to understanding whether and how inequality affects economic growth. Policymakers in particular need to grasp whether past efforts to raise taxes on the wealthy—in particular the higher tax rates for top U.S. income earners enacted in 2013 as part of the 2013 federal budget deal struck by Congress and the Obama Administration—are effective at slowing income inequality."Saez starts out saying we need to do more work and get more data to understand if and how income inequality affect growth, and then finishes by asking if current policies are doing enough to slow income inequality. For Saez, then, it seems that inequality in itself is bad regardless if it affects economic growth. I tend to sympathize more with the first part of the paragraph. While I find it hard to rationalize how CEOs are realistically worth $10 million+ in annual income, I also can't rationalize why someone would pay $1,000 to go to a Taylor Swift concert. The question is whether this is a market failure that requires intervention. For Saez, that answer seems to be yes, income inequality is a failure of capitalism that needs to be remedied by the state. Some economists (e.g. Ben Bernanke, Joseph Stiglitz) argue that as income inequality increases, there is a drop in aggregate demand as concentrations of wealth among a few will spend far less than more egalitarian levels of income. It might be true that the highest income earners do not spend as high of a percentage of their wealth on goods and services as middle- and low-income earners, but that money isn't sitting under their mattress either.
While income inequality has been rising since the 1970s, this isn't the only period in modern history in which inequality has increased. Peter Lindert of UC Davis has studied the issue for a long time and published an article, originally in the Journal of Income Inequality, that suggests that income inequality also rose during the first industrial revolution. This might sound surprising as the industrial revolution is generally thought of as the event that brought millions out of poverty. While that may be true, it didn't distribute that wealth evenly. In the article, Lindert writes that inequality likely increased in the UK from the beginning of the industrial revolution up through about 1810. He suggests that inequality may even contribute to economic growth because individuals with extremely high incomes can accumulate enough capital for high-cost endeavors, such as building a manufacturing plant, that would otherwise be much more difficult. In a recent episode of EconTalk, Russ Roberts and James Bessen discussed the industrial revolution's affect on wages in the United States. One thing that surprised me was Bessen's comment that wages for many factory workers didn't increase along with the massive increase in productivity until almost 1870, a full half century after these productivity-enhancing technologies were adopted. Bessen attributes this stagnation with firm-specific knowledge that left workers with little bargaining power because the skills they acquired on the job weren't transferable to other employers. It wasn't until many of these technologies were standardized that wages began to really improve.
Based on the work of Lindert and Bessen, I wonder if our widening gap in earned income is due to some of the same forces. In many ways, the 1970s represented the start of another industrial revolution: the computer age. Just as weavers didn't see large wage increases with productivity in the 1800s until the technology matured, perhaps the same is happening now. One problem I see now compared to the first industrial revolution is the pace of change. If wage increases generally come as technology matures and then stagnates as new technologies are adopted and worker skills become much more firm specific, then the rate of change makes a huge difference. If a technology plateaus for only a decade before new technologies are adopted, that leaves a very small window for workers to cash in on their knowledge and skills to increase wages before new technologies render their experience obsolete. In the podcast, Roberts makes the argument that maybe the best skill to have is to know how to learn quickly.
There are obviously several factors that could be causing the stagnation in wages, but I think technology is one to consider. If this is a significant cause, then simply increasing taxes or the minimum wage is unlikely to help. Rather, improving education and worker retraining or removing barriers to entry for entrepreneurs or reducing regulatory burdens (which may have been put in place to protect current industry leaders) would likely be much more effective at reducing inequality. That is, of course, if income inequality is indeed something that needs to be addressed or if it is simply a symptom of where we are in our current "industrial revolution."
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