What's Causing The Rise In Income Inequality?

Rising income inequality, and declining social mobility in the US, demands an explanation from labor economists.  Many economists have resisted explanations which challenge economic dogma, or which raise questions about the supremacy of the American economic system.  Some economists have simply denied that inequality has been growing in the US.  Others have looked for explanations that don't raise questions about economic dogma, or about the American way of life.

Economic dogma assumes that the market price is always right.  There are many examples of this approach. For example, it has been used to justify the rapid growth in CEO compensation.  If CEO compensation is growing faster than it has in the past, it must be because the labor market for CEO's has changed.  The job requires more skill than it has in the past, and there is a small supply of individuals who have the skills demanded by the market.  Therefore, the market has placed a premium on those rare skills.  There are many problems with that explanation.  For example, it does not explain why the CEO labor market in the US is different from the CEO market in other advanced countries.  The compensation premium for CEO's in Europe and Japan has not grown as fast of it has in the US.  This suggests that the CEO market in the US may be different than similar markets outside of the US.  The US CEO market may reflect successful rent seeking by US CEO's, and weak governance by Boards of Directors.  It may also reflect changes in the US culture which are supportive of the CEO reward system that has developed in the US.

Another approach to the inequality problem is to focus on skill differences in the general workforce.  Some argue that rising inequality is primarily driven by changes in technology.  Those with technical skills are rewarded with a wage premium. Again it assumes that he market price is always right. It also assumes that there has no change in the relative bargaining power between labor and management.   This explanation fails explain why income inequality has grown faster in the US than it has in other advanced economies that use the same technology. It also suggests that the rate of technological change in the last decade is dramatically different from the technologies used in the recent past.  More importantly, it has the advantage of shifting attention away from the top of the economic pyramid where most of the growth in income has occurred.  It also fails to address the implications of globalization on the labor market.  The supply of labor has increased, while the demand for labor has been relatively constant.  Moreover, the price of labor is much lower in less advanced economies.  Lower labor costs increase corporate profits, and rising profits increase the share of income going to top management and corporate shareholders.