Getting A Leg Up On Income Inequality

Getting A Leg Up On Income Inequality
Different inputs result in different outcomes, and equity is earned rather than dispensed. Income inequality can be reduced through education and job skills training, tax and regulatory reform, and growth of free trade, say economists and stakeholders. Photo: Pictures of Money.

A key aim of Initiative 1433 to raise the Washington state minimum wage, and a theme accentuated by Governor Jay Inslee in his 2016 State of the State speech, is reducing income inequality.

However, a 2016 paper by four economists for the National Bureau of Economic Research (NBER) finds that the gap between rich and poor has been routinely overblown due to poor methodology. It is one of several such critiques which have begun to surface as the issue has gained currency.

Meanwhile, some state lawmakers and stakeholders say inequality is best addressed through job creation, which in turn is encouraged by workforce skills development, tax and regulatory reform, and expanded trade.

None of this has yet diminished instincts to engineer more equalized economic outcomes.

Washington’s ‘Bigger Journey’

During his State of the State speech in January, Inslee told the assembled joint legislative session, “I think the State Investment Board can help…I’ve asked the..board to…exercise its voting authority to reduce the widening pay gap between CEOs and their workers. I’m encouraging the board to promote this policy with other states and institutional investors. Small steps like this can be the beginnings of bigger journeys.”

That bigger journey now includes I-1433, a statewide ballot measure facing voters in November. It puts the earnings of unskilled workers front and center. The Washington state minimum wage is $9.47, one of the highest in the country. I-1433 would increase it to $13.50 by 2020.

Income Inequality ‘Far Lower Than Generally Believed’

Yet, income inequality is “far lower than generally believed,” according to a paper for NBER by economics professors Laurence J. Kotlikoff of Boston University, Alan Auerbach of the University of California at Berkeley, and Darryl Koehler of Economic Security Planning. (An explanatory summary of the paper, by the authors, is here).

They used raw data from the Federal Reserve’s 2013 Survey of Consumer Finances to measure lifetime spending as a means of determining income inequality.

Measurement Matters 

“The right measure is not how much wealth or income people have or receive but their spending power after the government has levied taxes on those resources and supplemented those resources with welfare and other benefits,” they write.

Others agree. Inequality narrows when government benefits such as Social Security, cash public assistance, and welfare are included as a part of individual incomes, according to a Wall Street Journal commentary by Robert Doar. He is a poverty studies fellow at the American Enterprise Institute, and former commissioner of the New York City Human Resources Administration.

These transfer payments are partly why income inequality is actually less now than it was in the prosperous 1920s, when government benefits were virtually zero, says Brookings Institution economist Gary Burtless.

More Nonfamily Households

Traditional studies also fail to account for the historically high number of unmarried or nonfamily households, currently 52 percent, compared to just 29 percent in 1967. The greater proportion now of single-earner households dampens growth in household income, while per capita income levels tell a different, more positive story.

Nevertheless, the study concluded that income inequality, while much lower than believed, is still significant.

The question is what to do about it.

A Full Menu Of Responses

Some economists say the best route is promoting economic growth through tax, regulatory and immigration reforms, and abolishing the requirements for certain occupational licenses.

Washington Council on International Trade President Eric Schinfeld told Lens that trade agreements help level the playing field between Washington industries and foreign competitors by providing equal access to their markets. This grows exports for local industries and means more jobs, he added.

“The biggest solution to income inequality is for more people to have good paying jobs,” he said.

State Sen. Michael Baumgartner (R-6) is chair of the Senate Commerce and Labor Committee. He told Lens that the state should make it easier for business to hire inexperienced workers and give them training necessary to achieve economic mobility.

“It’s become vogue…in our state to see who can symbolically out-mandate each other with increased government regulations to attempt to address income inequality,” he said.  “A far better way to do it would be to reduce…the high cost of doing business in our state.”

In 2015, Baumgartner introduced two “teen wage” bills intended to reduce youth unemployment. SB 5421 would have allowed employers to pay teens ages 14 to 19 during summer months only the $7.25 federal minimum wage, instead of the $9.47 state minimum wage. SB 5422 would have created a “training wage” of 85 percent of the state minimum wage for teens ages 16 to 19.

However, both bills failed to make it to the Senate floor for a vote. Unless the political makeup of the House changes, any similar legislation is unlikely to pass as well, said Baumgartner.

Even some supporters of minimum wage increases like Sen. Dean Takko (D-19) urge caution on finding ways to narrow the chasm between rich and poor. Takko is a member of the Senate Economic Development Committee.

He told Lens that while he sees income inequality as a growing problem, the best way to solve it isn’t readily apparent.

“When you get into these kinds of things (minimum wage increases), there are a lot of unintended consequences,” he said. “That’s what I’m more concerned about.”

Education, Skills Development Crucial

To help reduce income inequality, the state should invest more in higher education, including science, technology, engineering and math (STEM) programs, said Schinfeld.

Higher level job skills will be increasingly necessary, as automation and innovation make low-skilled work more scarce. Community and technical colleges are seen as especially crucial for skills development in Washington state and the U.S.

Writes Diana Furchtgott-Roth of the Manhattan Institute’s Economics 21 project, “If firms have to pay $15 an hour, they will hire workers who are worth $15 an hour. Those with $8.50-an-hour skills will be left unemployed. The way to higher-paying jobs is by increasing skills, not by artificially raising wages. Education gives the skills to get the first job and then move up to a better one.”


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