Increasing Inequality and Winner-Take-All Economics

One of the mildly worrying economic trends of the last thirty years has been the increasing gap between rich and poor in the US. Many policy analysts conclude that this is the clear result of not following whatever policies they advocate, and thus demand quick action. However, as a recent OECD study shows, most countries have seen increases in inequality since 1980:

Given that countries as varied as Israel, Germany, New Zealand, Sweden and Finland have all seen increases in inequality of similar or greater scale (though not to the same absolute level, since they started lower) to that of the US over the last 30 years, it seems hard to imagine that it is simply a matter of US tax or social safety net policy which is the cause of the trend.

A more likely cause, to my mind, would be that the combination of transportation and technology with decreasing trade barriers have made it possible for there to be “winners” on a larger scale than was possible in the past. A blockbuster movie in 2011 has literally billions more potential paying viewer than a blockbuster in 1970, due to technology, the economic growth the developing world, and the global marketplace for arts and culture. The web allows single sites/services such as Google and Facebook to dominate not just one country or region but the entire world, thus allowing the founders and owners to become richer than they could have if infrastructure and other barriers. And if it seems odd that Finland is among the countries in which inequality has grown a good deal, check to see if you’re carrying a Nokia phone. In a whole range of products and services, it’s possible for a small number of winners to win bigger than was possible thirty years ago. For ordinary workers, on the other hand, the number of customers their work reaches has not necessarily increased. Thus the growth in inequality.

And on a minor side note, it’s interesting that one of the highest levels of inequality on the chart is in Mexico — a country which has a tendency to increase its own inequality and that of it’s neighbor to the north at the same time by exporting many of its lowest earners across the border. Given that this benefits those who cross the border a good deal, I don’t really see this source of inequality as a problem. Poor immigrants from Mexico are generally better off in the US than they would have been at home, even if, in large numbers, their presence can make the US look like it’s inequality is increasing (since the population is not held constant.)

2 Responses to Increasing Inequality and Winner-Take-All Economics

  • Art Deco says:

    Very few people are successful entrepreneurs in export industries, so one might posit that that phenomenon would influence a observation of the most affluent 2% or so or the wealthiest 2% or so having an improved position vis-a-vis the remainder, but not any observed improvement in the relative position of salaried workers (bar the corporate elite) over wage-earners.

    Couple of alternative hypotheses:

    1. Assortive mating. About a third of the labor force in 1957 was female. One might suppose that married women working in 1957 were intensely concentrated among impecunious wage-earning families and doing a good deal of shift work. The relationship between social stratum and women’s working hours now has cross-cutting influences and is not straightforward, with a great many married women in professional- managerial posts where you saw only a few spinsters 50-odd years ago.

    2. Common mindsets arriving accross a range of countries, leading to similar policy shifts (as regards income tax rates, &c.).

  • Very few people are successful entrepreneurs in export industries, so one might posit that that phenomenon would influence a observation of the most affluent 2% or so or the wealthiest 2% or so having an improved position vis-a-vis the remainder, but not any observed improvement in the relative position of salaried workers (bar the corporate elite) over wage-earners.

    Maybe I’m over-extrapolating from personal experience, but it seemed to me that a lesser degree of the same effect might well apply to the whole top 20-30%.

    So, for instance, since hitting a decent salary level and leaving hourly work behind, I spent a number of years working at a consumer electronics company which sourced it’s parts and eventually whole products overseas, and sold in multiple countries, though my segment of the company only sold to North America. I’d tend to assume that resulted in the company as a whole being more profitable, and probably helped drive my salary up in a way that would not have happened without the global supply chain and the IT which allowed me to do analysis or set prices on large numbers of products for the whole continent (and take advantage of the higher price elasticity made possible by the communications medium of the web.)

    Or my current job deals with US sales only — but modern technology allows my role to deal with price optimization for over a thousand stores across hundreds of products, something which software simply didn’t exist fore 30+ years ago.

    So while I and salaried workers who do the type of work that I do for large companies may not be “winners” who take all, scale, global supply chains and technology do certainly make our work very productive compared to what it might have been 30, much less 60, years ago.

    That said, I see a fair amount of explanatory power in your two points as well, particularly 2.

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