Sunday, November 1, 2009

Income inequality and globalization

Stolen directly from marginal revolution:


Positive feedback in inequality

Here is a very nice summary of some important trends from Arnold Kling.  Arnold buried the lede on this one so a hat tip to Tim Kane at Growthology.
I think that perhaps the most important trend of the past thirty years is the increased importance of cognitive skills relative to physical labor. Obviously, this has been going on for more than just the past thirty years, but during the past thirty years we saw an acceleration. This has had a number of consequences:
1. It changed the role of women. Their comparative advantage went from housework to market work.
2. This in turn, as Wolfers and Stevenson have pointed out, changed the nature of marriage. Men and women look for complementarity in consumption rather than in production.
3. This in turn leads to more assortive mating, with achievement-oriented men looking for interesting mates rather than for good maids.
4. This in turn leads to greater inequality across households. It also fosters greater inequality among children. The children of two affluent parents are likely to have much better genetic and environmental endowments than the children of two (likely unmarried) low-income parents.
5. Inequality is exacerbated by globalization and technological change. If your comparative advantage is basic physical labor, you have to compete with machines as well is with workers from the Third World.
The net result is an economy that has improved considerably for people with high cognitive skills, but which has improved only somewhat for people with relatively low cognitive skills.

I think this is a remarkably interesting area of study.  Paul Krugman did a lot of work on this as well, pointing out that for a specific set of people, economic growth has been significantly more beneficial.

It's most interesting to point out how almost all the people who think this level of inequality is a good thing are those who have the cognitive skills necessary to benefit.  The King always thinks a monarchy is a good idea.

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