A primer on inequality

Haven't voted yet? Read this speech by a worried central banker

Published November 7, 2006 4:44PM (EST)

If there was one piece of timely educational material that How the World Works could hand out to voters before going to the polls today, it would be the speech given yesterday by San Francisco Federal Reserve Bank President Janet Yellen. (Thanks to Mark Thoma, of Economist's View, for the link.)

Janet Yellen has appeared in this space before, a mere three weeks ago. Like most central bankers, she oozes sober forethought. Which makes her analysis of growing inequality in the United States all the more compelling. When wild-eyed bloggers rant about the rich getting richer at the expense of everyone else, they're easy to ignore. Central bankers who live and die by economic data are tougher to avert one's eyes from.

That said, Yellen doesn't make any points that haven't been made before. But on a day when control of Congress is being decided, they are worth repeating. And no matter what happens today, these trends are likely to continue, absent signficant changes in how this country is governed.

...Over the past three decades, much of the gain from excellent macroeconomic performance has gone to just a small segment of the population -- those already in the upper part of the distribution. As a result, inequality has grown. This inequality, coupled with increased turbulence in family incomes associated with job displacement and restructuring, sheds substantial light on the sources of the disappointment and concern that show up in the opinion polls.

The pressures of globalization are playing a role in depressing the income of the middle class, but it is far from the only factor. Equally important, or perhaps even more important, is the pervasive influence of technology, or as, the economists like to call it, "skill-biased technological change."

In recent years, globalization and skill-biased technological change may have been working in combination to particularly depress the wage gains of those in the middle of the U.S. wage distribution... The explanation goes like this. The surge in the use of new technologies that began in the mid-1990s led to major changes in the way business was conducted and organized within the U.S. and globally. Technological change and globalization, especially outsourcing, complemented the skills of highly able workers performing non-routine work requiring problem-solving skills. This explains the continued rapid increase in real wages at the top of the distribution. In the middle of the distribution, however, technology and globalization had the opposite effect -- substituting for workers performing routine or repetitive tasks and depressing their wages. At the bottom of the distribution, these developments have had little impact during the last decade. By that time, many low-wage jobs that could be eliminated by technology had already vanished. Most of the remaining low-wage jobs involve manual and service work that cannot easily be automated. This may explain why, as I said, wages in the middle not only rose far more slowly than those at the top, they also rose more slowly than those at the bottom of the distribution during the 1990s.

Shutting down the borders and imposing economic sanctions on foreign nations, as some Democrats are proposing, won't solve the problem posed by technological change. Beefing up the safety net and pouring more resources into education is essential. Compared to what other economically advanced countries are doing, the United States is a disgrace.

...It is instructive to draw some comparisons between the U.S. and other countries. In regard to inequality, over the past few decades it has risen more in the U.S. than in most other advanced industrial countries in the Organization for Economic Cooperation and Development, or OECD. Indeed, by most measures, the U.S. ranks near the top (some might say the bottom) in terms of household income inequality. The inequality gap in the United States is associated with higher levels of overall and child poverty relative to a majority of OECD countries... Among the 30 OECD countries, the U.S. ranks above only Mexico, Korea, and Ireland in gross public social expenditures as a share of GDP spending, and it does the least to target government taxes and transfers towards moving families out of poverty. Not surprisingly, outcomes such as infant mortality and life expectancy are worse in the U.S. than in most advanced industrial countries. As for workplace protections, unemployment insurance in the United States replaces a smaller share of income and offers benefits of shorter duration, while the minimum wage is quite low relative to average wages in the U.S. Moreover, U.S. firms face far fewer restrictions in their ability to fire or lay off workers than do firms in most other OECD countries.

Again, no matter who wins or loses today, these economic trends are here to stay. If anxiety about the economy doesn't translate into a change of power in Congress now, it will only heighten the tensions next time around.

By Andrew Leonard

Andrew Leonard is a staff writer at Salon. On Twitter, @koxinga21.

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2006 Elections Federal Reserve Globalization How The World Works