Professor Robert J. Gordon

In last Friday's Financial Times, economist Sir Samuel Brittan writes that in the heyday of debates about capitalism versus socialism, a common tactic was to calculate that if all incomes were equal, most people would gain only a trivial amount more. And that was without taking into account effects on incentives. It was therefore better for the ordinary wage earner to place his hopes on rising productivity than on state redistribution.

Brittan asks where are we now in this debate?

He says that today, the most interesting analysis of income distribution is coming from the US. Many Americans say that the national dream was that each generation would lead a better life than its predecessor; but they are afraid that this will no longer be true of their own children and grandchildren. US left-of-centre journals are full of calculations showing how a middle-income earner would have to work more hours today than five, 10 or even 25 years ago to obtain basic modern necessities.

The stock Republican reply has been to point to the increase in productivity and average real income in which the US has outpaced most leading western countries.

Briitan says that what is true of the average is not necessarily true of the median - the person in the middle.

Economist Robert Gordon estimates that real median earnings per hour in the US have hardly increased since 1966.

He says that the top 10% have captured 50% of the income gains in the past forty years. The top 1% gained more than all the bottom 50%.

Brittan recommends land and wealth taxes rather than increases in the marginal rate of income tax.

A gross imbalance in earnings is not good for an economy in the long term.

The new Chairman of the Federal Reserve Ben Bernanke said on Wednesday, that groos inequality is detrimental to the economy as workers who feel aggrieved are more likely to oppose free trade and globalisation generally.

Where Did the Productivity Growth Go? Inflation Dynamics and the Distribution of Income Ian Dew-Becker, Robert J. Gordon

Abstract:

A basic tenet of economic science is that productivity growth is the source of growth in real income per capita. But our results raise doubts by creating a direct link between macro productivity growth and the micro evolution of the income distribution. We show that over the entire period 1966-2001, as well as over 1997-2001, only the top 10 percent of the income distribution enjoyed a growth rate of real wage and salary income equal to or above the average rate of economy-wide productivity growth.

Growth in median real wage and salary income barely grew at all while average wage and salary income kept pace with productivity growth, because half of the income gains went to the top 10 percent of the income distribution, leaving little left over for the bottom 90 percent. Half of this inequality effect is attributable to gains of the 90th percentile over the 10th percentile; the other half is due to increased skewness within the top 10 percent.

In addition to its micro analysis, this paper also asks whether faster productivity growth reduces inflation, raises nominal wage growth, or raises profits. We find that an acceleration or deceleration of the productivity growth trend alters the inflation rate by at least one-for-one in the opposite direction.

This paper revives research on wage adjustment and produces a dynamic interactive model of price and wage adjustment that explains movements of labor's share of income. What caused rising income inequality? Economists have placed too much emphasis on "skill-biased technical change" and too little attention to the sources of increased skewness at the very top, within the top 1 percent of the income distribution.

We distinguish two complementary explanations, the "economics of superstars," i.e., the pure rents earned by sports and entertainment stars, and the escalating compensation premia of CEOs and other top corporate officers. These sources of divergence at the top, combined with the role of deunionization, immigration, and free trade in pushing down incomes at the bottom, have led to the wide divergence between the growth rates of productivity, average compensation, and median compensation.

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Related:

America's rich are getting richer and their taxes may push down the US budget deficit to as low as $300 billion in fiscal 2006