Addressing income inequality

Income inequality between households and regions has rightly emerged as a policy discussion in this election cycle.

If we are lucky, and more dire events don’t intervene, it will remain part of the policy dialogue for some time. There is much to the debate, from macroeconomic policies all the way down to the composition of households, and I have and will continue to write on these issues.

At the most basic level, no discussion of inequality can avoid beginning at the huge difference education plays in employment and earnings.

In 1994, the federal government began reporting annual employment numbers by educational attainment. Since then, there have been about 35 million new jobs in the U.S., with almost 38 million of those jobs going to people with more than a high school diploma. No, that isn’t a typo; since 1994 there have been no net new jobs created for folks who have not attended college.

This factors into the income debate for three reasons. First, the relative oversupply of workers without post-secondary school acts to suppress wages. Like it or not, that is how supply and demand works, and labor markets are above all else, markets.

Second, the link between education and earnings is very strong, even when labor markets aren’t afflicted with excess supply. So, on average, people with more education earn more than people with less schooling.

Finally, there are profound regional differences in average educational attainment. In very affluent places such as Fairfax County, Virginia, or Hamilton County, Indiana, most adults have a college degree. In poor places such as McDowell County, West Virginia, or Owen County, Indiana, fewer than one in five have been to college.

This dynamic is largely ignored in the popular debate about income inequality. Instead, we hear about corporate greed and Wall Street excesses. While most of us are righteously outraged by a CEO of a failing company receiving millions of dollars in earnings, that represents a trivial part of income inequality. The popular villains of income disparities may be unsavory, but they are not the architects of the problem.

During the past two or more decades, there has been a growing excess supply of low-skilled workers and an excess demand for high-skilled workers. This suppresses wages for low-income workers, and drives upwards earnings for high-skilled workers. This drives people and places farther apart, making us more unequal. Again, there’s no need to explain the problem with tales of greed and avarice. Simple labor market models explain much inequality.

There is reason to think through the myriad issues surrounding income inequality. But, there seems to be a real reluctance to squarely address the education issue. I think that is because the problem of teens quitting school or not pursing more education are largely not economic issues. They involve much deeper social and cultural problems that are harder to talk about than greedy CEOs.

Still, unless we can wrestle with the real problems that lead to the educational differences, any fix to income inequality will be elusive.