So a couple of days ago, I was in a heated argument about the view on income inequality. I made the argument that I didnt think income inequality was as bad as most made it out to be (a generalized argument, I know) because the income for the poor increased at a faster rate than the wealthys. Basically I was trying to get at that the income inequality data thats frequently cited doesnt give the full picture. So I did some more digging, first looking for the stats I was initially talking about and figured this would make for an interesting discussion.
And turns out those stats were from a paper by the US Treasury, published in 07.
That paper examines the income mobility of households in the US. Income mobility is the percentage of households in a quintile that have moved into another income quintile (so theyre looking at income increases and decreases of households).
A household as defined by the US Census Bureau includes all the persons who occupy a housing unit as their usual place of residence. A housing unit is a house, an apartment, a mobile home, a group of rooms, or a single room that is occupied (or if vacant, is intended for occupancy) as separate living quarters.
A quintile is any of five equal groups into which a population can be divided according to the distribution of values of a particular variable. The variable here is income so these quintiles are given by ranges of incomes.
The household is really important and Ill come back to that later.
But here are some choice quotes from the Treasury paper first:
Some people might be a little confused, then, how its possible for the wealth distribution to increasingly favor the upper quintiles. The answer is because of income mobility over a period of time (say, 10 years), those in one quintile will probably move into another. And that makes sense because your incomes aren't static, especially for those in high skilled jobs.
Okay but theres still an income inequality issue, it's just not as clear as before because the poor and rich are very mobile and the poor's income increases at a faster rate. Despite there being differences in the approach to defining and viewing income inequality, I think its best to look at the source of the data: the US Census Bureau.
They wrote a report looking at the income distributions between 1947-1998, using those distributions (but varying how they are measured), to analyze if and why there is increasing inequality. They conclude, of course, that there is from 1980 on-wards (before that, because of the type of measurement, there were ambiguous results). Here are their reasons why:
Clear cut, logical explanations which likely explain most of what we see. But heres a more interesting reason (although it probably doesnt account for as much of the inequality differences as the others):
So changes in the socio-culture do affect the economic data we get and analyze, partially explaining differences if not distorting reality.
But if education and skill play that much of a role then can income inequality be seen as economic growing pains? Maybe. Theres no empirical consensus whether income inequality has a positive, negative or no effect on growth and that has to do with econometrics that I dont like getting into (e.g. endogeneity, measurement bias, different models to account for omitted variable bias like fixed effects, etc.).
Theoretically, I think it depends on the situation. Say that there are two countries producing two goods with fixed labor supplies, each having a comparative advantage in one of the goods. If they trade with each other, in theory, the lower supply of the good thats being imported in one country will result in lower employment and lower wages for that industry in that country. But there will be higher employment and wages for the industry thats producing the good thats exported. That could cause an increase in inequality but, overall, thats good for their economy. Those in the lower waged industry could be retrained, given more education, etc. to move into the other industry. They might make lower wages than before but at least they wont be unemployed.
Then you have situations where the nation is politically corrupt and thats why theres income inequality (to a point, I think political corruption can explain some income inequality in the US too). Obviously that isn't a sign of growth.
For the US, I think its mainly growing pains. We could ignore the issue entirely, though, and itll probably fix itself because people change their decisions based on their (perceived) situation, like how more and more people are attaining higher levels of education. But policies could be issued so that those who would struggle and suffer otherwise, wont as much. To do that, Id focus on significantly cheaper and more accessible forms of education and job training with job growth in the sectors that are growing at fast rates in mid-tier cities first. Then work from there.
Still, I definitely think the way the media poses it as well as most people who discuss it, make it seem like a bigger issue than it is.
Anywho what's your opinion on income inequality in the US? Do you think it will ever disappear entirely in our economy (it won't since we're capitalists - there will always be relative winners and losers)? If you disagree with the economists, what do you think are the causes? Or do you think income mobility doesn't give a better picture of our reality? And what types of policies do you think would help reduce inequality?
I should probably add I'd like to keep the discussion more-so on economics than politics. But I get they can't always be separated.
And turns out those stats were from a paper by the US Treasury, published in 07.
That paper examines the income mobility of households in the US. Income mobility is the percentage of households in a quintile that have moved into another income quintile (so theyre looking at income increases and decreases of households).
A household as defined by the US Census Bureau includes all the persons who occupy a housing unit as their usual place of residence. A housing unit is a house, an apartment, a mobile home, a group of rooms, or a single room that is occupied (or if vacant, is intended for occupancy) as separate living quarters.
A quintile is any of five equal groups into which a population can be divided according to the distribution of values of a particular variable. The variable here is income so these quintiles are given by ranges of incomes.
The household is really important and Ill come back to that later.
But here are some choice quotes from the Treasury paper first:
Some people might be a little confused, then, how its possible for the wealth distribution to increasingly favor the upper quintiles. The answer is because of income mobility over a period of time (say, 10 years), those in one quintile will probably move into another. And that makes sense because your incomes aren't static, especially for those in high skilled jobs.
Okay but theres still an income inequality issue, it's just not as clear as before because the poor and rich are very mobile and the poor's income increases at a faster rate. Despite there being differences in the approach to defining and viewing income inequality, I think its best to look at the source of the data: the US Census Bureau.
They wrote a report looking at the income distributions between 1947-1998, using those distributions (but varying how they are measured), to analyze if and why there is increasing inequality. They conclude, of course, that there is from 1980 on-wards (before that, because of the type of measurement, there were ambiguous results). Here are their reasons why:
Clear cut, logical explanations which likely explain most of what we see. But heres a more interesting reason (although it probably doesnt account for as much of the inequality differences as the others):
So changes in the socio-culture do affect the economic data we get and analyze, partially explaining differences if not distorting reality.
But if education and skill play that much of a role then can income inequality be seen as economic growing pains? Maybe. Theres no empirical consensus whether income inequality has a positive, negative or no effect on growth and that has to do with econometrics that I dont like getting into (e.g. endogeneity, measurement bias, different models to account for omitted variable bias like fixed effects, etc.).
Theoretically, I think it depends on the situation. Say that there are two countries producing two goods with fixed labor supplies, each having a comparative advantage in one of the goods. If they trade with each other, in theory, the lower supply of the good thats being imported in one country will result in lower employment and lower wages for that industry in that country. But there will be higher employment and wages for the industry thats producing the good thats exported. That could cause an increase in inequality but, overall, thats good for their economy. Those in the lower waged industry could be retrained, given more education, etc. to move into the other industry. They might make lower wages than before but at least they wont be unemployed.
Then you have situations where the nation is politically corrupt and thats why theres income inequality (to a point, I think political corruption can explain some income inequality in the US too). Obviously that isn't a sign of growth.
For the US, I think its mainly growing pains. We could ignore the issue entirely, though, and itll probably fix itself because people change their decisions based on their (perceived) situation, like how more and more people are attaining higher levels of education. But policies could be issued so that those who would struggle and suffer otherwise, wont as much. To do that, Id focus on significantly cheaper and more accessible forms of education and job training with job growth in the sectors that are growing at fast rates in mid-tier cities first. Then work from there.
Still, I definitely think the way the media poses it as well as most people who discuss it, make it seem like a bigger issue than it is.
Anywho what's your opinion on income inequality in the US? Do you think it will ever disappear entirely in our economy (it won't since we're capitalists - there will always be relative winners and losers)? If you disagree with the economists, what do you think are the causes? Or do you think income mobility doesn't give a better picture of our reality? And what types of policies do you think would help reduce inequality?
I should probably add I'd like to keep the discussion more-so on economics than politics. But I get they can't always be separated.
