Income inequality

Politicians screaming about inequality often provoke analysis like this. The point being the rich have gotten much richer in the last couple of decades but the poor have had to scrape by with on a few points of real income growth. I have a couple complaints about this sort of analysis.

First, which theory of justice requires there to be equal sharing of economic growth. I get strict egalitarians want to equalize incomes, but this doesn’t require them to go as far as lamenting about variances in growth rates. All they should have to do to get their point across is to take a look at the non-zero gini coefficient and be done with it. Why bother looking at differences in growth rates?

Second, once you accept some level of income inequality is inevitable, tracking income changes by income percentiles makes no sense. People aren’t stuck in income ranks. Lots of people start their careers in a lower income percentile and then move their way up through their careers. So really what one is doing when they track changes in percentiles is tracking a particular demographic. If that’s what you’re really doing, then why not do it explicitly?

This first diagram shows median income by age group since 1967 ((Source.)). Clearly, income growth has been much less dramatic in the youngest and oldest age groups. It seems easy to come up with perfectly legitimate reasons why this would be so. To me, this diagram doesn’t scream for the need for redistribution, but maybe you see differently.
median_incomes_by_age_over_time.JPG

BTW, you can track my dad in this diagram. He starts out in 1967 on the 15-24 line, then he jumps up to the 25-35 line in 1978, etc. Following my dad’s trajectory might be easier with this second diagram.

median_incomes_by_cohort.JPG

Its easy to see from this diagram that most of the income growth has happened in the middle ages. The inverted U-shaped pattern of lifetime income has become more dramatic in recent decades. Again, I don’t see a problem here.

UPDATED: fixed some typos.

4 Responses to “Income inequality”

  • Steve Roth says:

    There’s an unstated assumption/conclusion to this post: greater inequality leads to more growth/prosperity, so everyone is better off.

    Neither this post nor the Kenworthy post that you link to addresses this assertion.

    The Kenworthy post that he links to at the end, however—which goes unmentioned here—does directly address it.

    http://lanekenworthy.net/2007/12/03/does-more-equality-mean-less-economic-growth/

    The “is it fair” argument has merits, but a far more useful question is whether a more egalitarian society results in *more* prosperity/bigger pie/all boats rising/higher real GDP per capita.

    The empirical data on developed nations in the last thirty years–as opposed to ideological/moralistic arguments–suggest that it does.

    Only slightly tangential, see also:

    http://trueconservative.typepad.com/trueconservative/2008/01/government-bad.html

  • Will Williams says:

    “The point being the rich of gotten much richer…”

    You meant “have gotten much richer”, I guess. Unusual mistake.

  • pushmedia1 says:

    heh. yeah, I was tired writing the post… you can probably spot a few logical errors, too.

  • pushmedia1 says:

    (Steve’s comment got caught up in the spam filter. Sorry.)

    Steve, that may be an underlying issue here, but my point in this post is that talking about differences in growth rates between income percentiles is a bad way to measure changes in inequality. My point was that its strange to point to dynamics in the inequality time series to make arguments for redistribution. If you’re inclined toward redistributive policies, isn’t the mere existence of inequality enough for you to push for them?

    I disagree, by the way, that the data show a positive relationship between inequality and growth. I’ll just refer you to Barro (2000) and Banerjee/Duflo (2003). I’m inclined to think that at high levels of income, inequality has little effect on growth.

    In any case, I’m interested in the causes of the dynamics of inequality (i.e. the changes in inequality over time) purely because I think they’re neat and I haven’t heard an adequate explanation for them.