Income Inequality

While President Obama has recently raised the nation’s conciseness of income inequality, the subject is hardly new. Scholars, commentators, and working people have been talking about the widening gap between higher-income and lower-income earners for years now. The president seems to have found the cause in greed and injustice, but, as the new book, Thirty Tomorrows, shows, much more significant are the forces of globalization and advancing technology. Relief, then, will come less from ridding society of sin and more from finding ways to cope with these inexorable trends. Improved education and worker training provide answers.

The Evidence

The evidence of a widening income gap is powerful. During the last 20-some years, the incomes of the richest tenth of the country have grown five times faster than the incomes of the bottom fifth. The richest 25 percent of the country now on average have annual incomes 15 times those among the bottom 25 percent, up from 10 times in the mid-1970s. Meanwhile, the Internal Revenue Service has noted that the top 1.0 percent of the country earns 22 percent of the nation’s income, actually exceeding the previous high of 20 percent in 2000. Meanwhile, the bottom 50 percent of the income distribution earns a mere 12.8 percent of the total, down from its previous low of 13 percent in 2000.

Some analyses take exception to the picture painted by these measurements. They argue that the statistics fail to capture the influence of tax-free fringe benefits and government transfers, both of which benefit lower-wage workers disproportionately. Offering a different perspective, a novel U.S. Treasury study points out that individual families seldom stay in the lower-income bracket for long. Over the ten-year stretch, 1996 and 2006, the Treasury found that the incomes of those who started in the lowest quartile of the income distribution rose a comparatively fast 6.7 percent a year on average, as they advanced through the income distribution, far faster than the 1.5 percent gains showed by those who started in highest quartile of the distribution. But if there is ample room for dispute on the specifics, there is still enough evidence of a growing income gap to raise questions about the reasons why.

Causes

Globalization has received much media attention as a cause and with good reason. Because it is so much cheaper to produce some products in China, India, and other emerging economies, managements have sent the factories, mills, etc. overseas, throwing thousands out of their former positions into lower-paying jobs or simply onto unemployment rolls. And because the competition from emerging economies is most intense in the simpler products — toys, textiles low-level call centers, and the like — this burden has fallen most heavily on the less skilled and lower-paid in society. Even when the factories, workshops, and offices have remained in place domestically, the threat of a move abroad has constrained wage demands and so has slowed earnings growth at the lower end of the income distribution. Meanwhile, the greater profitability gained by the transfer to lower-wage workers overseas and the restraint exercised on wages domestically has accrued to the salaries and bonuses of management, boosting the income growth at the top of the income distribution.

Technology has reinforced this effect. Because the technology — robotics, systems, and the like — tends to substitute for more routine, repetitive functions, it tends to throw more lower-wage then higher-wage people out of work, with similar effects on income to when production moves overseas. Also in a similar way, the threat of a technological solution has restrained the wage demands of those still employed, especially in lower-income occupations. And also as with globalization, the systems, robotics etc. enhance the productivity and reach of management, fostering more rapid compensation growth among already higher-paid people.

Scholarly work has tried to disentangle these effects. Most of it attaches the greater impact to technology, tying some 70 percent of the lost jobs and wage shortfall to it. But because these influences are intertwined, any such effort to distinguish the impact of one from the other is tenuous at best. And in the public’s mind, it hardly matters. People can see that jobs have been lost, particularly in the simpler functions that have long securely employed millions. They can sense that the rich are getting richer and the poor, if not getting poorer absolutely, are losing their share of national prosperity. They want a solution.

Answers

Whether it is technology or globalization or both that have contributed to the problem, job security and income growth depend on an upgrading of worker skills. The object is to serve a more innovative economy, to enable it and each worker to cope with technology and to produce higher-value product that can support the higher wages earned in this country and expand them over time. The president and many others in Washington have stressed education in math, science, and technology. These certainly have a role in the needed process, but the reality of the situation is more complex.

That complexity is evident in the nature of innovation. There is, of course, a crucial need for scientists, engineers, and those with advanced technical skills. They make the underlying technological advances. But in order for the engineers’ inventions to have an economic effect, society also needs a second, less discussed, aspect to innovation: the sometimes seemingly chaotic efforts of millions of often low-tech people to combine new technologies with old in order to serve particular economic needs or productive efficiencies, often in ways never considered by the scientists and engineers who developed the original technologies.

The educational establishment must produce these people as well as scientists, engineers, and mathematicians. That will demand a different sort of education, extensive in nature, not at all like intensive study and instruction required to impart technical skill. Rather than Washington’s single-minded and simplistic focus on math, science, engineering, and technology, the educational establishment can only meet the broad needs of innovation by providing other courses better suited to cultivating these broad-based skills and abilities. It is noteworthy in this respect that Apple’s Steve Jobs had far less technical skill than most of his employees but contributed mightily to his firm’s and the economy’s success by sensing market needs and opportunities and applying technologies accordingly.

Nor is this more complex need restricted only to higher education. In worker training, too, there is a need for a similar sort of broad-based general upgrade. To some extent workers themselves have already responded to the challenge. They can see what scholarly statistical analyses have verified, that better-trained workers have better job security, as good as 20-30 years ago in fact, and enjoy better income prospects. Accordingly, workers have upgraded their skills so that the average employee today has 13 years of formal education and training, up from 10 years on average two decades ago. To counter the growing income disparity, this trend must become even more widespread. And, as with higher education, it needs to embrace more than just technical skills. High-value, technically advanced production also needs workers who can adjust to changing circumstances as well as communicate with each other, with management, and, because so much high-value production contains an element of customization, with customers as well.

Even if the nations’ efforts at education and training rise successfully to this need, a portion of the population inevitably and unfortunately will fall short. For various reasons — lack the cognitive skills, false starts, or just bad luck — they will miss the upgrade. For them, the economy will always have a need for low-skilled occupations, less than previously, of course, because of foreign competition and technology, and less remunerative, but a need nonetheless. It may be that this group will need public assistance to supplement low wages or substitute where such work is unavailable. Because it will take a broadly rich economy to provide such support, the innovation, as well as upgraded education and training, becomes still more important to create that needed wealth.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s