More on the income inequality gap
Just came across this article on income inequality by Nobel Prize economist Gary Becker and Kevin Murphy. It’s relevant to my post earlier today on the new OECD report.
Becker and Murphy argue that the positive side of income inequality in the U.S. is that there is a significant payoff for those having a college education compared to those without. And in today’s world, there is a greater demand for more educated and highly skilled workers:
Why is the earnings gap widening? Because the demand for educated and other skilled persons is growing. That is hardly surprising, given developments in computers and the Internet, advances in biotechnology, and a general shift in economic activity to more education-intensive sectors, such as finance and professional services. Also, globalization has encouraged the importing of products using relatively low-skilled labor from abroad. At the same time, world demand has risen for the kinds of products and services that are provided by high-skilled employees.
Becker and Murphy take issue with some of the proposed approaches to address the widening income gap, including a more progressive tax structure:
For many, the solution to an increase in inequality is to make the tax structure more progressive—raise taxes on high-income households and reduce taxes on low-income households. While this may sound sensible, it is not. Would these same individuals advocate a tax on going to college and a subsidy for dropping out of high school in response to the increased importance of education? We think not. Yet shifting the tax structure has exactly this effect.
A more sensible policy is to try to take greater advantage of the opportunities afforded by the higher returns to human capital and encourage more human capital investment. Attempts to raise taxes and impose other penalties on the higher earnings that come from greater skills could greatly reduce the productivity of the world’s leading economy by discouraging investments in its most productive and precious form of capital—human capital.
Don’t think the OECD economists read this article ‘though.