Jasper Smith

Commentary on politics, economics, culture and sports.

Drum on income inequality

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Kevin Drum discusses the oft-discussed subject of income inequality:

Whenever you hear someone propose an explanation for skyrocking income inequality over the past few decades, try to think about whether it explains the fact that inequality has gotten immensely worse not just between the top 20% and the bottom 20%, but between the top 1% and the 9% just below them. For example:

Greater returns to education? Do you really think that the top 1% are better educated on average than the next 9%?

Greater rewards for technical skills? Do you really think the top 1% have greater technical skills than the next 9%?

Globalization?

More stable families?

Race and gender?

A failure to take account of the growing value of health benefits?

Do any of these things plausibly seem like big differences between the top 1% and the next 9%? Pretty clearly they aren’t. So why is the top 1% outpacing even the well-to-do who inhabit the next 9%? What’s the big difference between these groups?

I can’t agree with Kevin that none of the factors he cites adequately explains the phenomenon. I reckon it really is globalization.

The term “global economy” implies a single, planet-wide market for everything, including labor. We’re far from arriving at such a destination, of course, but we’re seeing its harbingers with increasing regularity (e.g., U.S. programmers priced out of a job by people with equal skills in far away India).

Theoretically, at some point in the future, price differentials world wide should become tiny, and eventually vanish. Hence, a Big Mac will cost the same in Peru and Norway; an hour of acupuncture the same in Hong Kong or Nigeria; fifteen minutes of tech support the same in Long Island or Mongolia. The price of labor (wages) is naturally not exempt from this trend.

If we are indeed moving toward such a world, then ordinary folks living in rich countries can expect to see income/wage differences flattening between themselves and those in the developing world. Likewise the differences in income between wealthy people in rich countries and their wealthy counterparts in the developing world are diminishing; places like China, Russia and India are home to lots of tycoons. For this latter group — global high earners — the potential gains are truly staggering. Globalization itself — the fact that the entire human race increasingly is participating in market capitalism — means there is far more wealth up for grabs than ever before. All things being equal, economically successful “winners” benefiting from a market of 6.5 billion souls will enjoy bigger paychecks than their counterparts from the days when the same market counted only 2 billion.

So, if you’re living in a rich country and you don’t count yourself among the ranks of the wealthy, you’re undoubtedly going to find that the income gap between you and the tycoon class is growing, but that the gap between you and the rest of the world’s non-rich is getting smaller. We all gonna be one big happy proletariat!

What this scenario does not imply or require, however, is absolute declines in living standards. In other words, we might expect that over the long run, the wages of, say, Vietnamese workers will rise faster than those of Swedes or Americans, but Swedish and American wages (and, more importantly, Swedish and American living standards) can (and should) continue to grow in absolute terms.

In short, as long as you don’t mind the fact that the salary gap between you and a CEO is likely to expand from today’s differential of (say) 500 to (say) 3,000 in the year 2029, you’ve got an excellent chance of enjoying a higher standard of living that year than you do now. But in 2029 you’re also likely to make only two times more than a Malaysian doing similar work, instead of six times like you do now.

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Written by Jasper

October 29, 2006 at 12:14 am

Posted in Economics

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