Causes of rising income inequality, makers of a New America

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by Fabius Maximus

Summary: While the news media fills the air with flotsam and jetsam, powerful forces reshape America. Chief among them is rising income inequality. Like so much happening to us, it results from rational policies skillfully executed by our rulers for their benefit, not ours.


The evidence is more technical than usual here, so I state the conclusions at the beginning. Let us be clear about this. The drivers of inequality discussed here are political, although their effects are economic. First, business power is concentrating largely because the government does little trust-busting. Mergers which concentrate economic power receive only sporadic review from the government. Monopolies oligopolies grow like weeds.

Second, the destruction of private sector unions was done with support of Congress and the Courts, as the Left abandoned them in favor of radical social engineering.

None of this need matter for the future. We fought these battles once before, in the early 20th century – and won. We can do so again if we organize and stand together.

NBER: Union membership falls and income inequality rises - w24587

In the September Digest of the National Bureau of Economic Research (NBER), Steve Maas discusses one major cause of rising income inequality in “New Evidence that Unions Raise Wages for Less-Skilled Workers.” It is a summary of the NBER Working Paper “Unions and Inequality over the Twentieth Century: New Evidence from Survey Data” by Henry S. Farber. “Tapping into eight decades of private and public surveys, a new study finds evidence that unions have historically reduced income inequality.”

“…Their study finds that the salary premium for union members compared to workers with comparable skills and demographic characteristics has remained relatively steady over the last 80 years despite large swings both in the overall number of union members and in their education levels. The less skilled the workers were, the greater the wage premium associated with their union membership. The researchers find a negative correlation between unionization rates and measures of inequality such as the Gini coefficient.

“Between 1940 to 1970, when unionization peaked and income inequality narrowed, unions were drawing in the least-skilled workers. Before and after that period, unions were smaller and a higher fraction of their members were drawn from the ranks of high-skill workers. The 1940-1970 period also coincided with the highest share of union members drawn from minority groups.

“The clear implication of the researchers’ analysis is that, because unions offer a larger wage premium to less-skilled workers, unions have an important equalizing effect on the income distribution to the extent that they are successful in organizing the less-skilled. Recent decades have seen growth in educational attainment in the workforce, and, importantly, not only has the overall share of workers who are unionized declined, but unions have also become relatively less successful in organizing less-skilled workers. The remaining unionized workforce is more highly educated than it was earlier. The combination of the declining presence of unions in the labor market and the increased skill level of the remaining union workers means that the important equalizing effect of unions on the income distribution that was seen in the middle of the 20th century has diminished substantially. …”

For more about the crushing of America’s unions, see these posts.

Another paper shows a second cause of rising inequality

Increase in employment concentration - NBER paper w24307

In the May Digest of the National Bureau of Economic Research (NBER), Steve Maas discusses another major cause of rising income inequality in “Employer Concentration and Stagnant Wages.” It is a summary of the NBER Working Paper “Strong Employers and Weak Employees: How Does Employer Concentration Affect Wages?” by Efraim Benmelech, et al. “Two studies suggest that an increase in employers’ monopsony power is associated with lower wages.”

“Stagnant wages and a declining share of labor income in GDP in recent decades have spawned a number of explanations. These include outsourcing, foreign competition, automation, and the decline of unions.

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“Two new studies focus on another factor that may have affected the relative bargaining position of workers and firms: employer domination of local job markets. One shows that wage growth slowed as industrial consolidation increased over the past 40 years; the other shows that in many job markets across the country there is little competition for workers in specific job categories. …

“The researchers found a negative relationship between employer concentration and wages …In addition to finding lower wages in monopsony markets, the researchers also found that, over time, firms that dominate their labor markets were less likely to share productivity gains with employees. …

“Over the course of the study period, U.S. imports from China increased. The researchers found that import competition from China, which was associated with the closure or relocation of plants in a number of industries, accelerated the trend toward greater employer concentration in some local labor markets. This finding suggests that import competition not only reduced the demand for workers who previously produced the now-imported products, but that it may also have depressed wages for workers in other industries in affected labor markets as a result of increased labor market concentration.”

What do we get instead of news about these obvious findings?

Rising income inequality is one of the most powerful forces shaping America today, affecting all levels of society. Our news media seldom mention it. Instead we get stories about “skills shortages.” Few of these survive any serious scrutiny. Perhaps they convince some Americans that they are prosperous.




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