About that Inequality

Everyone believes that income inequality is getting worse in America.*

Funny thing, facts: they don’t always line up with beliefs.

And the facts are that income inequality

• Is wider across individuals than across families and households.
• Has not changed much across individuals over the last 20 years.
• Has increased among families and households over the last 20 years.

The first bullet point deserves a little explanation. Parents form a family and/or household even if one works and one doesn’t. But, if they get a divorce, we now have two individuals with a great deal of income inequality between them. Families and households have less income inequality precisely because they are a way for unequal singles to group together and share resources.

So, if income is not distributed more unevenly across individuals, but it is distributed more unevenly across families and households, then it must be something about the structure of families and households that is increasing inequality.

And yet, to the extent that forming families/households smooths out inequality, then any increase in inequality must be a fault of the story of smoothing that I told two paragraphs up.

The only conclusion is that increases in income inequality across families and households is because families and households are being formed in an unequal way. More specifically, it’s because we have two richer singles getting married, and two poorer singles getting married, when in the past those two couples would have been “shuffled” more.

In short, we don’t have an inequality of income problem, we have a mate sorting problem. Nothing the government does about income inequality is going to change that.

You may read more about this at Political Calculations.

* Never you mind that it’s consumption inequality we should really be worried about, rather than income inequality. I may be cynical, but I think the reason that government officials worry more about income inequality is that it’s easier to siphon off some of the income going into a rich person’s bank account, than it is to siphon off some of the steak that they buy with it.

Early Deindustrialization

All developed countries are deindustrializing: the share of the economy coming from manufacturing is declining, while the share from providing services to others is rising.

Outside of economics classes, people tend to think this is a new development. It isn’t. We’re decades into this process already.

In the United States, manufacturing employed less than 3% of the labor force in the early nineteenth century. After reaching 25-27% in the middle third of the twentieth century, deindustrialization set in, with manufacturing absorbing less than 10% of the labor force in recent years.

What’s new and interesting is that poorer countries are doing it at a lower level of income than the developed countries did. For example, the U.S. started to deindustrialize when real GDP per capita was about 1/3 of what it is now. But places like Brazil are deindustrializing already, at incomes less than half of that.

In Brazil, manufacturing’s share of employment barely budged from 1950 to 1980, rising from 12% to 15%. Since the late 1980’s, Brazil has begun to deindustrialize, a process which recent growth has done little to stop or reverse. India presents an even more striking case: Manufacturing employment there peaked at a meager 13% in 2002, and has since trended down.

And then there’s everyone’s boogeyman, China:

Consider China. In view of its status as the world’s manufacturing powerhouse, it is surprising to discover that manufacturing’s share of employment is not only low, but seems to have been declining for some time. While Chinese statistics are problematic, it appears that manufacturing employment peaked at around 15% in the mid-1990’s, generally remaining below that level since.

We’re not sure this is a good thing:

An immediate consequence is that developing countries are turning into service economies at substantially lower levels of income. When the US, Britain, Germany, and Sweden began to deindustrialize, their per capita incomes had reached $9,000-11,000 (at 1990 prices). In developing countries, by contrast, manufacturing has begun to shrink while per capita incomes have been a fraction of that level: Brazil’s deindustrialization began at $5,000, China’s at $3,000, and India’s at $2,000.

What are the long-term implications? We’re not sure:

… On the economic front, it is clear that early deindustrialization impedes growth and delays convergence with the advanced economies. Manufacturing industries are what I have called “escalator industries”: labor productivity in manufacturing has a tendency to converge to the frontier, even in economies where policies, institutions, and geography conspire to retard progress …

The social and political consequences are less fathomable, but could be equally momentous. Some of the building blocks of durable democracy have been byproducts of sustained industrialization: an organized labor movement, disciplined political parties, and political competition organized around a right-left axis.

The habits of compromise and moderation have grown out of a history of workplace struggles between labor and capital – struggles that played out largely on the manufacturing shop floor. …

I’m not sure what to make of any of this; even to a trained macroeconomist, this is an angle I haven’t thought about before.

Read the whole thing, entitled “The Perils of Premature Deindustrializaiton” by Dani Rodrik at Project Syndicate.