Income inequality has been a popular economic discussion in developed countries. One study suggests a new approach to looking at the problem. From the end of World War II to the 1970’s the share of income going to capital was mostly trending downwards. From the 1970’s to today, though, that trend has switched upwards. During this time the share of income going to capital has ranged from around 20%-30%. A recent study from Matthew Rognlie from the Massachusetts Institute of Technology shows that the rise in capital across developed countries has mostly come from housing. He argues that people are getting rich off their homes. In terms of income inequality, Rognlie suggests concern should be shifted away from the split between capital and labor, and more towards variables such as within-labor distribution of income. His reason being no! – ban that phrase! that the divide between capital and labor is more about housing. What do you think about Rognlie’s different approach to income inequality in developed countries?
Source: http://blogs.wsj.com/economics/2015/03/19/two-new-research-papers-that-could-upend-our-understanding-of-economic-inequality/
5 Comments
The graphs certainly make a convincing argument for Rognlie. I had heard of a degree of insourcing happening as foreign labor costs go up and communication difficulties and delays dissuade some foreign companies from foreign production, but there is still too much of a comparative advantage story to attribute much of an effect to the issues in the below Atlantic article.
http://www.theatlantic.com/magazine/archive/2012/12/the-insourcing-boom/309166/
With income inequality such an issue, especially in the United States I am very interested in this perspective. To be able to pin point a reason behind this inequality brings us closer to practices and policies that may help close the gap.
Could the shift in income have something to do with shifts in service and manufacturing industries? I know that manufacturing’s share of GDP has increased since the 1970’s while the service industry’s share has increased. Or am I just seeing a correlation and hoping that one causes the other?
Return to capital for top income earners decreased precisely because of the U.S involvement in two World Wars. While the importance of capital has diminished, the top earners today have become so called “working rich”. The top 0.1 percent income earners gather wealth from high wage such as entrepreneur/CEO salary. For this reason, I think Rognlie is correct in suggesting to shift our attention to variables such as within-labor distribution of income.
My sense is that housing wealth would not explain the US end, because the big gains at the top have been in non-housing wealth. A $20 million mansion is nothing for the truly rich, but may be the entirety of assets for a middle-income family. In contrast, the role of inherited wealth and of takings by senior executives in stock options and the like have both risen.
Now within-labor inequality may have risen, too. But before speculating further, we all need to do some research to see what data are available, if we can find a decomposition of the sources of inequality.
Finally, what is true of the US may not be what is at work in developing countries. Again, that’s a data question.
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