In last Friday's
Financial Times, economist Sir Samuel Brittan writes that in the heyday of
debates about capitalism versus socialism, a common tactic was to calculate that
if all incomes were equal, most people would gain only a trivial amount more.
And that was without taking into account effects on incentives. It was therefore
better for the ordinary wage earner to place his hopes on rising productivity
than on state redistribution.
|Professor Robert J. Gordon|
Brittan asks where are we now in this
He says that today, the most interesting analysis of income
distribution is coming from the US. Many Americans say that the national dream
was that each generation would lead a better life than its predecessor; but they
are afraid that this will no longer be true of their own children and
grandchildren. US left-of-centre journals are full of calculations showing how a
middle-income earner would have to work more hours today than five, 10 or even
25 years ago to obtain basic modern necessities.
stock Republican reply has been to point to the increase in productivity and
average real income in which the US has outpaced most leading western countries.
Briitan says that what is true of the average is not necessarily true of
the median - the person in the middle.
Economist Robert Gordon estimates
that real median earnings per hour in the US have hardly increased since 1966.
He says that the top 10% have captured 50% of the income gains in the
past forty years. The top 1% gained more than all the bottom 50%.
Brittan recommends land and wealth taxes rather than increases in the
marginal rate of income tax.
A gross imbalance in earnings is not good
for an economy in the long term.
The new Chairman of the Federal Reserve
Ben Bernanke said on Wednesday, that groos inequality is detrimental to the
economy as workers who feel aggrieved are more likely to oppose free trade and
Where Did the Productivity Growth Go? Inflation Dynamics and the
Distribution of Income Ian Dew-Becker, Robert J. Gordon
A basic tenet of economic science is that productivity
growth is the source of growth in real income per capita. But our results raise
doubts by creating a direct link between macro productivity growth and the micro
evolution of the income distribution. We show that over the entire period
1966-2001, as well as over 1997-2001, only the top 10 percent of the income
distribution enjoyed a growth rate of real wage and salary income equal to or
above the average rate of economy-wide productivity growth.
median real wage and salary income barely grew at all while average wage and
salary income kept pace with productivity growth, because half of the income
gains went to the top 10 percent of the income distribution, leaving little left
over for the bottom 90 percent. Half of this inequality effect is attributable
to gains of the 90th percentile over the 10th percentile; the other half is due
to increased skewness within the top 10 percent.
In addition to its micro analysis, this paper also asks whether faster
productivity growth reduces inflation, raises nominal wage growth, or raises
profits. We find that an acceleration or deceleration of the productivity growth
trend alters the inflation rate by at least one-for-one in the opposite
This paper revives research on wage adjustment and produces a
dynamic interactive model of price and wage adjustment that explains movements
of labor's share of income. What caused rising income inequality? Economists
have placed too much emphasis on "skill-biased technical change" and too little
attention to the sources of increased skewness at the very top, within the top 1
percent of the income distribution.
We distinguish two complementary
explanations, the "economics of superstars," i.e., the pure rents earned by
sports and entertainment stars, and the escalating compensation premia of CEOs
and other top corporate officers. These sources of divergence at the top,
combined with the role of deunionization, immigration, and free trade in pushing
down incomes at the bottom, have led to the wide divergence between the growth
rates of productivity, average compensation, and median compensation.
America's rich are getting richer and their taxes may
push down the US budget deficit to as low as $300 billion in fiscal