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Rising inequality

Planet Money reports on a new OECD study that finds that income inequality is rising worldwide within most countries:

Planet Money cites three possible explanations given in the OECD study for the trend:

1. Robots, etc.

Trade barriers have come down. Technology has advanced. The combination of these two factors has disproportionately benefited highly-skilled workers. You want to be the guy building the robot, not the guy whose job got replaced by a robot.

2. Rich people marry rich people

Inequality is calculated by household, not by individual. And a few changes at the household level have driven some of the increase in inequality.

For one thing, it’s become more common for people to choose spouses in their own income bracket. In other words, rich people are now more likely to marry other rich people, and poor people are more likely to marry other poor people. (There’s a creepy term for this: “assortative mating.”)

Single-parent households and single-person households without children have also become more common. Both groups are disproportionately likely to be at the bottom of the income ladder.

3. Free-wheeling job markets

State ownership of corporations has declined. Price controls have become less common. Minimum wages have fallen relative to average wages. Legal changes have made it easier to fire temporary wokers.

Taken together, these changes have actually improved overall employment levels. (Businesses are more likely to higher hire workers when they can pay lower wages and when it’s easier to fire people.)

But despite the gain in employment, the same shifts may also have driven up inequality. In the words of the report, “the high-skilled reaped more benefits from a more dynamic economy.”

That last explanation is the Paul Krugman explanation. In the 1950’s we had less competition and less economic freedom. Unions were more powerful protecting workers. We’re living in a libertarian’s paradise and of course, the rich get richer and the poor get poorer. I reject that interpretation of what unions actually do, but even if you agree with Krugman, is it really the case that Sweden and other countries have reduced their legal protections for workers?

There is a fourth explanation. The fourth explanation is that these results are statistical anomalies. They come from how we calculate inequality using household income. The underlying cause of the worldwide trend is an increase in the divorce rate that caused an abrupt change in the number of households and an unexpected increase in the labor force participation of married women. It is not a result of a dysfunctional economy or a dysfunctional political system or technological change. It’s the result of an increase in the availability of the pill and other forms of birth control that changed the sexual and marital culture leading to a world where divorce is much more common.

UPDATE: Oops. My “fourth” explanation is partially embedded in the second explanation given above. I read the heading “Rich marrying the rich” and missed the part about single-parent and single-person households. HT to Jacob Goldstein for pointing that out.