Along comes another study demonstrating that income inequality in the United States is getting worse and worse. The wrinkle this time is that it breaks down the growth in inequality by state. Virginia, it turns out, ranks 15th in the country for income inequality in 2008-2010, with the top fifth of households earning 8.1 times the income of the bottom fifth. That compares to the worst and best states, New Mexico with a 9.9 ratio of top to bottom, and Iowa with a 5.6 ratio.
“Pulling Apart: A State-By-State Analysis of Income Trends,” published by the Center on Budget and Policy Priorities and the Economic Policy Institute, also shows that income inequality increased between 1998-2000 and 2005-2007. In Virginia, the bottom income quintile lost $507 in income on average while the top quintile gained $17,138.
The numbers themselves are not terribly controversial. The trick is (1) explaining what is causing the increasing inequality, and (2) figuring out what to do about it.
“Pulling Apart” attributes the growing income inequality to the usual suspects such as globalization and foreign competition, the decline of unions, the increasing technology-intensity of work and the increasing returns to investment income. There’s probably some truth to these explanations, although how much is open to debate. What the study totally fails to consider is the movement of the population from low wage-earning regions to high wage-earning regions.
We can see the migration at work in Virginia as Southside and Southwest Virginia show near-zero growth as young people leave in search of better job opportunities while Northern Virginia grows like topsy. As high-wage Northern Virginians increase as a percentage of Virginia’s population — and NoVa, don’t forget, has among the highest incomes in the country — income inequality gets worse. Is that a bad thing? Would we rather see fewer jobs in Northern Virginia? Would we rather see poor Virginians stay put in Danville and Grundy? Or would we simply wish for the impossible, that NoVa tech jobs locate in small mill towns with uneducated workforces?
Ignoring the migration from low-wage regions to high-wage regions also overlooks the fact that high-wage regions also have a higher cost of living. If you adjust the wage differential by regional cost of living, the gap is not as great as it appears. Any analysis that fails to account for regional disparities in living costs exaggerates the gap in living standards.
The conclusions of this study are all the more suspect when you read the proposals on how to mitigate the growth in inequality: (1) Raise and index the minimum wage, (2) improve the unemployment insurance system, (3) increase the progressivity of state tax systems, and (4) strengthen the safety net.
Hmmm. How well has the minimum wage worked out as an anti-poverty tool? Let’s roll the tape. Santa Fe ($10.29) and Albuquerque ($8.50) have the highest minimum wages in the country. Yet New Mexico ranks No. 1 in the country for income inequality, and No. 10 for the increasing rate of in income inequality. It turns out that Arizona, California and Massachusetts also have minimum wages higher than the federal standard… and all three rank among the top 10 for income inequality.
The problem with progressive proposals like the ones advocated in this study is that they address symptoms, not causes. Sadly, there are reasons why America’s bottom fifth are losing ground. People are not acquiring the education and skills they need to keep pace with the demands of a globally competitive knowledge economy. The more you insulate people from that stark reality by redistributing money to them, the less incentive they have to expend the effort to improve their lot by acquiring those skills.
I am not saying that we should shred the safety net. But I am saying that we should acknowledge the unintended consequences of expanding it. Even with unemployment as high as it is, the U.S. manufacturing sector is unable to fill some 3 million jobs across the country because it can’t find employees with the requisite skills. You want to attack income inequality in the U.S.? Address that gap before redistributing more wealth.