January 29, 2007

National Data, By Edwin S. Rubenstein

Yes, Tyler, Income Inequality Is Real. And Immigration Is A Cause.

Don’t let the burgeoning gap between rich and poor get you down. It has nothing to do with public policy. No one is rigging the economy in favor of the rich. Instead, according to a recent New York Times op-ed by immigration enthusiast Tyler Cowen:

"Much of the measured growth in income inequality has resulted from natural demographic trends. In general, there is more income inequality among older populations than among younger populations, if only because older people have had more time to experience rising or falling fortunes." [Tyler Cowen, "Incomes and Inequality: What the Numbers Don’t Tell Us, New York Times, January 25, 2007]

Get it? The income distribution is widening because, as a country, we’re getting older, and older people derive more of their income from investments, and the lucky investors rise to the top while the losers fall to the bottom.

A booming stock market only accentuates the trend. It’s natural. Go back to sleep.

But—funny thing—the stock market was booming in the 1920s too. And, if anything, stock ownership was even more skewed toward the super rich then. Yet the Roaring Twenties gave way to a forty-year era during which the rich got relatively poorer in income while ordinary workers got richer:

"Claudia Goldin and Robert Margo have called the flattening of the income distribution during 1930-70 the "Great Compression," and they attribute it to at least three events that fit neatly into this U-shaped pattern, all of which influence the effective labor supply curve and the bargaining power of labor: the rise and fall of unionization, the decline and recovery of immigration, [VDARE.COM emphasis!] and the decline and recovery of international trade and the share of imports." [The Great Wealth Transfer, By Paul Krugman, Rolling Stone Magazine, November 30, 2006]

No one should begrudge rich—or lucky—investors from receiving big capital gains or other investment income. But historically investment income has played little or no role in either widening of narrowing the income gap.

Boring, ordinary wage and salary income is the culprit. And the supply and demand for labor is the key variable. This clearly was the case in the decades following the 1965 Immigration Act. 

Economists Ian Dew-Becker and Robert Gordon have compared wage and salary growth within the richest ten percent of American earners with that of the median wage earner. [Ian Dew-Becker, Robert J. Gordon, Where Did the Productivity Growth Go? Inflation Dynamics and the Distribution of Income, Brookings Papers on Economic Activity, 2:2005. PDF]

Here are their results, adjusted for inflation, for the years 1966 to 2001:

This is pretax wage and salary income, not investment income. Since the mid 1970s, and especially since the mid-1990s, the dramatic rise in the fraction of national income earned by the super rich is due to their labor income, not their investments.

The extreme skewness is historically unprecedented—especially in a period of strong labor productivity growth. Traditionally those gains are either passed on to consumers in the form of lower prices—thereby raising real incomes of a broad swath of workers—or distributed to shareholders as capital gains and dividends, or used to raise the wages of most employees.

What happened? In answering this, Dew-Becker and Gordon take a long view of U.S. economic history:

"To be convincing, a theory must fit the facts, and the basic facts to be explained about income equality are not one but two, that is, not only why inequality rose after the mid-1970s but why it declined from 1929 to the mid-1970s....

"Partly as a result of restrictive legislation in the 1920s, and also the Great Depression and World War II, the share of immigration per year in the total population declined from 1.3 percent in 1914 to 0.02 percent in 1933, remained very low until a gradual recovery began in the late 1960s, reaching 0.48 percent (legal and illegal) in 2002. Competition for unskilled labor not only arrives in the form of immigration but also in the form of imports, and the decline of the import share from the 1920s to the 1950s and its subsequent recovery is a basic fact of the national accounts."

Unfortunately, Dew-Becker and Gordon devote most of their 106-page essay to explicating the extraordinary gains of the ultra rich, suggesting that a small group of sports and media celebrities have perfected the market for their services, while top corporate executives have circumvented—or even overthrown—the market for theirs.

But, Ahnold and Andy Grove notwithstanding, immigrants are fairly rare in corporate boardrooms and Hollywood.

Of particular interest to us, however, is the anemic 11 percent growth in median wage and salary income. Harvard economist George Borjas finds that immigrants arriving from 1980 to 2000 have depressed wages of unskilled native workers by about 8 percent. [George Borjas and Lawrence Katz, The Evolution of the Mexican-born Workforce in the United States, Harvard University and NBER, April 2005. PDF]

Juxtaposing Borjas’s figure with Dew-Becker’s, we can (conservatively?) surmise that, absent immigration, the median worker’s wage would have risen 19 percent instead of 11 percent during the nearly four decades following 1966.

Implication: median wage income would have grown twice as fast, and the gap between median and upper income wages levels would be significantly less, had an immigration moratorium been imposed in 1965.

Notice how moderate we are, unlike the immigration enthusiasts. We’re not saying that immigration is the only reason for increases income inequality. But we are saying it is a reason. It's not natural, it's at least in part the result of misguided public policy—America’s post-1965 immigration disaster.

Tell Tyler Cowan.