Thursday, January 29, 2015

A Form of Inequality that Perhaps We Should be Concerned About

Inequality has been a hot topic the last few years, motivated in part by the after effects of the Great Recession.

Many economists don’t take this too seriously (and I’m among them). With more experience with the data, it’s harder for us to see that inequality has actually gotten worse, or to judge whether or not that’s a bad thing.

However, one aspect of inequality that I think is well-supported (although I’m not sure it’s a bad thing) is that over the last 30 years or so, we’ve increasingly moved towards an economy in which stars and superstars get paid more than they used to. Consider this chart:

5-01-29 Inequality from The WSJI think this is fairly accurate (and the source is 2 macroeconomists, unlike a lot of graphics you see in legacy media publications, or political discussions).

I have a lot of trouble with the common claim by progressives that the median household has seen no improvement in real income in 30-40 years. I think that’s ridiculous.

But I do think that the gains at the top have been larger, and this graphic supports that.

I’m agnostic about whether this is good or a bad thing though. I simply know of no concrete evidence that a pattern like this is harmful. So for me, it’s just a fact that I feel you need to be aware of.

Now, one argument that I do think you need to have command of, is that a problem in interpreting a chart like this, is that it’s unlikely that the top 5% are the same people from year to year. We do know that there is some churn in the top 5%, and that weakens any case that inequality is a serious issue.

I drew this chart from the article entitled “How a Two-Tier Economy Is Reshaping the U.S. Marketplace” in the January 28 issue of The Wall Street Journal.

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