Friday, October 30, 2009

An Interesting if Incomplete Narrative on Income Inequality

From Arnold Kling:

"I think that perhaps the most important trend of the past thirty years is the increased importance of cognitive skills relative to physical labor. Obviously, this has been going on for more than just the past thirty years, but during the past thirty years we saw an acceleration. This has had a number of consequences:

1. It changed the role of women. Their comparative advantage went from housework to market work.

2. This in turn, as Wolfers and Stevenson have pointed out, changed the nature of marriage. Men and women look for complementarity in consumption rather than in production.

3. This in turn leads to more assortive mating, with achievement-oriented men looking for interesting mates rather than for good maids.

4. This in turn leads to greater inequality across households. It also fosters greater inequality among children. The children of two affluent parents are likely to have much better genetic and environmental endowments than the children of two (likely unmarried) low-income parents.

5. Inequality is exacerbated by globalization and technological change. If your comparative advantage is basic physical labor, you have to compete with machines as well is with workers from the Third World.

The net result is an economy that has improved considerably for people with high cognitive skills, but which has improved only somewhat for people with relatively low cognitive skills."

There is one thing that this narrative leaves out: the top 1%. It does seem that when you are looking at that top 1%, which has been pulling away from the rest of the population, I think you see two trends: 1) a greater return for entrepreneurs as a result of lower startup costs and easier access to capital (a positive development); 2) eroding social norms relating to CEO pay generally and the finance industry as a whole thus enabling CEO/finance to extract greater rents from shareholders.

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