Some Info on Income Inequality

The President's State of the Union has kicked off the Democrat's income inequality offensive for this elections year. Here are some interesting arguments and research findings related to the subject.

Daniel Smith's Op-ed The Myth of Wage Stagnation Smith, a colleague at Troy University, lays out the argument that the oft-quoted data on earnings, which shows that average real wages only increased 5.58% since 1964, does not reflect increases in benefits and purchasing power. He points out that total compensation, which includes benefits, has increased 45% since 1964. He goes on to refer to Mark Perry's argument that purchasing power has increased when one considers the hours people need to work to earn enough money to buy consumer goods (see next link). Of course, not only do people have to work less hours to afford, say a TV, but the quality of the product purchased (which is not factored into inflation estimates) has increased dramatically in the past decades.

Fly in the ointment: While most of Smith's article is fact driven, he ends on an ideological note by arguing that the myth of wage stagnation is being used to do away with economic freedoms that increase incomes. While I have great sympathy for any argument in favor of economic freedom, it is more tenuous than the empirical case made in the first three quarters of the essay.

Mark Perry's Data on Hours Needed to Work to Purchase Goods  Speaking of Mark Perry, he often posts information on the increasing quality and decreasing real cost of consumer products. In this post, Perry has a table that shows the cost of 11 household appliances in 1959, 1973 and 2013. He also uses the average hourly manufacturing wage from each of those years to calculate the hours a factory worker would have to work to purchase them. Even though the price of these products increased from $1,851 in 1959 to $3,289 in 2013, the hours a worker need to work to purchase them dropped from 885.6 to 170.4.

Of course, Perry used the average manufacturing wage and much of the discussion has been about minimum wage workers who generally make much less. Perry did a comparison of what a college student could purchase with the earnings from a minimum wage summer job (40 hours/week for 12 weeks) in 1973 versus 2013. Someone working for minimum wage in 1973 would earn $768 ($1.60/hour x 480 hours) and someone working for minimum wage in 2013 would earn $3,480 ($7.25/ hour x 480 hours).

Now, if you use the CPI to adjust these wages for inflation, it would appear that the 2013 worker earned 14% less in real wages than the worker in 1973. However, if you look at what the two workers could buy with their earnings, you get a very different conclusion. The 1973 worker's $768 would purchase a typewriter, a calculator, a portable TV, a Radio-Tape player, and a compact refrigerator. The 2013 worker's $3,289 would buy a laptop and printer, an iPod, an iPad, an iPhone, a GPS, a digital camera, flatscreen TV, a blu-ray player, a home theater system, a Playstation, a Kindle Paperwhite, Sonicare toothbrush, a clock radio/iPod docking station, a TiVo, a satellite receiver for a car, an espresso machine. and a calculator.

The difference between these bundles of goods is even more remarkable when you consider that a billionaire could not have purchased many of the things at any price in 1973. This leads Perry to argue that today's kids are the luckiest generation (at least until the next one).

Fly in the Ointment: In both cases, Perry looked at manufactured consumer goods, which have seen both increases in quality and decreases (or relatively small increases) in price. In comparison many things like , houses, gasoline and beef, have not increased much in quality but have increased in price.  More importantly, healthcare, which has increased in quality, has gotten much more expensive. Of course, this is why the CPI, which looks at broad range of goods, says the $768 in 1973 is worth more than the $3,480 in 2013.

The Equality of Opportunity Project: Harvard's Equality of Opportunity project reports two interesting sets of findings regarding individual income mobility, i.e., the changes in income that individuals experience in their lifetimes. This is not income inequality, per se, but mobility relates directly to individual prospects in our economy.

First, they find that the prospect for upward mobility among children who grow up in below median income families varies a great deal across different geographic regions of the US. While you really need to look at the map they posted, the areas of lower upward mobility are heavily concentrated in the southeast while the areas of highest mobility run through the plains states.

Second, they report that income mobility was very stable from 1971 to 1992. They measure this mobility in terms of the difference in the average income percentile of children born to low income families versus children born in high income families. As they sum it up, "On average, children from the poorest families grow up to be 30 percentiles lower in the income distribution than children from the richest families, a gap that has been stable over time."

Fly in the Ointment: There really isn't one here, besides the difference between income inequality and mobility previously noted.