The Inequality Express


Mickey Kaus, The End of Equality, BasicBooks, 1992
Paul R. Krugman and Robert Z. Lawrence, "Trade, Jobs and Wages" Scientific American,April 1994
Edward E. Leamer,"Wage Effects of the U.S.-Mexico Free Trade Agreement," in Peter M. Garber, ed.,The Mexico-U.S. Free Trade Agreement. MIT Press, 1993.
Frank Levy and Richard Murnane,"U.S. Earnings Levels and Earnings Inequality: A Review of Recent Trends and Proposed Explanations," Journal of Economic Literature, September 1992
Lawrence R. Mishel and Jared Bernstein, The State of Working America. Economic Policy Institute, 1993.
Lawrence R. Mishel and Jared Bernstein, "Is The Technology Black Box Empty? An Empirical Examination of the Impact of Technology on Wage Inequality and the Employment Structure," Economic Policy Insitiute, April 1994.
Michael D. Young, The Rise of the Meritocracy 1870-2033, Thames and Hudson, 1958.

In his 1958 book, The Rise of the Meritocracy, 1870-2033, British sociologist Michael Young predicted that growing inequality in Britain's income distribution would spark a great populist rebellion in the year 2034. As British society moved closer to realizing the ideal of equal opportunity, Young wrote, it would also abandon any pretense of equal outcome: Each individual's socioeconomic status would depend less on lineage, family connections, and political influence, and more on intelligence, education, experience, and effort. Outright racial and gender discrimination and iniquitous privilege would be gone; inequality based on merit would take their place. The victims of this new inequality those who were once protected by good union wages, civil service status, or seniority would then take to the barricades.


We haven't seen any such revolution yet, but the rest of Young's prophecy today seems uncomfortably prescient. Virtually every number cruncher who has perused contemporary income data from the United States and the United Kingdom reports three clearly defined trends, each consistent with Young's forecast. First, the distribution of earnings in both countries increasingly reflects the distribution of formal education in the workforce. Second, the gap in earnings between the well educated and the not-so-well educated is steadily increasing. And finally, the real standard of living of a large proportion of the workforce particularly those with less than a college degree has steadily and sharply declined.


Universal acceptance of these trends has not, however, led to any agreement about their source. Some scholars emphasize increasing demand for skills in a high-technology economy. Others claim globalization of the economy has thrown workers in high-wage countries into competition with workers in low-wage ones. Still others indict deindustrialization, the decline of unions, rising immigration, and the proliferation of winner-take-all labor markets. This lack of consensus about causes has produced a lack of consensus about remedies.


Here we will attempt to solve the mystery of rising wage inequality, and in so doing consider what might be done to stymie it. The best primer for this exercise is Agatha Christie's Murder on the Orient Express.




Merit or Market?


When Young penned his satire, there appeared little reason to heed his warning. In the immediate postwar period, while Europe and the United States were enjoying the heady days of rapid growth, economic expansion almost always spawned greater equality. Class warfare was giving way to an implicit and generally peaceful social contract. The big trade-off between equality and growth so elegantly detailed by the American economist Arthur Okun seemed to hold more true in theory than in practice. In the U.S., real average weekly earnings would grow by 60 percent between 1947 and 1973. Median family income literally doubled. And over the same period, personal wages and family incomes became tangibly more equal, not less. Along with growth and greater equality, poverty declined across the nation. Those at the bottom of the distribution gained more on a percentage basis than those at the top. The higher wages of unionized workers did not come at the expense of other workers' living standards. If anything, the rising wages of higher-paid labor were extracted from the profits that traditionally went to the wealthy.


There is little dispute that by 1973 this trend had come to an end. Inequality actually rose, especially during the 1980s. Many initially blamed a slowdown in overall economic growth. But the expansion of the economy after the 1980-82 recession suggested a new dynamic at work: Faster growth no longer reduced inequality or did much to increase the earnings of those at the bottom of the skill ladder. Wage dispersion returned to levels not seen since before the 1960s. By the late 1980s, family income inequality was higher than at the end of World War II.


Wage dispersion, of course, is not the only source of economic inequality. Another source is demographic trends, such as the simultaneous rise in the number of dual income couples and single-parent families. The tremendous increase during the 1980s in nonwage sources of income for the well-to-do interest, dividends, rent, and capital gains plays an important role as well. But whatever role these other causes may play, changes in the distribution of wages and salaries are clearly a primary factor in rising inequality.


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Racial and gender discrimination continue to be the basis of large earnings differences. However, as the influence of more virulent prejudices has declined in the labor market, differences in education and skill have had a greater impact on wages. One manifestation of this trend is the increasing wage ratio of college-educated workers to high school dropouts. In 1963, the mean annual earnings of those with four years of college or more stood at just over twice (2.11 times) the mean annual earnings of those who had not completed high school. By 1979, this ratio had increased to 2.39. This was but a harbinger of things to come. By 1987, the education-to-earnings ratio had skyrocketed to nearly three to one (2.91). The trend continues today.


In fact, the entire pattern of wage growth during the 1980s reflects a remarkable labor market "twist" tied to schooling. (See "The Wage Gap," page 82). During this decade, the average real wage of male high school dropouts fell by over 18 percent, while male high school graduates suffered nearly a 13 percent real earnings loss. At the other end of the distribution, men who completed at least a master's degree emerged as the only real winners. Their earnings rose by more than 9 percent. Note that even men who had attended college without graduating saw a serious erosion in their earning power. And men who completed college discovered that their undergraduate degrees merely served to prevent a decline in inflation-adjusted wages. Women fared better than men in terms of overall wage growth, but the imprint of a labor market twist is clearly discernible here as well.


That three out of four U.S. workers have not completed college provides some indication of how large a proportion of the entire labor force has been adversely affected by the new meritocratic distribution. If we take some liberty with Robert Reich's definition of symbolic analysts people such as research scientists, design engineers, and public relations executives whose work focuses on problem-solving, problem-identifying, and strategic brokering activities and limit the use of this term to those with two or more years of schooling beyond the bachelor's degree, the successes in the new economy account for just 7 percent of the U.S. labor force. If we include men with the equivalent of at least a master's degree plus women with at least a bachelor's, we could say the proportion of real earnings winners includes about 15 percent of the workforce. The extreme losers in this new meritocratic society those with no more than a high school diploma still comprise more than half of all U.S. workers.


In economic terms, the "return" of education, or how much one earns with a given level of education, has diverged sharply from its "rate of return," or how much an additional year of education is worth. What we have seen is a reduction in the return of education a decline in earnings for high school graduates, for example while the increment in earnings due to a little more schooling pays off a whole lot, most notably at the high end. This is why the college degree for men has become a defensive good. It provided almost no wage growth during the entire decade of the 1980s, but at least it kept college graduates from suffering the nearly 13 percent loss sustained by those with only a high school diploma. For men, completing college during the 1980s became the equivalent of donning a brand new pair of running shoes to go bear hunting with a companion. If the bear ends up attacking you, you cannot outrun it. But in order to survive you need to outrun your friend. Anyone who has visited a vocational guidance counselor lately will recognize this as the principal underlying message. The college degree still outfits women with the equivalent of a new pair of Reeboks, but any less schooling leaves women trying to run in quicksand.




The Economists' Lineup


To explain this crisis, economists have offered up ten suspects:


Suspect One: Technology. Robert Lawrence of Harvard's John F. Kennedy School of Government and Paul Krugman, now at Stanford University, are the leading advocates of this position. They believe that the new information technologies skew the earnings distribution by placing an extraordinary premium on skilled labor while reducing the demand, and hence the wage, for those of lesser skill. This, they contend, is about all you need to explain current earnings trends.


The problem is that no one has any direct measure of the skill content of technology. Proving this hypothesis would require proving not just skill-biased technological change but also a tremendous acceleration in new technology during the 1980s. After all, at least some level of technological change occurred in earlier decades without such an adverse impact on earnings equality. What's so different about technology in the 1980s and 1990s? According to David Howell ("The Skills Myth," TAP, Summer 1994, No. 18), and Lawrence Mishel and Jared Bernstein in an Economic Policy Institute working paper, there is little evidence that the pace of innovation the speed at which new machines are brought to factories and new products are developed was any faster than during the 1960s or 1970s. Most businesses are not introducing technology that requires vastly improved skill. Many are simply paying less for the same skills they have been using all along while others are hiring better educated workers at lower wage rates to do the work previously relegated to lesser-educated employees.


Suspect Two: The service-based economy. Other researchers, including George Borjas of the University of California at San Diego, have argued that a primary suspect is deindustrialization the shift of jobs from goods-producing sectors to the service sector. In previous writings, I have estimated that between 1963 and 1987 the earnings ratio between college graduates and high school dropouts working in the goods-producing sector (mining, construction, and manufacturing) increased from 2.11 to 2.42 a jump of 15 percent. In the service sector, however, the education-to-earnings ratio mushroomed from 2.20 to 3.52 a 60 percent increase. All of the employment growth in the economy during the 1980s came in the services sector, where wages were polarizing between high school dropouts and college graduates four times faster than the goods-producing industries. Hence, this could explain at least part of the dramatic increase in earnings inequality.


Suspect Three: Deregulation. Government deregulation of the airlines, trucking, and telecommunications industries very likely has produced the same effect. In each of these industries, intense competition from new non-union, low-wage entrants, such as the short-lived People Express in the airline industry, forced existing firms to extract large wage concessions from their employees to keep from going bankrupt. How much this has contributed to overall earnings inequality remains an open question.


Suspect Four: Declining unionization. Unions have historically negotiated wage packages that narrow earnings differentials. They have tended to improve wages the most for workers with modest educations. As Richard Freeman of Harvard and a number of other economists have noted, the higher rate of union membership is one of the reasons for the smaller dispersion of wages found in manufacturing. That unions have made only modest inroads into the service economy may explain in part why earnings inequality in this sector outstrips inequality in the goods-producing sector.


Suspect Five: Downsizing. The restructuring of corporate enterprise toward lean production and the destruction of internal job ladders as firms rely more heavily on part-time, temporary, and leased employees is still another suspect in this mystery, according to Bennett Harrison of Carnegie Mellon. The new enterprise regime creates what labor economists call a "segmented" labor force of insiders and outsiders whose job security and earnings potential can differ markedly.


Suspect Six: Winner-take-all labor markets. The heightened competitive market, which forces firms toward lean production, may also, according to Robert Frank and Philip Cook, be creating a whole new structure of free-agency, "winner-take-all" labor markets. As Frank has explained ("Talent and the Winner-Take-All Society," TAP, Spring 1994, No. 17), in winner-take-all markets "a handful of top performers walk away with the lion's share of total rewards." The difference between commercial success and failure in such markets may depend on just a few "star" performers in movies the director and leading actor or actress; in the O.J. Simpson trial the conduct of just one or two trial attorneys. Given the high stakes involved in a multimillion dollar movie project or a murder trial involving a well-to-do client, investors are willing to pay a bundle to make sure they employ the "best in the business."


Today, the fields of law, journalism, consulting, investment banking, corporate management, design, fashion, and even academia are generating payoff structures that once were common only in the entertainment and professional sports industries. Just a handful of Alan Dershowitzes, Michael Milkens, and Michael Eisners can have a sizeable impact on the dispersion of wages in each of their occupations. There is considerable evidence that inequality is not only rising across education groups but within them, very likely reflecting such winner-take-all dynamics.


Suspect Seven: Trade. Even more fundamental to the recent restructuring of the labor market and a likely proximate cause of deindustrialization, deunionization, lean production, and perhaps even the free-agency syndrome is the expansion of unfettered global trade. According to trade theory, increased trade alone is sufficient without any accompanying multinational capital investment or low-wage worker immigration to induce the wages of similarly skilled workers to equalize across trading countries. Economists call this dynamic "factor price equalization." As the global economy moves toward free trade, lower transportation costs, better communications, and the same "best practice" production techniques available to all countries, factor price equalization is likely to occur.


Unfortunately, in a world like ours where there is a plentiful supply of unskilled labor juxtaposed to a continued relative scarcity of well-educated workers, this "price equalization" within skill categories leads to a "wage polarization" between skill categories. The gap between the compensation of low-skilled workers and high-skilled workers everywhere will tend to grow. According to the well-respected trade theorist Edward Leamer of the University of California at Los Angeles, freer trade will ultimately reduce the wages of less-skilled U.S. workers by about a thousand dollars a year, partly as a result of NAFTA. If factor price equalization is a chief source of wage dispersion today, just consider the implications when China and India with their immense unskilled workforces enter fully into global markets.


Suspect Eight: Capital mobility. Freer trade generally provides for the unrestricted movement of investment capital across borders. This inevitably accelerates the process of growing wage inequality. Modern transportation and communications technologies, combined with fewer government restrictions on foreign capital investment, have led to increased multinational capital flows between countries. To the extent that companies move to take advantage of cheaper unskilled labor, transnational investment adds to the effective supply of low-skilled workers available to American firms, thus reinforcing factor price equalization.


Suspect Nine: Immigration. Increased immigration potentially has the same effect, if a disproportionate share of new immigrants enters with limited skills and schooling. This is true at least for legal immigrants. The typical legal immigrant in the U.S. today has nearly a year less schooling than native citizens. Undocumented immigrants surely have even less. As such, while many immigrants to the U.S. come here with excellent education and skills, there is little doubt that the large number of Central American, Caribbean, and Southeast Asians seeking refuge in this country has had the unfortunate side effect of at least temporarily boosting the supply of low-skill workers seeking jobs.


Suspect Ten: Trade deficits. The trade gap has contributed to the decline in those sectors of the economy that have in the past helped to restrain earnings inequality. Moreover, trade data indicate that the import surplus itself is disproportionately composed of products made by low-skilled and modestly skilled labor. This boosts the effective supply of workers at the bottom of the education-to-earnings distribution and thus depresses their relative wages.






Thus, in our rogue's gallery we have ten suspects: skill-biased technological change, deindustrialization, industry deregulation, the decline of unions, lean production, winner-take-all labor markets, free trade, transnational capital mobility, immigration, and a persistent trade deficit. Quantitatively parsing out the relative impact of all of these forces on wage distribution is fraught with enormous difficulty. Still, Richard Freeman and Lawrence Katz have attempted to do something like this, at least for the wage gap between men with a college degree and those with a high school diploma. The results of their research and that of some other economists are summarized in the chart above.


What do these results suggest? If the Freeman and Katz estimates are in the right ballpark, the answer to our mystery is the same denouement as Agatha Christie's in Murder on the Orient Express. They all did it. Every major economic trend in the U.S. contributes to growing inequality largely linked to merit. None of these trends shows the least sign of weakening.


Each trend reflects the growth of market forces and the decline of institutional constraints on competition. This was Young's essential message more than 30 years ago. Increased reliance on domestic market dynamics as the sole determinant of earnings produces inequality. Heightened competition within these markets, as a consequence of fuller integration into the global economy, exacerbates this wage dispersion. While it may be sinister, there is nothing conspiratorial about this phenomenon. It is embedded in the very nature of laissez-faire market dynamics. For this reason, meritocratic inequality is much harder to remedy than overt forms of discrimination based on race and sex.




Policy Endgames


Even economists who tout the merits of the market have come to recognize the need to soften the potentially devastating social impact of current income trends. Yet given the long-standing resistance to most forms of public intervention in the marketplace, the search for solutions has been restricted to just three types of countermeasures: education and training, immigration reform, and direct tax-and-transfer policy.


In theory, education can offset the effect of skill-biased technological change and factor price equalization. If somehow we could produce a true glut of symbolic analysts in place of high school dropouts, meritocratic inequality would begin to resolve itself. Education reduces the surplus of low-skilled workers and relieves the shortage of skilled workers. If this strategy also happens to increase the overall level of education, it has the added advantage of improving overall labor productivity and ultimately real wages.


A number of education and training programs have widespread appeal. These include expanding the Head Start program for disadvantaged preschool children, levying a corporate tax to finance on-the-job training, instituting a national apprenticeship program, and converting current grant and loan programs into income-contingent loans for college and university students. Other possibilities under consideration for education reform include setting national standards for school performance, introducing merit systems to reward successful teaching, instituting voucher systems, and increasing teacher and parent control over schools.


Legal restriction of immigration is a second possible means of reducing wage inequality. Canada has a higher rate of immigration than the United States. But immigration laws in the two countries have produced very different effects on their respective labor markets. Since the 1960s, U.S. policy has stressed family reunification. Canada, in contrast, employs a point system designed to produce a more skilled immigrant labor pool. This approach has produced legal immigrants in Canada who average 1.3 more years of education than native Canadians. If we ignore the thorny ethical issues surrounding the rights of political refugees and judgments about the worthiness of individuals seeking to immigrate a whole other debate one could imagine tilting immigration policy toward greater use of skill-based criteria.


Finally, if immigration control and education cannot do the job, there is the old standby of progressive tax-and-transfer policy to effect greater equality after wages are paid. Traditionally, most contemporary liberal economists have favored this method, for it entails the least interference with market forces.


On the surface, this complement of liberal policies seems germane for coping with meritocratic inequality. Not surprisingly, all three policies are at the top of the domestic agenda of the Democratic Party. Yet, given the powerful set of national and global forces at work in the economy, these policies may not be enough.


A case in point is education and training. Greater equality in schooling does not by itself produce more equal earnings. The distribution of education has become significantly more even over the past three decades. Among year-round, full-time workers, the overall variation in completed years of schooling has declined by more than 25 percent since 1963. The performance of black students and other minorities on the Scholastic Aptitude Test (SAT) is further evidence of this convergence. In 1976, the average verbal SAT score for blacks stood at the 74th percentile of whites; by 1990 the average score was up to the 80th percentile. Math SAT scores for black students improved by the same amount.


But even as education backgrounds have converged, the importance of small differences in education has increased enough so to offset any equalizing effect education would otherwise have. Recall the distinction between the return and the rate of return of schooling. As such, no matter what other benefits might flow from increased schooling, expanded education is not, by itself, a certain cure for inequality.


Job training programs have made even less headway. While the federal government has experimented with a bevy of programs from the original Manpower Development and Training Act (MDTA) of the Great Society to the Job Training and Partnership Act (JTPA) of the 1980s, repeated evaluations suggest mixed results at best. Some programs like the Job Corps, which provide long-term training opportunities to disadvantaged youth, have been cost effective. The vast majority, however, have provided dubious returns. And even when these programs are deemed successful, the earnings advantage they give participants produces only the slightest deviation in the trend toward income inequality.


James Heckman of the University of Chicago has estimated just how small this deviation really is. Assuming a generous 10 percent rate of return on investment, he calculates that the government would need to spend a staggering $284 billion on the U.S. workforce to restore male high school dropouts to their 1979 real incomes. To restore education-based wage differentials to 1979 levels without reducing the real incomes of existing college-educated workers would take more than $2 trillion.


Future investments in human capital programs may have a somewhat better track record than past attempts, particularly if they are well targeted. But one cannot ignore the enormous increases in inequality that have already taken place. And to keep inequality from growing even more quickly, government would have to expand these programs at a frenetic pace. This is not to say that there is no role for training in solving America's labor market problems. While more training may not significantly reduce inequality, it is nevertheless useful for raising overall productivity, providing individual workers with a defense against further wage decline, and for rectifying specific skill shortages which could otherwise lead to wage-led inflation.


Immigration reform may also have a marginal impact on the earnings distribution, but any improvement will be largely limited to regions of the country where immigration flows have been disproportionately large California, Texas, Florida, and perhaps a few states in the Northeast.


That leaves tax-and-transfer programs as the centerpiece for adjusting distributional outcomes. On paper, a suitably progressive set of tax rates combined with sufficiently generous transfer assistance could radically redistribute income after it is earned in the market. But in practice even such hard-to-win liberal measures as President Clinton's 1993 tax initiative produce relatively little redistribution. In 1977, when the federal tax system was significantly more progressive than today, the richest fifth of American families had 9.5 times the pretax total income of the poorest fifth. Federal taxes reduced the overall gap in relative shares by less than 20 percent; regressive state and local taxes wiped out this improvement. Given increased reliance on regressive payroll taxes and an aversion to any further increase in progressive income taxation, the tax system is unlikely to do much more.


The same is true of public transfer programs. Over the past 20 years, the New Deal safety net of unemployment insurance and welfare assistance has come under attack. Unemployment insurance covered more than 60 percent of the jobless during the 1961 and 1975 recessions. Despite the greater severity of the 1982 recession, only 43 percent of jobless Americans collected unemployment benefits. During the 1991 recession, coverage was down to 40 percent. While the Clinton administration implemented important reforms of the federal unemployment insurance system, the states and the federal government are unlikely to greatly expand coverage of the unemployed. As for the traditional welfare system, including Aid to Families with Dependent Children (AFDC), real benefit levels have been cut in many states and the government has imposed greater eligibility restrictions. Most of the proposed reforms of the AFDC program would change the dynamics of dependency, but do nothing to change the final distribution of income and they could, by forcing welfare recipients off the roles after two years, make matters worse.


Education and immigration reform, as well as redistributive tax-and-transfer policy, could contribute to reducing inequality, but they are by themselves even under the best of political scenarios no match for the concerted forces now driving the labor market. Indeed, relying exclusively on redistributive tax-and-transfer schemes to redress the growing inequality problem would likely require tax rates and transfer sums so large that there would be not only massive political resistance but real economic costs in terms of disincentives to investment and growth.




The End of Inequality?

There is, however, an additional policy agenda which a progressive government could embrace. This agenda would focus attention on the market forces that generate greater inequality. First, there is direct regulation of the labor market. As the empirical evidence demonstrates, the growth in earnings inequality has materialized in part because of a serious erosion in wages at the bottom of the skill distribution and a sharp decline in unionization. Higher minimum wage standards are one way government can affect the distribution of employee compensation. While raising the mandatory wage minimum theoretically entails some trade-off in the form of job loss, some recent studies prove the positive earnings impact of modest increases in the statutory minimum far outweigh any unemployment effect. Thus, the aggregate wage bill paid to less-skilled workers increases, improving the living standards of those on the bottom rungs of the earnings ladder.


Labor law reform makes it easier for unions to organize workers and provides an indirect method of accomplishing the same objective. While there are many reasons why union membership is dwindling, the recent Fact Finding Report of the U.S. Commission on the Future of Worker-Management Relations found undeniable evidence that the playing field is tilted heavily toward employers. Employers can permanently replace striking employees, which reduces the ability of unions to organize and to freely negotiate collective bargaining agreements. Unions do not have free access to employees during membership drives, and the penalties for employer unfair labor practices are trivial. To remedy this, government could ban permanent striker replacements, permit union organizers access to in-plant bulletin boards and public forums, impose more costly penalties on employers who violate the rights of union organizers, expedite legal remedies, and authorize binding arbitration for first contracts.


There are also industrial and trade policies to consider. Advocates of industrial policy can cite the success of the U.S. aircraft and agriculture industries, in which government purchases and research-and-development subsidies helped to create and maintain industries that now dominate world markets. The Carter administration's Chrysler loan guarantee, which provided an eleventh-hour reprieve from certain bankruptcy for the then-hapless automaker, turned around an old smokestack company and saved tens of thousands of well-paying jobs not only at Chrysler but at hundreds of its suppliers. With a new lease on life, Chrysler has surged back as a world leader in automotive technology. There are, of course, many instances of failed industrial policy the government's ill-fated Synfuels Corporation, for example but there are an ample number of cases on the other side of the ledger. Maintaining the nation's manufacturing base would have a salutary effect on incomes.


The other policy that can bolster the goods-producing sector is implementation of fair-trade language in trade agreements. One way of doing this is to use tariffs and trade barriers designed to give temporary protection to key industries, promoting industrial revitalization and economic transition. Another form of managed trade would tie the offer of reduced protection to a trading partner's compliance with certain environmental and labor standards. Critics of NAFTA argued for side agreements that would have linked the pace of tariff reduction to the rate at which Mexican wages caught up with Mexico's rapidly rising productivity. To be sure, government-imposed limits on trade can have detrimental effects on prices and therefore reduce average real incomes from what they might be under a free trade regime. Nevertheless, a carefully crafted set of trade policies that condones temporary protection of selected domestic markets and sets minimum labor and environmental standards can soften the distributional impact of factor price equalization. The trick is to keep such protection from becoming permanent or prompting a trade war.


One last point: What about the use of macroeconomic stimulus to counteract inequality? As noted above, growth per se is no longer an antidote to increased wage dispersion. But it is important to realize that it is the sine qua non for providing the tax revenue and the political will to address inequality through government action. Hence, overzealous attacks on government deficits that reduce aggregate demand and overly restrictive monetary policies that unnecessarily boost interest rates can poison the environment for possible egalitarian reforms.


Is there any evidence that more aggressive structural policies can help? Critics like Mickey Kaus, the New Republic columnist and author of The End of Equality, think not. In declaring that "the venerable liberal crusade for income equality is doomed," Kaus argues that



you cannot decide to keep all the nice parts of capitalism and get rid of all the nasty ones. You cannot have capitalism without `selfishness,' or even `greed,' because they are what make the system work. You can't have capitalism and material equality, because capitalism is constantly generating extremes of inequality as some individuals strike it rich . . . while others fail and fall on hard times.


This may sound sensible, but it will come as remarkable news to a large number of our foreign capitalist competitors. A comparison of earnings trends across countries suggests that different institutional frameworks, all operating within a capitalist framework, produce substantially different distributional outcomes.


Kaus confuses capitalism with laissez-faire economics. All nations now face nearly identical pressures from technological change and global competition. Yet not all are experiencing the same degree of growing income inequality. Those countries with stronger unions, national wage solidarity agreements, generous social welfare programs, and more vigorously pursued industrial and trade policies have greater wage equality than countries pursuing pure free-market strategies. Relying on an extensive review of comparative statistics, Richard Freeman and Lawrence Katz conclude that while educational and occupational skill-wage differentials were growing rapidly in the United States and the United Kingdom during the 1980s, the experience elsewhere was quite different. Wage equality increased in the Netherlands; wage differentials did not change noticeably in France, Germany, and Italy; and wage dispersion increased modestly if at all in Australia, Canada, Japan, and Sweden.

In all of these capitalist countries, intensified global competition and technological innovation pushed the distribution of earnings and income toward greater inequality. Structural protection against this onslaught was greater in countries that did not follow the Reagan-Thatcher road to full-scale deregulation and laissez-faire trade policies.



True, the flexibility of the U.S. market may be partly responsible for lower overall unemployment rates compared with these other countries, but the price of this flexibility seems to be much higher levels of economic polarization and social inequality. Moreover, recent research by Rebecca Blank, a labor economist at Northwestern University, suggests there is little empirical evidence that social protection programs substantially affect labor market flexibility. Expansive social protection problems, then, are not the most important factor behind the high rate of unemployment in Europe, as many others suggest. Blank goes on to show that cutting back on social protection policies does not automatically reduce unemployment or increase the speed of labor market adjustment. Instead she finds that by enhancing worker well-being, social protection policies may actually permit flexibility that would not otherwise be possible. All of which means that the U.S. can adopt policies to directly redress income inequality without raising the specter of double-digit unemployment.


So can we avoid fulfilling Michael Young's prophecy for 2034? Can a society with high- and low-skill workers have a reasonably equitable distribution of income? The answer is a qualified "yes," but it requires that we focus on equal outcome, not just equal opportunity. There is a fundamental distinction separating progressives from neoconservatives and neoliberals, and it turns largely on this point: Progressives are willing to consider a broader and more balanced array of public policies to keep the free market from perpetrating and then perpetuating socially destructive levels of inequality.

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