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Nope, The Evidence Still Says Income Inequality Is Not A Problem


I recently argued that we don’t have an income inequality problem. My central point was that major studies from the University of Michigan, the U.S. Treasury, and the Federal Reserve have all documented that, despite what we read in the news about “income stagnation,” individual incomes tend to rise over time.

However, I received several emails insisting that we do indeed have an income inequality problem. Given how common four of these arguments are, they are worth addressing.

1. Women have increasingly had to work to support their families. In the 1950s and ‘60s, a single income was enough to support a middle-class family. But today two incomes are required just to keep up. 

This argument is both false and demeaning to women. First, prior to the 1960s, most women stayed home to manage a household, which included chores, cooking, cleaning, laundry, child care, shopping, and other crucial tasks. Women today often still perform these duties, yet we discount their role by considering only employment outside the home—which was traditionally the male role—as work. Ironic we should complain of “patriarchy” while we undermine the traditionally female role and encourage the traditional male one.

The truth is homemaking is some of the most laborious and important work one can do, and it often requires more time than work outside the home requires. According to economists Michael Cox and Richard Alm, the average workweek of a homemaker in the 1950s was 52 hours, while the average for her husband was 39 hours.

Second, the idea that women have been forced to work outside the home to keep up with flat or declining wages is wrong. In fact, working women are a sign of economic advancement. Why? As technology has improved, women have traded working in the home for working outside the home. Advancements like dishwashers, food delivery services, washing machines, nannies, and other child-care arrangements have enabled women to choose whether to be a homemaker.

Many have chosen outside careers, which has resulted in more leisure time. According to a study from the University of Maryland, by the late ‘90s the typical American had 40 hours of leisure time per week, compared to just 35 hours of leisure time in 1975. Meanwhile, the average work week in 1960 was 38.6 hours, while the average work week in 1996 dropped to 34.4 hours. In a word, women work outside the home not because they have to, but because it affords a higher standard of living.

2. Wages have stagnated since the 1970s.

The myth of wage stagnation is commonly perpetrated by looking at average real wage statistics. But there are several problems with using average wages as a measure, which I’ve explained before, herehere and here. Briefly, one big problem is that average wage statistics are skewed downward due to the large wave of immigration we experienced in the 1980s and 1990s. Even though many immigrants were finding work and improving their lives, the influx of low-skilled work pulled wage averages downward, which makes it appear like there was stagnation when there really wasn’t.

A more accurate measure is median income statistics, which progressive Stephen Rose has used to show that, adjusting for inflation, wages have increased by 33 percent since 1979. Furthermore, other measures of economic well-being, such as total compensation and wealth, have also steadily increased since the 1970s. See this graph, for instance, from the St. Louis Federal Reserve:

Furthermore, while there is no doubt that real wages have gone up, simply observing wages doesn’t tell us their true value. For instance, if a male who earns $20,000 in 1960 earns, in inflation-adjusted dollars, $25,000 today, that may not look like much of an increase. But what if the prices of goods and services relative to wages dropped over that period? What if milk costed $1 in 1960 but costs $0.50 today?

In fact, that is precisely what has happened with regard to many goods and services. But even where there hasn’t been a drop in absolute dollars, it takes fewer work hours today to afford things like food, cars, TV, vacations, clothing, and sundry other items relative to work hours required in 1960.

Moreover, these goods and services have vastly improved over time. An average car today, for example, has technology that surpasses that of even the most advanced vehicle from 1960; and so, too, the size and comforts provided by today’s homes and apartments exceed those of 1960, which brings me to the next point.

3. Home prices are higher today than in in 1970.

Not only are today’s homes bigger, but they include far better technology and comforts, like central air and heating, extra rooms and bathrooms, furnishing, kitchen appliances, and garage space. Simply looking at the price of housing in 1970 versus the price of housing today fails to reflect these improvements. But accounting for the extra space in the average home today, in terms of work hours housing costs have declined.

“In 1997,” Cox and Alm document in “Myths of Rich and Poor”:

a new, single-family home cost six times what it did in the early 1970s–in dollar terms. After adjusting for the increase in the size of new homes and higher pay, however, most of the inflation disappears. A 1,975-square-foot, median-priced new home cost 9,961 hours in 1970 and 11,039 hours in 1997, or 1,078 additional hours. Over 27 years, then, the average work time required to buy a new home rose only 10 percent, or the equivalent of six months. Mortgage rates are a percentage point lower than they were in the early 1970s. On a house with a 5 percent down payment, the break in interest payments will trim the work cost of a new house over a 30-year purchase by 1,561 hours, a reduction of nine months on the job needed to pay for the house. Another consideration involves a decrease in household size during the past quarter century. Each residence today houses, on average, fewer people than it did in 1970, so in buying a median-sized home each person is getting more square feet. If we take into account shrinking household size, then an individual’s living space is actually 6 percent cheaper than it was in 1970. (emphasis added)

4. The cost of a college education has skyrocketed.

College costs have spiraled out of control, and certainly require attention. But this is due in large part to government subsidies, not to declining wages. When government subsidizes something, prices rise. For instance, if government gave us all $5 coupons to purchase yogurt, the demand for yogurt would spike and prices would rise so that supply meets demand. At that point, people would then complain the cost of yogurt has increased so government would provide us $6 coupons, and so the cycle would continue.

The same principle applies to college tuition. Is it any surprise that the two areas where government plays its largest roles—education and health care—have witnessed the most unmanageable cost inflation? As with health care, university costs would decline if we promoted market forces rather than increased government subsidies.

In sum, statistics clearly demonstrate income gains and better standards of living than ever before. Still, the important point is not to get bogged down in statistics, especially when discussing statistical units like “families,” “households,” “the top 1 percent” or even “average” or “median” wages. The truth is individuals and how they fare over time is what’s important, and in that regard the evidence is irrefutable: People move up the economic ladder over the course of their lives.