(2008-10-15) Kling Schulz Income Inequality

Arnold Kling and Nick Schulz on Income Inequality.

Income inequality in the United States consists of two gaps. The first gap is an upper-lower gap, between those with a college education and those without. The second is an upper-upper gap, between those with high incomes and those with extraordinarily high incomes.

The upper-lower gap reflects changes in the structure of the economy. New technologies place a premium on cognitive ability... Heckman and others find little evidence that education can reduce differences in cognitive skills that arise from genetic endowments and early childhood experience. Instead, early family conditions seem to be a major factor in the upper-lower income gap. The Manhattan Institute’s Kay Hymowitz, in her book Marriage and Caste in America, has documented that for upper-income Americans marital stability has recovered from the disruptions of the 1970s. But for lower-income Americans the problem remains. Since 1980, the proportion of never-married mothers among college graduates has stabilized near 3 percent, while the proportion among high school graduates has risen from 3 percent to 10 percent, and the proportion among high school dropouts has doubled to nearly 15 percent. These figures are important because, as Hymowitz points out, “Virtually all—92 percent—of children whose families make over $75,000 are living with both parents. On the other end of the income scale, the situation is reversed: only about 20 percent of kids in families earning under $15,000 live with both parents.” (Single Parent Family)

There is also another factor at work. A trend is underway in America for marriage to be increasingly “assortative.” That means children of well-educated parents tend to marry one another and the children of less educated parents tend to marry one another. This was less the case a few generations ago... As women have become better educated and live longer, the opportunity cost of staying at home instead of earning money in the marketplace is much higher. This has no doubt tempted more couples, united by their interest in shared consumption, to have both partners work outside the home. (Two Income Family)

A final trend that promotes income inequality is that more Americans may be engaging in a kind of gambling behavior in their choice of occupation. They are increasingly choosing to play in winners-take-most tournaments... As best-selling writer and investor Nassim Taleb points out in The Black Swan, safe occupations are those where the worker is paid a fixed amount per unit of time. An accountant or a nurse is not going to become extremely rich or extremely poor; they could be called “billers,” because they bill for their time. On the other hand, a professional singer or a software entrepreneur is playing in a winners-take-most tournament. The difference in talent between an international pop star and an unknown lounge singer may actually be quite small. However, the nature of these fields is that the difference in rewards can be enormous. People who choose these sorts of occupations could be called “players.” Winners-take-most tournaments widen the distribution of income... Technological progress is most likely speeding up, leading to more of what Joseph Schumpeter called “creative destruction.” Many jobs destroyed in a modern economy are for billers, which force them to change and in some cases prompts them to try their hand at entrepreneurial, player-type enterprises.

What can government policy do about widening income inequality in the United States? Given the other forces driving inequality, there may be less that government can do than one might hope. Research from James Heckman suggests that education is a relatively feeble remedy for the effects of family background (although Heckman believes that early intervention, in Pre-School or even before, shows promise).