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Busting Myths about Income Inequality by Chelsea German

Politicians speak often about income inequality. But that doesn’t mean they are well-informed. Indeed, they propagate four myths about the issue.

  1. Most often, those vying for elected office describe income inequality as static — as though the people who make up each income group do not change.
    The “top 1 percent” or the “top 10 percent” of income-earners are portrayed as exclusive clubs that seldom accept new members or see old and current members leave. No fluidity, no change.
  2. Political figures also have a tendency only to blame income inequality on factors like trade, immigration, an insufficiently high minimum wage, inadequate taxes on the wealthy, or the vague concept of “greed.”
  3. They typically ignore the sizeable role of choices under an individual’s control.
  4. They downplay the role of regressive government regulations.

Reality is much more interesting than soundbites.

Americans often move between different income brackets over the course of their lives. Indeed, over 50 percent of Americans find themselves among the top 10 percent of income-earners for at least one year during their working lives, and over 11 percent of Americans will be counted among the top 1 percent of income-earners for at least one year.

Fortunately, a great deal of what explains this income mobility are choices that are largely within an individual’s control. While people tend to earn more in their “prime earning years” than in their youth or old age, other key factors that explain income differences are education level, marital status, and number of earners per household. As AEI’s Mark Perry recently wrote:

The good news is that the key demographic factors that explain differences in household income are not fixed over our lifetimes and are largely under our control (e.g. staying in school and graduating, getting and staying married, etc.), which means that individuals and households are not destined to remain in a single income quintile forever.

According to the U.S. economist Thomas Sowell, whom Perry cites, “Most working Americans, who were initially in the bottom 20 percent of income-earners, rise out of that bottom 20 percent. More of them end up in the top 20 percent than remain in the bottom 20 percent.”

While people move between income groups over their lifetime, many worry that income inequality between different income groups is increasing. The growing income inequality is real, but its causes are more complex than the demagogues make them out to be.

Consider, for example, the effect of “power couples,” or people with high levels of education marrying one another and forming dual-earner households. In a free society, people can marry whoever they want, even if it does contribute to widening income disparities.

Or consider the effects of regressive government regulations on exacerbating income inequality. These include barriers to entry that protect incumbent businesses and stifle competition. To name one extreme example, Louisiana recently required a government-issued license to become a florist. Lifting more of these regressive regulations would aid income mobility and help to reduce income inequality, while also furthering economic growth.

If our elections were more about the substance of serious public policy issues, rather than demagoguery and soundbites, achieving reasonable solutions could move from the land of make-believe to our complex, dynamic reality.

This article first appeared at CapX.

Chelsea GermanChelsea German

Chelsea German works at the Cato Institute as a Researcher and Managing Editor of HumanProgress.org.

Federal Bureaucrats Are Paid 78% More than Private Sector Workers by Chris Edwards

New data show that worker compensation is rising faster in the federal government than in the private sector. After rapid growth in federal pay during the George W. Bush years, growth slowed from 2011 to 2013 after policymakers enacted a partial freeze on federal wages.

That era of restraint is now over. The latest data from the Bureau of Economic Analysis (BEA) show that wages rose 2.9 percent in the federal government in 2014, on average, compared to 1.7 percent in the private sector.

When benefits such as pensions and health care are included, federal compensation increased 2.8 percent, on average, compared to 1.3 percent in the private sector.

Federal civilian workers had an average wage of $84,153 in 2014, compared to an average in the private sector of $56,350. The federal advantage in overall compensation (wages plus benefits) is even greater. Federal compensation averaged $119,934 in 2014, which was 78 percent higher than the private-sector average of $67,246.

This essay discusses trends in federal and private pay.

The BEA provides compensation data by industry. The figure shows average compensation in 17 major private industry groups, as well as compensation for federal civilian workers, the military, state and local governments, and federal government enterprises (mainly the postal service).

The federal government has the fourth highest paid workers in the United States, after utilities, mining, and the management of companies.

Federal compensation is higher, on average, than compensation in the information, finance and insurance, and professional and scientific industries.

Federal compensation is more than twice as high as compensation in the education industry, and it is more than three times higher than compensation in the retail trade industry.

For more information, see here.

Cross-posted from Cato.org.

Chris EdwardsChris Edwards

Chris Edwards is the director of tax policy studies at Cato and editor of DownsizingGovernment.org.