The Great Divergence: A Dialogue

Entry 5: Earnings and wealth inequality are real and significant.

This week, the Washington Monthly is featuring a conversation about economic inequality, prompted by Timothy Noah’s new book, The Great Divergence: America’s Growing Inequality Crisis and What We Can Do about It. Participants are Mark Schmitt, director of the fellows program at the Roosevelt Institute, and Brink Lindsey, senior scholar at the Kauffman Foundation.

From: Mark Schmitt

To: Brink Lindsey

Nostalgia is indeed something to be wary of in thinking about inequality over the last several decades. You are the author of the memorable aphorism, “left and right are both pining for the ’50s. The only difference is that liberals want to work there, while conservatives want to go home there.” Liberal Boomers like Paul Krugman have fairly recently discovered the wonders of the ‘50s and early ‘60s – a period that, when younger, most of them regarded as stifling. Can the factors of the Postwar era that led to “The Great Compression” be extracted from those we want nothing to do with, and then transported into our world, “Bill and Ted” style?

In at least one of the cases you raise, the answer is obviously, no. The economy in which, for the most part, a single worker (usually male) could support an entire family at a middle class level can’t easily be recreated without recreating the world in which 51 percent of the population was essentially excluded from better-paying jobs. “Assortative mating” of higher-income individuals, which admittedly has a significant effect on inequality, is only possible in a world where women have roughly equivalent economic opportunities.

As you say, if the entry of women into higher wage jobs, and their tendency to form households with higher income men, explains 25-30 percent of earnings inequality, that’s not trivial. But it also leaves a whole lot unexplained.

On immigration, it is odd that Noah focused mostly on the second-order effect – does immigration lower the wages of native-born workers? – and not the possibility that immigrants themselves are lower-skilled, lower-wage workers, thus increasing the numbers at that end of the workforce. But the paper by Robert Lerner that you cite is hardly the last or only word on the matter. Noah cites a study by Gary Burtless that took the approach you propose, looking more directly at whether immigrants on their own skewed the distribution of income, finding that average wages would have been 2.3 percent higher, total, over the whole period from 1979 to 2008 if there had been no immigration at all. A 2007 paper by David Card estimates immigration’s share of responsibility for the change in wage inequality from 1979 to 2000 at 5 percent of the total.

Note that those are studies of wage inequality only, from surveys, and don’t account for the high ends of inequality in which capital gains make up a much larger share of the shift. A Congressional Research Service analysis last winter of changes in inequality from 1996-2006 found that wage income had actually become more equal during that period. By far the biggest contributor to the overall change in the Gini coefficient was capital gains and dividend income.

Finally, on unions, you and Tim Noah are telling exactly the same story, as are Card, Frank Levy, David Autor, Larry Katz, and every other labor economist: Workers lost their power to bargain for higher wages. Where you see a story of sound economic policy that drove out unionized firms with their “above-market wages” (in my economics textbook, wages freely negotiated between employees and employers are market wages); Noah sees primarily as a concerted effort by companies, with help from government policy, to get rid of unions. Both are ideological takes on the same basic set of facts – workers lost their power to bargain for a share of the rewards of their higher productivity. I’d be more sympathetic to the argument that firms had to cut costs in the face of competition if it weren’t for the fact that executive compensation skyrocketed, as did returns to capital. Executive salaries that are determined not by market negotiation but by captive boards and compensation consultants paid by the companies are what should be called “above-market wages.” And companies often stripped their costs to the bone not in response to competition, but to demands from private equity firms and others for short-term cash flow. American firms can afford to pay their employees better, and the shift in the power relationship, from employees who are able to negotiate as a group to those who cannot, is a major reason they don’t. And the consequence is that a major element of the American dream, that a moderately skilled worker can achieve a middle-class lifestyle, is at risk.

Being skeptical of nostalgia, though, I don’t believe that the solution is simply to hope that we can get back to the levels of union penetration of the 1960s. Workers who want to form unions should face fewer obstacles than they do, but no one has persuaded me that simply passing the Employee Free Choice Act is going to result in a massive increase in unionization or union power. And as we saw with the rescue of the auto companies, workers know that they can’t ask for levels of compensation that their employers really can’t match. So recognizing that, the question is whether there is some other way to give workers some of the clout that once enabled them to claim more of the value of their own productivity, or whether we make up for it in some other way, such as through income supplements or, say, wage insurance, which essentially would do the same thing through redistributive taxation. But to simply say, decline of unions caused inequality (especially wage stagnation in the middle), but since I don’t like unions that inequality doesn’t bother me doesn’t seem like a very good answer to those workers or their families.

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