Economic Inequality: Facts, Theory and Significance

Studies | Economy | Government | Social

No. 312
Tuesday, June 10, 2008
by David R. Henderson


Introduction

The rise in economic inequality in the United States over the last two decades is well-documented by economists.  The attention researchers give this subject and the results they have found should be expected for two reasons.

First, in U.S. society there is generally a strong egalitarian ethic.  Differences in income are widely suspect unless strongly justified, and accepted justifications are fairly narrow.  Economists share this egalitarian ethic as much as the general public, if not more so.  Moreover, they focus much more consistently than the general public on the desirability of equality.  This egalitarian ethic among economists is not new.  In their famous critique of rent control, the late Milton Friedman and George Stigler wrote:

For those, like us, who would like even more equality than there is at present, not just for housing but for all products, it is surely better to attack directly existing inequalities in income and wealth at their source than to ration each of the hundreds of commodities and services that compose our standard of living.2

Second, economic inequality has been extensively documented because economists today have much greater access to a larger amount of data, as well as more tools to empirically analyze the data, than just a few decades ago.  Yet despite their sharpened tools, many economists have drawn incorrect empirical conclusions. Fortunately, other economists have corrected them.

In this study, I make five main points about inequality:

  1. Although income inequality has increased, it has not increased as much as some economists claim.
  2. Even though inequality has increased, almost all Americans have become better off economically.
  3. Household income varies substantially for three reasons that are often ignored:  (i) differences in household size and especially in numbers of workers, (ii) differences in skill levels among people, and (iii), related to both of the above, differences in age.
  4. Income mobility substantially mitigates inequality, and income mobility in the U.S. economy is quite high.
  5. The majority of economists judge how just an income distribution is only by how equal it is; they don’t ask how people obtained what they have.  This disregards the fact that, by and large, those with higher incomes have earned them.

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