Economic Inequality in the United States

Lars Osberg

• Publisher: Routledge
• Year: 2015
• ISBN:
  9781317289715
• Edition: 1
• Topic: Negocios y empresa
• Subtopic: Negocios en general

Originally published in 1984, this study explores multiple theoretical perspectives as well as critically analysing the most recent evidence at the time to try and find a full explanation for inequality in the United States. Arguments of neoclassical economists and Marxist and institutional structuralists are considered by Osberg as well as putting forward his own model. Osberg uses his findings to attempt a complete explanation of the issue and advises on policies which could be undertaken by the government to try and lessen the gap. This title will be of interest to students of Economics.

1	INTRODUCTION

1.1 Equality—A Value or a Description?

Few areas of economics are as contentious as a study of economic inequality and, in part, this is because at the same time that “equality” is for many a deeply held value about how society should be, “inequality” is a description of how society is. The most straightforward definition of economic inequality is probably “differences among people in their command over economic resources” (although to be useful one must be more specific about which economic resource and how it is measured). In this book, we do not enter the debate on whether society should be economically equal or unequal or how a “just” degree of economic inequality should be defined. Rather, the emphasis here is on description and analysis—description of the extent of economic “inequality” and analysis of its causes. The omission of a full discussion of what “ought to be” is not due to any view that it is an unimportant topic; the omission arises solely because there is more than enough material involved in the description and analysis of economic inequality to fill this, or indeed a much larger, book.

Most people’s interest in the extent and causes of inequality stems, however, from the value which they place in “equality.” Such a value is traced by many writers to religious roots, that “all men are equal in the eyes of God,” since regardless of “superiority in the arts which bring wealth and power, judged by their place in any universal scheme, they are all infinitely great or infinitely small” (Tawney, 1952:38). The value of equality finds expression in such classic statements as the American Declaration of Independence: “We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness.” “Equality” is thus a very powerful ideal, closely connected to (but not identical with) the criteria of “equity,” “fairness,” and “justice” by which we judge the moral authority of existing and potential social institutions.

But what does “equality” mean? If it means “equality of result” in the economic sphere, is this equality of annual income, of lifetime income, or of lifetime “utility,” which includes nonmonetary rewards? If it means “equality of opportunity,” is this an “equal start” in any race, however defined? Or is it an “equal start” in a contest whose prizes are set to maximize the utility of the least well-off participant (Rawls, 1971)? Or is it the conception that although people “differ profoundly as individuals in capacity and character, they are equally entitled as human beings to consideration and respect, and that the well-being of a society is likely to be increased if it so plans its organization that, whether their powers are great or small, all its members are equally enabled to make the best use of such powers as they possess” (Tawney, 1952:35)?

Each of these conceptions of “equality” would lead to a very different “ideal society.” There is a world of difference, for example, between a society which defines “equal opportunity” as identical expenditure on the education of all children and one which defines it, as Tawney does, to mandate compensatory educational programs for the handicapped and the disadvantaged. If “equality” is one’s goal, it clearly matters a great deal how one defines it.

A major theme of Chapters 2 and 3 is, however, that for the purposes of description and analysis it also matters a great deal how one defines the extent of inequality. Pure “description,” uncontaminated by values, is probably an unobtainable goal. There are many empirical definitions of economic “inequality,” each of which emphasizes more or less heavily particular aspects of inequality. As Chapter 2, section 2 points out, some statistical measures emphasize more heavily differences between the extremes and the middle groups of a distribution, while some emphasize more heavily inequality among the middle groups. Some variables (such as wealth, Chapter 3) are distributed more unequally than other variables (such as income, Chapter 2). Which variable, and which measure, one chooses to describe will clearly affect one’s perception of economic “inequality.” In Chapter 2, we focus on the distribution of annual income, whereas Chapter 3 discusses the distribution of economic power, of wealth and riches, and of lifetime income. One’s view of which variable is the most important to study depends, at least partially, on one’s values—i.e., on which definition of “inequality” as a description of where society is makes most sense in terms of one’s conception of “equality” (i.e., where society should be).

Indeed, definitions are important even if one does not value “equality” and wishes only to analyze the reasons why annual earnings of full-year, full-time employees varied in 1981 between $7,000 and $22,550,000¹ or why the top 0.5% of the population own roughly 20% of the nation’s wealth (see Table 3.1). There are a variety of explanations of these phenomena, and some variables (such as “economic power” and its inequality) may be crucial components of one theory although they do not “make sense” in the context of another. Indeed, even the “facts” one selects to explain are intimately related to one’s theoretical perspective. Some “facts”—such as the inequality of lifetime consumption annuities as described by Irvine (1980) or the rate of surplus value as described by Wolff (1979b)—are understandable only within a particular theoretical context. Other “facts” (such as the inequality of “wealth” or “riches”—see Chapter 3) may have subtly different definitions whose rationale depends partially on the theory they are part of and whose measurement produces different perceptions of the extent of the economic inequality around us. Since it is a truism that the personal acquaintances of most people tend to be other people with similar habits, attitudes, and backgrounds, these differences in theoretical perspective can have important practical consequences. Given a sufficiently circumscribed set of personal experiences it is quite possible (and quite comforting) for an individual to believe that “most” people are “like me.” If the logic of a theory, reinforced by the comforts of complacency, overwhelms an individual’s other sources of information, he or she may be convinced that economic inequality is “really” quite small and not worth troubling about.

Such a perception does not, of course, alter the reality which faces other people. Low income is a fact of life for many Americans but our perception of the extent of “poverty” will be influenced by which definition of a “poverty line” we choose to adopt. Chapter 4 outlines these methods of defining “poverty” (which are ultimately based on differing analyses of the nature of deprivation) and argues that there are good grounds for seeing “poverty” as relative to the average living standards of the rest of society. The issue of poverty is, therefore, inextricably linked to the inequality which exists in the lower half of the income distribution. On the other hand, such issues as the inheritance of property are of primary importance for the upper tail of the income and wealth distributions. Since economic inequality has several aspects, no single measure of inequality is likely to be appropriate for all purposes.

1.2 Economic Theory—The Problem of Choice of Perspective

It is far from easy to separate values from descriptions and descriptions from analyses. It is, however, essential to try if one is to make an informed choice among the various research traditions which seek to explain economic inequality. A major theme of Chapters 5 through 11 is that a variety of explanations exist—Chapter 5 discusses alternative explanations of the division of national income between the owners of “labor” and “capital” while Chapters 6 through 9 present critical summaries of the different theories available of the determination and distribution of labor earnings (Chapter 10 offers a summary) and Chapter 11 examines the acquisition of property.

In Chapters 6 through 10, a distinction is drawn between theories which explain the determination of individual earnings and those which explain the distribution of earnings. It is argued that only under particular assumptions can a theory which explains, for example, why a union member or a more highly educated individual usually receives a relatively higher salary be directly generalized to a theory of the impact of unionization or a general increase in education on the distribution of earnings (see sections 6.3.3, 8.2.2, and 9.1). To some extent, the issue is the familiar one of a distinction between partial and general equilibrium analysis. It makes sense, when looking at how education or unionization will affect an individual, to assume that the market demand for goods and for education (either as a credential or as a productive input) remains unchanged. It makes much less sense to assume that a general change in the distribution of education or a general increase in union membership will leave market values unchanged; thus generalizations concerning the impact of the distribution of education or unionization on the distribution of earnings require a general equilibrium approach—i.e., both a theory of supply and one of demand. A theory of earnings determination can, therefore, explain why the earnings of two individuals are unequal but it may not be able to explain the “inequality” of earnings—i.e., the distribution of earnings of the entire population.

Chapter 6 discusses “chance” as a theory of earnings distribution and the role of ability and socioeconomic background in earnings determination. Chapter 7 concerns racial and sexual differences in earnings. Chapter 8 presents the “human capital/neoclassical” perspective on individual and family earnings, on the distribution of earnings, and on the intergenerational transmission of earning power. It emphasizes the role of individual choice in earnings determination. Chapter 9 outlines the “neo-institutional” and “radical” views—it emphasizes the importance of constraints. In some respects the differences among these theories are very profound—as can be seen in Chapter 13’s discussion of public policy to deal with inequality. In some respects, however, their differences are surprisingly slight since as bodies of applied theory their predictions must conform to the same underlying empirical events of the real world. Some events therefore acquire a different terminology in different theories, but retain the same consequences. One can, for example, assert that the advantages children from upper income families have when they enter primary school (see section 6.3) are due to early human capital investments in “child quality” by their parents (see section 8.4) or to their “class background” (see section 9.4)—either way they tend to do better in school as a result. Given the great differences in theoretical starting points and methodologies, it is extremely interesting that the “neoclassical” and “radical” analyses agree on two important predictions—that left to itself a capitalist market system will produce neither equality of outcome nor equality of opportunity in the labor market. Indeed the very distinction between “equality of opportunity” and “equality of outcome” is somewhat misleading in any society which lasts over more than one generation and in which the resources acquired by parents can be passed, without redistribution, to children.

1.3 Other Issues

Anyone who starts writing a book on economic “inequality” will inevitably acquire a certain humility by its end. The topic is as vast as any in economics, and with considerably more implications than most for a wide range of other disciplines. Psychology, biology, and genetics tell us of the “inequalities” we can expect to find in the human organism; sociology and politics emphasize the inequalities in the relationships of human social animals; history reminds us that the inequality of the present is conditioned by the inequalities of the past, while ethics points out that as moral beings we all must make judgments on inequality. All of these disciplines remind us that “economic man” is but one of humanity’s dimensions and in all of these disciplines inequality has been greatly studied—often with frequent reference to economic inequalities. One cannot, and should not, avoid making some connections to these other disciplines in a book on economic inequality but, for the most part, they have been left as unexplored avenues.

Even within economics, “inequality” is so broad a topic that any discussion that does not spread over several volumes will leave many stones unturned. There is no discussion here, for example, of regional or international inequalities, very little on the impact of trade unions on inequality, and nothing on economic inequality in noncapitalist societies. Even among those subjects which are discussed, it is apparent that any of them could well have received far more extensive treatment, and every reader will have his or her candidates for the ones which should have. The selection of topics and emphases is entirely the responsibility of the author—in addition to that of the determination of labor earnings, the issues of property, of growth, and of government intervention seemed to him the most important.

Chapters 6 through 10 emphasize the determination and distribution of earnings because that is the primary source of income for most American families. Chapter 11 discusses the acquisition of property—the theory and evidence surrounding both the “life-cycle” view that most families acquire their property by individual saving from labor earnings and the radical view that most property is inherited. However, although the tenor of discussion is markedly different, there is no basic disagreement on empirical predictions between “radical” and “neoclassical” positions. As an empirical matter, there is no necessary contradiction between the two views if a relatively small minority of families own a very large chunk of the nation’s wealth (and inherit most of it) while the rest of the population (i.e., the majority of families) save their wealth (if any) from labor earnings, as appears to be the case. The ethical issue involved is that of the justification of the social institution of private property since private property as a reward for individual exertion and private property as an inherited birthright have often been viewed somewhat differently.

Chapter 12 discusses the link between economic inequality and economic growth and development. Sociologists and political scientists would argue that the link is profound, that unequal societies which lack an ideology to legitimate inequality face a continual tension between institutionalized values and social reality which may be politically and socially destabilizing. Economists, on the other hand, have tended to talk of “trade-offs” between equity and efficiency, between growth and redistribution. International comparisons, however, do not indicate any clear tendency for more unequal societ...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Originel Copyright Page
• Dedication
• Table of Contents
• Preface
• 1 Introduction
• 2 Inequality in Money Income
• 3 Economic Inequality
• 4 Poverty and Inequality
• 5 Of Laborers and Capitalists—The Issue of Factor Shares
• 6 Of Chance and Ability
• 7 Of Race and Sex
• 8 The “Neoclassical” Perspective: The Implications of Choice
• 9 Structural Interpretations: The Importance of Constraints
• 10 An Eclectic Summary
• 11 The Acquisition of Property
• 12 Growth and/or Equality?
• 13 Government and Inequality
• 14 Conclusion
• Bibliography
• Index of Names
• Index of Subjects
• About the Author