Click amount to donate direct to CounterPunch
  • $25
  • $50
  • $100
  • $500
  • $other
  • use PayPal
Please Support CounterPunch’s Annual Fund Drive
We don’t run corporate ads. We don’t shake our readers down for money every month or every quarter like some other sites out there. We only ask you once a year, but when we ask we mean it. So, please, help as much as you can. We provide our site for free to all, but the bandwidth we pay to do so doesn’t come cheap. All contributions are tax-deductible.
FacebookTwitterGoogle+RedditEmail

What’s Really Driving Income Inequality?

Over the last several decades, inequalities in both incomes and wealth have grown substantially within the United States and in other high-income nations. In the United States, for example, the income share of just the top one half of the top 1 percent grew from 5.39 percent of the nation’s income in 1979 to 13.37 percent in 2010. By contrast, over this same period the share of the bottom 90 fell from 67.65 percent to 53.74 percent.

With the aim of examining the causes of this shift in earning, the Organisation for Economic Co-operation and Development, known as the OECD, recently published a lengthy book on the subject, titled Divided We Stand: Why Inequality Keeps Rising. Despite a wealth of data presented in the tome, the authors of the study largely failed to explain why, in fact, inequality keeps rising.

First, they focus largely on the relatively high wages of the 90th percentile of earners to that of the 10th percentile, which misses the fact that much of the increase in inequality was well above the 90th percentile. Again, with the United States as an example, growth in wages at the 90th percentile of wages only just kept pace with the overall average. Ninety percent of the distribution failed to keep up.

Though the OECD study does devote some time to discussion of inequality at the very top—including compensation in the financial sector—they do not draw any connection between what happened at the very top to what they observed in the broader economy. To some extent, increasing inequality between the 90th and 10th percentiles reflects the former shielding itself more effectively from the redistribution to the 99th percentile.

On the other hand, they do find that increased post-secondary education was a significant equalizing factor. This is the flip side of the top-income effect, as a more educated workforce created increased competition for higher (but not necessarily very high) paying work.

So if not the incomes of the very top, to what does the OECD attribute the increase in inequality? In large part, the authors find that the deterioration of certain institutions and policies are to blame. They report that falling union coverage, weakened product market and employment protection regulation, and shrinking tax wedges have all contributed to increased inequality.

The authors then attribute much of the increase in inequality to technology. Unfortunately, their chosen measure is the cyclical component of business spending on research and development. Though their analysis points to their measure as a statistically significant factor, it is difficult to explain a decades-long trend with a variable that by construction should be unchanged over the business cycle. In fact, working from the OECDs’ data, we found that the trend in research and development spending over this period explained none of the rise in inequality.

If increased post-secondary education is not offsetting technology, as the authors suggest, but only weakened institutions, then we still require an explanation for the increase in inequality in recent decades. Our reproduction of the OECD analysis shows that the combination of all explained effects in the model is likely equalizing on balance, leaving the trend of increased inequality entirely unexplained. In other words, while the OECD finds there are some factors that contribute to inequality and other factors that equalize wages, they failed to explain the shift in incomes toward the top.

Our analysis suggests alternatively that increased financial sector compensation has been an important driver of inequality. Quite apart from this finding, it is unfortunate that the authors of the OECD study appear to have missed their own story. Perhaps in the future we will see less blame on “technology” and greater attention paid to other factors that may contribute to inequality—such as the large rents that are earned by bankers operated in a bloated financial system.

David Rosnick is an economist at the Center for Economic and Policy Research in Washington, D.C.

This article originally appeared on Economic Intelligence.

Stonewall and the Battle for Gay Rights 

Director John Scagliotti has donated copies of his acclaimed films Before Stonewall and After Stonewall for the CounterPunch Online Auction. Bid now to own a copy these ground-breaking documentaries on a radical struggle for equal rights.

More articles by:
October 17, 2018
Patrick Cockburn
When Saudi Arabia’s Credibility is Damaged, So is America’s
John Steppling
Before the Law
Frank Stricker
Wages Rising? 
James McEnteer
Larry Summers Trips Out
Muhammad Othman
What You Can Do About the Saudi Atrocities in Yemen
Binoy Kampmark
Agents of Chaos: Trump, the Federal Reserve and Andrew Jackson
David N. Smith
George Orwell’s Message in a Bottle
Karen J. Greenberg
Justice Derailed: From Gitmo to Kavanaugh
John Feffer
Why is the Radical Right Still Winning?
Dan Corjescu
Green Tsunami in Bavaria?
Rohullah Naderi
Why Afghan Girls Are Out of School?
George Ochenski
You Have to Give Respect to Get Any, Mr. Trump
Cesar Chelala
Is China Winning the War for Africa?
Mel Gurtov
Getting Away with Murder
W. T. Whitney
Colombian Lawyer Diego Martinez Needs Solidarity Now
Dean Baker
Nothing to Brag About: Scott Walker’s Economic Record in Wisconsin:
October 16, 2018
Gregory Elich
Diplomatic Deadlock: Can U.S.-North Korea Diplomacy Survive Maximum Pressure?
Rob Seimetz
Talking About Death While In Decadence
Kent Paterson
Fifty Years of Mexican October
Robert Fantina
Trump, Iran and Sanctions
Greg Macdougall
Indigenous Suicide in Canada
Kenneth Surin
On Reading the Diaries of Tony Benn, Britain’s Greatest Labour Politician
Andrew Bacevich
Unsolicited Advice for an Undeclared Presidential Candidate: a Letter to Elizabeth Warren
Thomas Knapp
Facebook Meddles in the 2018 Midterm Elections
Muhammad Othman
Khashoggi and Demetracopoulos
Gerry Brown
Lies, Damn Lies & Statistics: How the US Weaponizes Them to Accuse  China of Debt Trap Diplomacy
Christian Ingo Lenz Dunker – Peter Lehman
The Brazilian Presidential Elections and “The Rules of The Game”
Robert Fisk
What a Forgotten Shipwreck in the Irish Sea Can Tell Us About Brexit
Martin Billheimer
Here Cochise Everywhere
David Swanson
Humanitarian Bombs
Dean Baker
The Federal Reserve is Not a Church
October 15, 2018
Rob Urie
Climate Crisis is Upon Us
Conn Hallinan
Syria’s Chessboard
Patrick Cockburn
The Saudi Atrocities in Yemen are a Worse Story Than the Disappearance of Jamal Khashoggi
Sheldon Richman
Trump’s Middle East Delusions Persist
Justin T. McPhee
Uberrima Fides? Witness K, East Timor and the Economy of Espionage
Tom Gill
Spain’s Left Turn?
Jeff Cohen
Few Democrats Offer Alternatives to War-Weary Voters
Dean Baker
Corporate Debt Scares
Gary Leupp
The Khashoggi Affair and and the Anti-Iran Axis
Russell Mokhiber
Sarah Chayes Calls on West Virginians to Write In No More Manchins
Clark T. Scott
Acclimated Behaviorisms
Kary Love
Evolution of Religion
Colin Todhunter
From GM Potatoes to Glyphosate: Regulatory Delinquency and Toxic Agriculture
Binoy Kampmark
Evacuating Nauru: Médecins Sans Frontières and Australia’s Refugee Dilemma
FacebookTwitterGoogle+RedditEmail