The Gini Index is a conventional measure of income distribution equality. A Gini index of 0 corresponds to every household having the same income, while an index of 100 corresponds to one person earning all the income. The Gini index in the United States tends to be a higher than in Western European countries. The US Gini index is about 45, while most European countries have Gini indices in the 30s. However, this comparison can be misleading, since European countries individually tend to be more culturally and socially homogeneous than a large continental nation like the US. The more proper comparison is between the US and the entire EU. The total US population is comparable to that of EU and there are significant income disparities from country to country within EU that broaden the net EU income disparity. The per capita gross national product (GDP) in Denmark is $34,800 as compared to Poland whos per capita GDP is about $13,100. Hence, income inequality for the EU as a whole can be substantially larger than that for any single European country. (See the CIA World Factbook for these figures)
There can be little statistical doubt that there has been a gradual increase in US household income inequality since 1980, with a particularly large jump in the early to mid 1990s. There are many causes for this increase. There has been a long-term change in the labor market valuing skilled as opposed to unskilled labor increasing the relative income of highly trained individuals. Households have changed, with more single-parent households which traditionally have had lower incomes. Even for a couple where both people earn a good income, divorce will drive down relative household income and putting them at a relative economic disadvantage. The rise in two-income families has widened household income disparity. Two people can generally earn more income than one person working outside the home. Moreover, high income individuals tend to marry other high-income people further exacerbating household income disparity.
There are two important values that seem to be at odds here. It is important for countries to maintain a sense of community identity and common purpose. This affinity can be attenuated with high levels of income disparity. On the other hand, we value meritocracy where earnings and achieve are not artificially limited by forced equality of outcomes. The more severe the meritocracy is, the greater the income disparity is likely to be. A common example of this effect can be found in professional sports where even members of the same team can earn radically different salaries based on their perceived contribution to the team.
It seems that dealing with widening income distribution with punitive tax policies is counterproductive. It reduces growth, which hurts the poor the most, and sets one income class against another income class. An alternate solution is to maximize social mobility in a couple of ways.
First, schools, particularly those for the poor, are largely a failure. The differences between public schools in affluent neighborhoods and poor neighborhoods will tend to broaden income distributions in the following generations. The introduction of vouchers for educational choice will broaden the range of educational options for poor children. It would also likely improve public schools in those very same poor neighborhoods.
Second, the collapse of families is correlated with all sorts of pathologies that curb the prospects of child in such families. As a culture we should encourage the maintenance of stable two-parent families and not pretend that all familial configurations are just as likely to produce successful and happy children. The government can help by easing the economic pressure on young families. One method to do this is to increase the dependent deduction, particularly for young children.
One thing is clear, unless changes are made on the front end of life, there will be little can be done on the back end to reduce the consequences.
This entry was posted on Sunday, December 3rd, 2006 at 3:22 pm and is filed under Economics, Social Commentary. You can follow any responses to this entry through the RSS 2.0 feed.
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Reducing Income Inequality
The Gini Index is a conventional measure of income distribution equality. A Gini index of 0 corresponds to every household having the same income, while an index of 100 corresponds to one person earning all the income. The Gini index in the United States tends to be a higher than in Western European countries. The US Gini index is about 45, while most European countries have Gini indices in the 30s. However, this comparison can be misleading, since European countries individually tend to be more culturally and socially homogeneous than a large continental nation like the US. The more proper comparison is between the US and the entire EU. The total US population is comparable to that of EU and there are significant income disparities from country to country within EU that broaden the net EU income disparity. The per capita gross national product (GDP) in Denmark is $34,800 as compared to Poland whos per capita GDP is about $13,100. Hence, income inequality for the EU as a whole can be substantially larger than that for any single European country. (See the CIA World Factbook for these figures)
There can be little statistical doubt that there has been a gradual increase in US household income inequality since 1980, with a particularly large jump in the early to mid 1990s. There are many causes for this increase. There has been a long-term change in the labor market valuing skilled as opposed to unskilled labor increasing the relative income of highly trained individuals. Households have changed, with more single-parent households which traditionally have had lower incomes. Even for a couple where both people earn a good income, divorce will drive down relative household income and putting them at a relative economic disadvantage. The rise in two-income families has widened household income disparity. Two people can generally earn more income than one person working outside the home. Moreover, high income individuals tend to marry other high-income people further exacerbating household income disparity.
There are two important values that seem to be at odds here. It is important for countries to maintain a sense of community identity and common purpose. This affinity can be attenuated with high levels of income disparity. On the other hand, we value meritocracy where earnings and achieve are not artificially limited by forced equality of outcomes. The more severe the meritocracy is, the greater the income disparity is likely to be. A common example of this effect can be found in professional sports where even members of the same team can earn radically different salaries based on their perceived contribution to the team.
It seems that dealing with widening income distribution with punitive tax policies is counterproductive. It reduces growth, which hurts the poor the most, and sets one income class against another income class. An alternate solution is to maximize social mobility in a couple of ways.
First, schools, particularly those for the poor, are largely a failure. The differences between public schools in affluent neighborhoods and poor neighborhoods will tend to broaden income distributions in the following generations. The introduction of vouchers for educational choice will broaden the range of educational options for poor children. It would also likely improve public schools in those very same poor neighborhoods.
Second, the collapse of families is correlated with all sorts of pathologies that curb the prospects of child in such families. As a culture we should encourage the maintenance of stable two-parent families and not pretend that all familial configurations are just as likely to produce successful and happy children. The government can help by easing the economic pressure on young families. One method to do this is to increase the dependent deduction, particularly for young children.
One thing is clear, unless changes are made on the front end of life, there will be little can be done on the back end to reduce the consequences.
This entry was posted on Sunday, December 3rd, 2006 at 3:22 pm and is filed under Economics, Social Commentary. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.