At the Milken Institute’s Global Conference in Los Angeles on Monday, a top-level discussion of income inequality, economic mobility, and poverty revealed differing interpretations of the data, their causes, and their implications for public policy.
AEI visiting scholar Edward Conard faced off against Vice President Biden’s former chief economist Jared Bernstein. The Bernstein/Conard debate over inequality went something like this: Bernstein suggested that inequality was bad for the bottom of the wage scale, as evidenced by stagnant or falling wages at the lower end of the income distribution, relative to many other countries, and compared to post World War II wage growth when inequality was lower.
Conard contended that the local demand created by rising top-end wages is the chief reason that median incomes have continued to rise, despite wage pressure from within and outside the US, and suggested that social issues may play a role in the falling wages at the lower end of the income distribution scale. I found Conard’s arguments more convincing, but you should watch the video yourself.
I’ve paraphrased a selection of the comments below.
1. Inequality: what has caused it?
1) Technology: as tech has evolved, it’s complementarity with the most highly-skilled workers has put a wage premium on workers with those skills.
2) Globalization: increasing the supply of labor puts downward pressure on employment and earnings opportunities for non-college-educated workers
3) Financialization: more resources are being devoted to an industry with highly unequal pay. And the growth of “super managers” more broadly explains 2/3 of the growth in the concentration of income in the top 10%.
Key point: income growth at the top and wage pressure on unskilled workers are both factors—but are largely unrelated.
1) Technology and innovation: agrees with Bernstein on this point.
2) Pressure on the wages of middle class and on low-skilled workers: this is the result of a variety of factors—the massive entry of women into the US labor force, more workers from the Baby Boom generation, and over 30 million foreign-born immigrants. Along with globalization, this large increase in the domestic labor supply has placed downward pressure on the wages of unskilled workers.
2. Is inequality bad for those not at the top?
Yes. Growth at the top means that those at the bottom are operating at a relatively greater disadvantage—they cannot afford the schools and educational enrichment activities that the top end of the income scale enjoy.
In the post WWII era, incomes at the top, middle, and bottom all doubled. That has not happened since inequality has risen over the past three decades. The wages at the bottom of the scale have remained mostly flat, and the growth in the median US incomes has been flat since the early 2000s.
No. Over the past 30 years, median incomes have risen significantly despite inequality. Only after the recession have they dipped. And they still remain well above most high-wage countries, like Germany and France.
The only force driving up American wages relative to the world wage? Local demand—and that demand is chiefly due to the outsized success of the top 1% relative to those in Europe and Japan. That has been evidenced in two ways: wage and employment growth.
US employment has grown by 50% since 1980; Germany and France—less than half as much; Japan, less than a third. And as US employment has grown by 50%, we average 20 to 25% more hours of work per person than Europe and Japan, and at income levels 20 to 25% higher than in Europe and Japan.
If it were the case that income inequality was bad for the middle class, we would not have seen the outsized growth in employment relative to Europe and Japan at wages that are significantly higher.
And comparing post WWII growth with the current US economy is not comparing apples and apples. A dearth of births in the Great Depression meant very tight labor market after the war, driving up wages. The movement from rural to urban areas boosted productivity. Capital-intensive manufacturing was substantial.
Those trends have run their courses, and we now have a much greater labor supply (Baby Boomers, a wave of immigration, and entry of women in the labor force) and more global competition. So growth must be compared to other high-wage economies at this point in time—not to the past when circumstances were different.