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Output inequality
Posted by: Jon Henke on Monday, May 08, 2006

Edward P. Lazear, Chairman of the CEA, has an important article in today's Wall Street Journal — essentially taken from a recent Hudson Institute speech — on the US economy, wages an inequality issues...
...some claim that the benefits of this economic boom are being enjoyed only by the relatively well-off, and that we have left the rest of our workforce behind. Is this true? Over the last 25 years, the wages of the skilled have continued to grow faster than the wages of the less skilled. For example, the wages of the college-educated have grown by 22% since 1980, while the wages of high-school drop-outs has fallen by 3%.

This does not mean, however, that the rich are benefiting at the expense of the poor. Instead, it means that the return to investing in education and training continues to grow.
As I've argued for quite some time, the Folk Marxist notion of "income inequality" is an invented problem. To be sure, poverty is a problem for those enduring it.

But in terms of "inequality", why focus on the distribution of income? Why not the distribution of output, which is simply the other side of the income coin? Neither income nor equality are necessarily "wealth", but wealth is created by 'output'.

The issue — and this is something we'll have to deal with indefinitely — is that, in a wealthy free society, market income distribution will naturally grow more attenuated. After all, productivity is infinitely expandable and there is no ceiling to the value of output; there is, however, a floor. ($0) If individuals do not choose to acquire the skills/education required to be minimally productive, they'll necessarily be left behind.
The data show that it is this greater return to investing in education that is driving the long-run widening of the income distribution. The cause is not increases in immigration or international trade, as some have alleged. First, wages for less-skilled workers have not declined with growing trade, even in sectors of the economy with the greatest import competition. Second, some of the groups that have experienced the highest wage growth have also seen increased immigration swelling their ranks. Silicon Valley is full of highly paid immigrants and native-born Americans who work side-by-side, earning very high salaries in the high-tech sectors of our economy. For less-skilled workers, studies suggest that immigration has only a modest effect on wages of the native-born. Third, those who have examined the data systematically find that trade and immigration can account for at most a small proportion of the increased wage spread that has occurred over the past 25 years.
We're left with two basic policy alternatives. Sure, there are 1,001 variations on these, but they all come down to...

  • ...subsidize non-productivity, lack of skill and lack of education through liberal policy solutions like increases in the minimum wage, increased redistribution and various price controls/protectionism. But that will only ameliorate the symptoms without addressing the root causes.

  • ...make apparent to workers the costs of non-productivity, thus incentivizing education and job skills. This will leave the symptoms largely untreated, but encourage the development of basic skills and productive behaviour.

Naturally, any politically viable solution will almost certainly combine aspects of each of these, but proponents of capitalism and economic progress must consider the underlying issues behind inequality. The problem, at its root, is not that some people aren't getting enough cash; it's that they aren't sufficiently productive. Addressing "income inequality" without considering output inequality is an ultimately self-defeating solution. [crossposted at Chequer Board]
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Previous Comments to this Post 

Over the last 25 years, the wages of the skilled have continued to grow faster than the wages of the less skilled.
I know that’s a prevailing narrative but I honestly don’t believe it’s true because it fails to acknowledge the disparities in income growth among people with college educations (or even those with advanced degrees). I think the reality is, unfortunately, that protected groups have prospered enormously over the last 25 years and groups exposed to competition—regardless of level of educational attainment—less so.

Is the income growth of medical doctors, for example, due to their skills or due to barriers to entry, bans on telemedicine, the gatekeeper role to the pharmaceutical industry? I think a little of both with the emphasis on the latter.

Said another way, the wage disparity is due to market forces i.e. the desireability and availability of skills and not to having skills. There are lots of skilled mechanics, tool and diemakers, engineers, and so on with lots of skills.

Conflating “skills” with the supply and demand for specific skills is sophistry.
Written By: Dave Schuler
I agree with Dave as far as this—when degreed "professionals" who persuade legislatures to enact barriers to their competition see their incomes rise—this is a factor that must be controlled for in comparing the incomes of those professionals with non-professionals.

Has that variable been controlled for here?

Yours, TDP, ml, msl, & pfpp
Written By: Tom Perkins
URL: http://
Education and training by themselves do not produce increased income. Highly skilled and experienced muleskinners have not seen their incomes increase. If the demand for a particular set of education and skills exceeds supply, then incomes for those skills increase. A four-year college education in English will not earn as much as a four year education in math. or engineering. I have known of PhDs in astronomy who couldn’t find a job, since the demand for astronomers is not very large.
Incomes for skilled jobs in silicon valley have increased because demand for those skills exceeds supply, and the relatively small number of LEGAL immigrants with these skills is not enough to meet the aggregate demand.
Unskilled labor is a different story. Over the last 20 years or so, the supply of unskilled labor has increased more than the demand, due to illegal immigration. (Incidentally, it might be more accurate to measure total employment costs rather than wages, since taxes, paper work, insurance, etc. are all factors contributing to employment decisions). In addition to driving down wages for unskilled labor, the glut of low-cost labor has increased the number of jobs for this labor, as per supply/demand theory. How many landscaping companies existed 20 years ago?
Any data regarding wage levels at the lower end are probably suspect anyway, as there are large numbers of people who work for cash, and there are no records.

Education is not a panacea; it increases the supply of educated people, not the demand, and it does not affect the demand for unskilled labor.
Written By: timactual
URL: http://
Education is not a panacea; it increases the supply of educated people, not the demand, and it does not affect the demand for unskilled labor.
I’m not sure I can agree that education only increases the supply of educated people and not the demand.

The increasing demand from say the late ’40s till now for college educated workers seems to belie that point. And that demand continues to grow. The problem is, they are more available now than they were and their beginning salaries reflect that fact.

There certainly can be lags in employement as the supply increases faster than demand, but you certainly can’t argue that demand is fixed.

And theoretically it might indeed affect the demand for unskilled labor if "educated people" are a viable alternative in terms of cost (of course it would also depend on the nature of the work, how satisfied the educated worker would be with the work and the probability that, given more options, the worker would leave as soon as other more satisfying work is available).
Written By: McQ
I suspect that if one went to the trouble of doing the research, it would turn out that those currently working as muleskinners are highly educated and happy with their earnings. The same is probably true, for example, for traditional blacksmithing but not as much so for the sort of industrial blacksmithing I used to do.
Written By: triticale
I’m glad to see that you think any solution involves both of these elements.

Because really, this is a values question. You’re right, most liberal economic policies subsidize "lack of productivity". I can admit that. My question is, stated clearly, "so what? what’s wrong with that?" This is a realistic response to some of the criticisms above, which are pointing out that education is not a pancaea, a college degree does not make you immune to not being able to find work or diving into debt for reasons not neccesarily related to shameless self-indulgence. In short skills - a definition that broad - =/ economic success and/or security.

So, leaving people to suffer when they get a bad economic break may "incentivize" acquiring more skills. Just like sticking red-hot-branding irons into someone and leaving them to suffer may "incentivize" them to proclaim loyalty to your dictator of choice. But that doesn’t mean you have a healthier society, because a society of suffering is not healthy.

As anyone in Mexico who isn’t able to emigrate here could tell you, acquiring skills is not as easy as wanting to acquire them. For one thing, acquiring them usually costs a lot of money.

Last, but not least, I frankly don’t value the accumulation of wealth as a societal value. I understand that some pressure for success is needed to avoid stagnation and social decay, but while we’re on that subject, you should see what massive income inequality does to the macroeconomy, not to mention social cohesiveness. Spend some time in Moscow or Mexico City. Is that what we’re shooting for?
Written By: glasnost
URL: http://
"You’re right, most liberal economic policies subsidize "lack of productivity". I can admit that. My question is, stated clearly, "so what? what’s wrong with that?""

The first problem is that your subsidization requires forcing someone else to provide it. It isn’t voluntary. Someday perhaps I’ll read a sound rationalization for that, but I’m not holding my breath.

Secondly, it is a values question, and the primary value which you are not articulating, glasnost, is responsibility. It is possible and reasonable, for almost every person in this country, to behave such that serious risks can either be avoided or financially covered. If most people actually did this, the number of people who genuinely needed assistance would be so small that most people would be happy to assist them in their time of need (which of course many people already do, all the time).

Liberals are quick to point out how it’s possible to have a degree and not find work or fall into debt for reasons other than self-indulgence, but they never seem to go any deeper than making the statement, as if this is all there is to it.

How often do people select degrees with poor market demand? I think many liberals don’t particularly care for the fact that an engineering degree generally has more demand than one in literature. Shouldn’t all education be equally valued? Also frequently left out of the picture is that some students graduate with degrees but poor grades and/or poor communication skills. A degree isn’t enough. Do liberals dislike competition, or just certain forms of it?

As for falling into debt through no fault of your own, this is pretty damn hard to do. Of course it happens occasionally, but what tiny percentage of the population are we talking about? I just don’t believe this is a problem of any significant magnitude and I’d be happy to support a safety net for cases of genuine no-fault need. Of course that’s not the way it ever works out (see Social Security, Medicare, Welfare, etc.).

I’ve been to Mexico City. You think the problem is inequity? You think that redistributing wealth is going to solve their poverty problem?
Written By: Unknown
URL: http://
Wow what a concept wages tied to output. If you want more money produce more. I notice that Mr. Lazear points out “wages of the college-educated have grown by 22% since 1980, while the wages of high-school drop-outs has fallen by 3%.” I am not sure that education is the complete reason. I have seen high-school drop-outs around the Atlanta area start their own business, become experts in various areas that require little or no education and become very rich. It could be that the wage drop experienced by some has as much to do with motivation as education. After all if you have enough for a beer and some fishing worms, why work?
Written By: ER Barker
URL: http://

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