Here's the Kind of Inequality That Really Matters

Moneybox
A blog about business and economics.
Dec. 17 2013 8:44 AM

The Two Inequalities

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Well-paid, but still working for the man

Photo by Maddie Meyer/Getty Images

I really like this chart from Catherine Mulbrandon highlighting the Lorenz curve (a key measure of unequal distribution) for a bunch of different types of income. Several cool points fall out of the chart right away.

incomeguide

One is that the distribution of capital income is much more unequal than the distribution of wage income. Which is to say that the gap between LeBron James' salary and the salary of a middle-class sales manager at the Miami Heat is small compared with the gap between Micky Arison's investment income and the income earned by that sales manager's 401(k) holdings. All discussions of inequality that talk about labor unions compressing the wage scale, human capital, superstar effects, etc. are talking about inequality of labor income. But even though labor income is unequally distributed it isn't all that unequally distributed.

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In contrast to labor income, we understand the sources of the unequal distribution of capital income extremely well. Capital income is unequally distributed because wealth itself is very unequally distributed. There's no substantial controversy about this. The distribution isn't skewed because investing skill is massively skewed; it's skewed because money-to-invest is skewed. Now of course you can get wealth in various different ways—you could found a business, you could get a high paying job and save a lot, or you can get your fortune the old-fashioned way and inherit it. But once you've got your fortune, wealth begets wealth.

Last it's interesting that the distribution of business income looks exactly like the distribution of capital income. There's a big theoretical problem with how to understand the income of small-business owners and other entrepreneurs. Do they make money because of the labor they do for the firms they own, or do they make money because they own the firm they work for? It looks from this chart like business owners' earnings is driven by their ownership of the business rather than their labor for the business.

These points all matter because they point to the existence of two different axes of inequality. One is the wage gap between the high earners and the low or median earners. But the other is the traditional class conflict between the people whose earnings are dominated by work and the people whose earnings are dominated by wealth-possession. In particular, a structural shift in the economy to become less favorable to people who work for a living (including rich people like King James) in favor of people who own things (including the relatively modest fortunes of "middle-class" retirees living off accumulated savings) isn't necessarily going to do anything to the wage-distribution curve. And yet the clash between peasants and landowners, between factory workers and factory owners, and now between people cheered by the S&P recovery and those saddened by the wage slump is probably the more significant political issue.

One issue this poses is that analysis of political issues in terms of "income" quartiles can get pretty misleading. A married couple where Dad earns $65,000 a year and Mom works part-time bringing home $15,000 a year is in the fourth quartile of the American income distribution. A 70-year-old widower whose $2 million in savings bring him an annual income of approximately $80,000 is also in the fourth quartile. But their policy-relevant economic interests are unlikely to have very much in common since in reality their financial situations are entirely dissimilar.

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.

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