Lies, Damned Lies and Inequality

The Department of Economics in Trinity College, the Institute for International Integration Studies (IIIS) and the Dublin Economics Workshop today jointly hosted a conference entitled “Irish Economic Policy for the Crisis: What Next?“. Over the next few posts, I’ll be discussing the ideas posited by the many and distinguished speakers, both in the context of Ireland and more generally.

Firstly, Brian Nolan of UCD discussed inequality in Ireland. He mentioned several standard indicators of inequality. In Ireland’s case, these statistics have exhibited stability over time. Thus, he concludes that inequality has neither increased nor decreased dramatically over the last several years. The truth can sometimes be concealed by statistics.

His argument hinged on the distribution of income by decile. Over the last twenty years, the proportion of GDP accounted for by the bottom half of Ireland’s income distribution has remained fairly consistent in each decile. The same can almost be said for the top half of the economy, except that lower top-earners have lost part of their share to upper top-earners.

However, these figures only one interpretation of inequality. They specifically ignore the changes in productivity that have occurred in the economy. If we look at the distribution of productivity growth by income, the picture of entrenched inequality is shattered.

It could be contentious, but let us assume that productivity increases came mainly from workers in the top half of the income distribution. There are many reasons to suppose this. Economic growth would have been driven by export industries in the early years of the economic boom, an area that tends to be populated by skilled high-earners.

Meanwhile, their increased purchasing power allows wages to rise in other sectors (such as the service industry) without any increases in productivity within these sectors. It should be noted that many industries saw wage increases driven by simple supply and demand, the classic case being the construction industry.

But this claim would imply that, the income gap between rich and poor has not risen despite an increase in the productivity gap. Note though that this could simply be explained by low unemployment pushing up wages at the lower end of the scale. However, it raises several interesting questions.

Firstly, the classical distinction between progressive and non-progressive industries (i.e. those that see productivity increases, and those that don’t) is somewhat tired – it could easily be argued that a teacher provides a more valuable service for her student today than another student ten years ago, even if she’s teaching them the same thing. Surely the market value of labour is synonymous with the product of that labour, and certainly cannot exceed it?

Secondly, are standard economic indicators deficient by ignoring the distribution of productivity growth? Note that such factors could only be used to contribute towards understanding of the rate of change in inequality, because of the difficulty in computing absolute levels of productivity. If so, the data might not then paint the same picture demanding more government spending.

© The Free Marketeer 2009

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