Associate Professor of Economics Jay Corrigan examines wealth inequality.
Slices of the economic pie are more lopsided than ever before. According to data released in September, the richest 10 percent of American households earn just over half of all U.S. income. That’s the highest fraction since the federal government started keeping these sorts of records 100 years ago. And the U.S. isn’t the only place where the gap between rich and poor is growing. Over the last forty years, the richest 10 percent gained ground in Canada, Germany, and Japan.
So what explains this increase in income inequality across rich countries? Economists most often point to technological changes that have made the most talented workers ever more productive. As an example, consider that the only way to listen to professional musicians at the turn of the twentieth century was to go to a live performance. Not coincidentally, thousands of musicians made a living performing in front of audiences. The most talented performers played in the largest venues and so made more money than their less talented peers, but the difference would have been relatively modest.
Today, most of us listen to recorded music. And because an iTunes download costs the same whether it’s recorded by the top artist in a genre or by someone less talented, the most talented performers now capture a much larger share of our entertainment dollars. There are still thousands of musicians scratching out a living, but technology has increased the gap between the most talented and the slightly less talented.
Something similar has happened in most industries. In 1970 it would have been hard to imagine one person overseeing a firm employing hundreds of thousands of workers spread across several continents. But advances in communications now make that possible. Of course the biggest firms have always wanted to hire the brightest managers, and so the most talented individuals have always made more than their slightly less talented peers.
What’s different today is that the biggest firms are much bigger. Because today’s huge multinational corporations have deeper pockets than their smaller regional predecessors, today’s most talented managers command salaries many times higher than equally talented managers in 1970. As in the music business, there are probably just as many managers today as there were forty years ago, but changes in technology have led to a larger gap between the richest and the rest.
Whether you see all of this as a problem likely depends on your politics. But to understand what, if anything, can be done to reduce income inequality, it helps to look back to the 1940s, ’50s, and ’60s, when income inequality actually decreased. Of course there were also technological improvements in that era, but the supply of highly skilled workers increased more rapidly than the demand for their services, keeping their incomes—and income inequality—in check. This increase in supply was due to a combination of an increase in the percentage of Americans finishing college and women entering the workforce in larger numbers. Unfortunately, both of those trends have leveled off since about 1980.
While in recent decades we’ve succeeded in increasing the percentage of Americans who enroll in college, it turns out to be much harder to increase the percentage who actually finish. Why? Rising costs and a lack of adequate preparation both play a role. These are both hard problems to solve. And now that the number of women in the workforce roughly equals the number of men, it’s hard to imagine women entering the workforce in still larger numbers.
If there’s one area where there’s still low-hanging fruit, as it were, it’s immigration. Immigrants create about half of all successful startups, but we make it hard for highly skilled immigrants to live and work in the U.S., even those who developed their skills at American colleges and universities. Increasing the cap on the number of visas issued to highly skilled immigrants each year—or, as Bill Gates has suggested, removing the cap entirely—would increase the supply of top talent, reducing income inequality.
Economists generally assume societies face a tradeoff between income equality and economic growth. Immigration reform is the rare policy proposal that promises to simultaneously make the economic pie bigger and divide the pie more evenly between the rich and the poor.