Inequality Did Start Around 1970

Inequality Did Start Around 1970
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In this post by Bob Murphy, some commenters disagree with the use of the early 1970s as the point when income and wealth inequality started to become a problem.

Thomas Piketty has recently gained some fame for pointing this out. His sometimes co-author Emmanual Sanz has done a lot of work pointing to this same conclusion.

The income and wealth divide that is now seen as a problem did start right around 1970 (depending on what type of data you want to look at to judge this, it started as early as 1968 or as late as 1973). The income divide is not fabricated, nor are these dates just pulled from thin air.

Whether income inequality is a problem is another issue. Incidentally I don’t think it is, as I’ve argued here and here.

But rather than look at statistical work by economists, we can use some more common measures to make the point.

income inequality

The Gini index is a very simple measure that shows the degree of income distribution within a country. A Gini figure of 0 would mean that everyone earns the same amount. A figure of 1 means there is a maximum degree of inequality. By this very common measure income inequality in the US bottomed out in 1968 and has advanced ever since.

The ratio of the average wage to the minimum wage is a good way to gauge how much more the average wage earner makes relative to the bottom of the wage-earning scale. (Technically speaking the unemployed are the bottom rung of that ladder, but we’ll just deal with those with jobs.)

A rising ratio means that the average wage earner is enjoying more income growth than the minimum wage earners. Again, this figure was more or less constant until the late 1960s, before it jumped. It was only the outbreak of the crisis in 2007 that really compromised this advance, though even that is now bygone past.

In short, income inequality is advancing. It’s not necessarily a problem, but it has definitely occurred more-or-less starting around 1970.

When I say it’s not “necessarily” a problem I mean that earned income inequality is quite fair. Those who work hard, put in long hours, or have great ideas will see their incomes rise relative to those who lack those skills. They get richer as a reward, but we’re all better off because of them as well. The problem right now is with unearned inequality.

So what could be the source of unearned inequality? How could one group get ahead without having to put in the long hours, hard work or bringing forth great ideas?

How about we look at how income is defined – with money. The period of time right around 1970 was unique in recent history as it was the end of the Bretton Woods era and the start of a pure fiat standard by all the central banks of the Western world. It ushered in a period of unanchored central bank credit creation, and government deficit spending. If one wants to blame something for the inequality that coincided exactly with this momentous event, why not pick the obvious reason?

  • Jason Madden

    You are also missing something rather obvious – this period coincides with mass low-skill immigration and the beginning of deindustrialization – both very significant drags on wages. Capital reaps this decline in wages in profits, which of course begets greater inequality.

  • LVM

    IIRC the issue is income inequality as it relates to inflation.

    • Julien Couvreur

      Hum, the data shows no change in inequality for individuals, only for households. Demographics and social changes seem a factor.

  • Steven Collins

    Bah please, you guys are supposed to be the ones who are actually intelligent about the economy.

    Anyone who is even marginally familiar with Austrian Economics should be smart enough to know that the minimum wage is a purely political construct which tells us absolutely nothing about the economy or inequality meaning the ratio of average wage to minimum wage does not tell us anything about inequality, it tells us about how wage data drives political action and nothing more.

    To really show what this article is attempting to show it should be measuring the ratio of wage income to non wage income, even better if it could be calculated wage income + net small business profits (those reported on personal income taxes) to non wage income. This would accurately measure the shift in income away from wages and into financial instruments and provide a correlation between the growth of fiat money and active central bank interventions and the growth in inequality measured by the GINI coefficient.

    Instead they give us the libertarian populist equivalent of the dreck you find on DailyKos. Low information libertarians and free market types will eat it up but the graph doesn't say what the author claims it says and is utterly worthless meaning the entire article is just random speculation written as if it were presenting new information.

  • David Howden

    Steven Collins:

    that´s a great idea – I look forward to reading about it when you write it up. Please do post a link.

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David Howden is Chair of the Department of Business and Economics, and professor of economics at St. Louis University, at its Madrid Campus, Academic Vice President of the Ludwig von Mises Institute of Canada, and winner of the Mises Institute's Douglas E. French Prize. Send him mail.

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