A Turning Point for Income Inequality?
Policy + Politics

A Turning Point for Income Inequality?


The rising income inequality of recent decades could be headed for a turn. That intriguingly optimistic idea, suggested by J.P. Morgan economist Michael Feroli this week in a note to clients, hinges on some other shifts happening in the economy. And it depends on economists being right about the causes of rising inequality, as Feroli explained:

The economics profession has arrived at an uncharacteristically high degree of consensus regarding the cause of this trend: the pace of technological advance has outstripped the ability of the educational system to supply the human capital skills needed to utilize this technology, leading to out-sized earnings gains for those who have such skills (the so-called college wage premium).

In other words, over the past few decades, people in developed economies who were educated enough to take advantage of the technological advances won higher wages. Those who couldn’t keep up with the technological advances got left behind financially as well. In what economists have described as a race between education and technology, education lost – and so did many workers.

Those trends may have started to turn in recent years, Feroli writes. College enrollment rates have climbed, driven in part by a bad economy that made the investment in education more appealing. A study published last year by the Federal Reserve Bank of Chicago found that college enrollment increased slightly more than would have been expected based on historical trends, with about 2.1 million more people going to school between 2007 and 2010 than trends from earlier in the decade would have suggested.
On top of that, the pace of technological progress may be slowing, Feroli suggests. His evidence: “In the second half of the 1990s, the real price of computer equipment declined at a 24 percent annual rate, indicating an extremely rapid pace of increase in computing power. Over the last five years those prices have fallen at only a 6 percent annual pace, consistent with progress occurring at a much slower rate.”

Feroli says some data indicate that structural factors have been closing the gap between “haves” and “have nots” for several years, but cyclical factors – the Great Recession and not-so-great recovery – have overwhelmed that improvement. “As the economy hopefully moves back toward full employment, this alone should reduce inequality,” the economist writes. “Furthermore, if the leading explanation of inequality is correct, and recent trends in education and technological advance continue, we could see a further compression of wages.”
It’s reason for optimism, tempered by a few large caveats. First, those recent trends in education and tech could still fall off. People might pull away from school as an improving labor market calls or the rising costs of college scares them off. Technology could gallop ahead once again – and are the real prices of computer equipment a good gauge of technological advancement at this point anyway?

Second, as we mentioned at the top, the economists could be wrong – hey, it’s happened before. The technology vs. education theory may not really explain what’s caused the income gap to widen. “The technology story of rising income inequality actually doesn’t fit the data when you look at it,” says Heidi Shierholz, an economist at the liberal-leaning Economic Policy Institute. “A huge share of the increase in wage inequality is happening within education groups and within occupation groups.”

Feroli acknowledges all those risks to his inequality forecast and calls them “legitimate.” Still, he writes, “it is not a stretch to say that the next few years have the best chance in a generation to witness a narrowing in income inequality.”