Income inequality in the United States is a hot-button political issue in this mid-term election year. Advocates for substantial increases in the minimum wage, for instance, believe that imposing higher wages on employers will reduce poverty and lessen income inequality. The evidence just does not justify this claim. Workers who remain employed after the increase are made better off on the backs of those workers who face reduced hours or unemployment following government-mandated wage hikes.
The statistics undeniably show that incomes at the top end of the distribution have increased relative to those at the bottom. Before significant changes are made in wages and tax structures, however, isn’t it important to understand why the distribution of income has changed?
University of Pennsylvania economist Jeremy Greenwood and his co-authors did just that. In an article that will appear in the May 2014 American Economic Review these researchers compared household income distributions in the United States between 1960 and 2005, the most recent year for which data are available. To make this comparison they used a statistical tool called the Gini coefficient. The Gini coefficient is zero when income is equally distributed and 1 if income is held by only a small fraction of the households.
Based on analyzing income for thousands of households in the United States, the researchers found that the Gini coefficient for 1960 was 0.33. By 2005 it increased to 0.43. The increase underpins the populist movement’s recent campaign for programs to redistribute income from the “1%” to remaining 99%.
Greenwood and his associates sought to explain how much of the observed change in income inequality is due to changing demographics of education and workplace. It turns out that much of the change in income distribution is due to the advancing role of women in society and business. And, perhaps more importantly, how women pick a mate.
In 1960 women, as a group, were less likely to attain a college education than in 2005. If they were employed outside the home, women were more likely to be employed in support jobs relative to men: Think secretary instead of manager, nurse instead of doctor.
Today, women represent a larger proportion of college enrollments than before. When women enter the work force with a college degree in hand, they do so at a level more equal to their male counterparts. Women today are therefore more likely to have successful, high-income jobs than in the past.
What Greenwood’s research uncovered is that women’s climb up the education-cum-career ladder has also affected who they chose for a marriage partner. Today’s female college graduate is more likely today to associate with and marry other college graduates. Because the modern woman is more likely to marry another college graduate than someone with a high school diploma (or less), household incomes increase relative to what would occur if such “assortive mating” did not occur.
How much of the increase in income inequality since 1960 is explained by women’s gains in education and business? What would the distribution of household income look like if women did not engage in assortive mating and instead chose mates at random? Greenwood’s research shows that the difference in the distribution of household income in 2005 would be essentially the same as it was in 1960.
This finding provides one explanation of why the distribution of income has changed over the past 50 years. The results from such careful research indicate that income inequality really isn’t due simply to policies that favor the rich over the poor as some claim. Rather, income inequality is more due to educational differences than favoritism in the tax code.
Failure to recognize the economic and demographic forces that altered the distribution of income over time will lead to disastrous policies with detrimental consequences. One can only hope that such evidence will preclude simplistic policies to “fix” income inequality that impulsively reallocate income to achieve somebody’s preconceived notion of a “fair” distribution.
R.W. Hafer is a research professor of economics and finance at Southern Illinois University Edwardsville and a research scholar at the Show-Me Institute.