Income Inequality: Have the US Poor Made the Biggest Gains?

Russ Roberts at Café Hayek has long argued that the proper way to examine income growth through time, when assessing inequality trends, is to trace the income growth of the same people through time.  In his latest article here he links to some evidence on this point and concludes that “people are getting richer across the income distribution (though the picture for blacks is mixed) and the biggest gains go to the poor (true of both whites and blacks)”.

In the same article he suggests that the much higher divorce rates in the US experienced by those in the lowest income quartiles may help explain why those focusing on the growth in the median incomes of the lowest income quartiles may come to more pessimistic conclusions.

A 2004 Business Roundtable publication here by UK sociologist, Patricia Morgan Family Matters:  Family Breakdown and its Consequences stressed the significance of the contribution of family policy changes – such as welfare policy, taxation and family law – to reduced family stability in New Zealand, although of course it is not the only factor.

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Reducing Poverty or Inequality: Which Matters More?

Today the Herald published the third in a six-part series by Simon Collins titled Divided Auckland, asserting that poverty in Auckland is rising again and the income gap between rich and poor has widened dramatically.

There would be much to commend in a focus on poverty: why people at the bottom of the income scale are not doing well at school, not making a successful transition from school to work, are getting stuck in welfare poverty traps, or are struggling to raise kids, sometimes without intact families.

Since government is the dominant player in education, housing, health, welfare and the regulation of access to jobs, such a focus on poverty should consider carefully which existing policies are likely aggravating poverty and which ones are likely alleviating it.

But this is not, unfortunately, the focus of the articles to date.  Having identified the poverty concern, the series quickly switches the focus to income inequality.

The Business Roundtable has made many contributions to public debate on the issue of poverty versus inequality in recent decades.  In an article here on the topic, Roger Kerr wrote:

Other things being equal, I prefer less inequality in incomes and wealth rather than more. But I worry much more about poverty and hardship – in New Zealand and in poor countries.

It’s easy to explain why. Imagine if all incomes in New Zealand could somehow be quadrupled tomorrow. Most people would see this as a huge advance, especially for the least well off. But inequality would remain unchanged.

Or consider what would happen if Microsoft and all its millionaire employees were to relocate to New Zealand. Income inequality would ‘worsen’. But how many New Zealanders would regard that as a bad thing?

See also Roger’s article here, my blog The OECD Report on Inequality – A Quest for Equal Poverty for All? here, the Business Roundtable’s release on Richard Epstein’s case for a flat tax here, and Buchanan and Hartley’s book Equity as a Social Goal.

The last article in the Herald‘s series is to be published on Saturday and is about ‘what to do’.  Let’s hope the focus is on what to do about poverty.

Bryce Wilkinson
Acting Executive Director

THE OECD REPORT ON INEQUALITY – A QUEST FOR EQUAL POVERTY FOR ALL?

On 5 December this week the OECD reported that the gap between rich and poor in OECD countries has reached its highest level for over 30 years.  Its press release here called for governments to act quickly to tackle inequality.  The full report is “Divided We Stand: Why Inequality Keeps Rising”.

The New Zealand media was (commendably) quick to latch onto the chart in the press release that indicated that the degree of inequality appeared to have increased the most for New Zealand between ‘the mid-1980s and late 2000s’.  (For the record, when the data behind the chart is downloaded and examined, Sweden narrowly tips New Zealand out of first slot on this measure.)

Despite some of the rhetoric apparently to the contrary in the press release, the OECD’s analysis, conclusions and recommendations look very orthodox and commendable – the way to help people at the bottom of the income distribution is to improve their educational and workplace opportunities.  Here are some quotes:

“The main driver behind rising income gaps has been greater inequality in wages and salaries, as the high-skilled have benefitted more from technological progress than the low-skilled.  Reforms to boost competition and to make labour markets more adaptable, for example by promoting part-time work or more flexible hours, have promoted productivity and brought more people into work, especially women and low-paid workers. But the rise in part-time and low-paid work also extended the wage gap.”

“Investing in human capital is essential to promote employment and employability, and to tackle inequality. Indeed, our report clearly indicates that up-skilling of the workforce is by far the most powerful instrument to counter rising inequality.”

“The single most important factor to both reduced wage dispersion amongst workers and higher unemployment rates is educational attainment.”

“The evolution of earnings inequality across OECD countries in recent decades could be viewed mainly … as “a race between education and technology”.

The report also finds that, compared with market returns, government tax and spending policies generally do have an overall redistributive effect in favour of the lowest income distribution groups.  Again this finding is unexceptional.  Those who are on benefits and not working obviously do not earn a market income from wages.

What the figures do not, and cannot, show, is the effect of tax and spending policies on the lowest income distribution groups compared to policies that are more likely to help them move out of poverty and up the employment ladder.  These include greater diversity and flexibility in education, a welfare system that does not trap people on benefits through high effective marginal tax rates, and the removal of barriers to employment of young, unskilled, would-be workers, such as high minimum wages.

But all these observations and findings apply regardless of the size of the income gap or whether it is widening or narrowing! 

A key problem with the focus on income gaps rather than on improving the skill attainment and job prospects  for those currently at the bottom is that it panders to the absurd Marxist notion that the rich have somehow got rich at the expense of the poor.  Yet there is no basis for saying that people who are not working are poor because others are earning good incomes by working hard and productively. Wealth generation is not a zero sum game.

Another key problem is that the OECD’s measure of inequality proposes that New Zealanders would be just as well off if everyone were poor as they would be if everyone were rich. This is because the only thing that matters under this measure is equality of outcome.  The ideal income distribution is reached when differences in effort and skill go unrewarded. Those who work hard should earn no more than the most idle in the community.

It is a curious thing that the OECD considers this proposition to be so unexceptional as to be not worth drawing to anyone’s attention in its press release.

Dr Bryce Wilkinson
Acting Executive Director
New Zealand Business Roundtable