NCPA - National Center for Policy Analysis

Factors in Income Inequality

April 6, 2000

Much has been written and spoken recently on income inequality -- why the poor appear to lose ground, while the wealthy earn even more. But economists point out that inequality has been around for centuries; it's a historical reality.

Moreover, there is evidence it rises from that old law, supply and demand.

Data collected by Vanderbilt University economist Robert A. Margo show how it has worked historically in the U.S.

  • Demand for educated labor in an industrializing economy caused a gradual widening of inequality during the 19th century -- and such demand may also have been a factor in the technological revolution of the past few decades.
  • By contrast, supply -- in the form of the avalanche of GI Bill-financed college graduates after World War II -- may have helped dampen inequality into the 1950s.
  • Similarly, the tendency for Americans to attend and graduate from high school -- which was underway by the 1890s -- seems to have decisively lowered the relative returns to education, increasing equality.
  • Wars increase equality by boosting demand for unskilled labor, while recessions and panics decrease equality because they hit unskilled labor hardest.

Prolonged expansions end up increasing equality, because labor markets get tight -- and that may be what has been happening since 1994, a period during which the trend toward greater inequality seems to have stalled.

"History shows that when inequality goes up," Margo says, "it eventually comes down again."

Source: Peter Brimelow, "Unequal? Unfair?" Forbes, April 17, 2000.

 

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