Some other social science blogs set me to thinking about income inequality.
What I want to look at today are two rather less obvious but I think more interesting questions that arise when we move away from static comparisons between countries and rather focus on comparisons drawn over time. One of my central gripes with the Varieties of Capitalism literature, which is by now moribund due to a preoccupation with demonstrating the superiority of the putative Scandinavian model, is that it fails to attempt to account for changes over time when drawing its comparisons between countries.
For example, take a hypothetical situation in which three countries are compared across a range of qualitative vectors. At t-1 it may be that there exists n degree variance between the countries in question. Suppose we repeat the same analysis for two further points in time and record a similar degree of variance. Do we then conclude that there still exists a significant degree of divergence among the three model cases?
Perhaps, but that depends on what question we are trying to answer. For example, it may be that all three of the models in question have registered increasing degrees of income inequality yet at the same time the degree of difference between the models has remained the same or similar. Such a result would suggest that there is common underlying force driving income inequality in all three models despite the formal persistence of institutional variation. Static comparisons force us to focus on the variation because that is all we have to compare. If we were instead to compare trends over time we may be forced to account for some other variable along side of institutional variation which is of a higher order in causal determination.
Below I have drawn a simple graph of US, Swedish, British, and Canadian GINI scores over roughly the same points in time.
When I see a plot like this I am immediately suspicious of any purely technical explanation such as a skill biased technical change. The Canadian case might fit this description but the US and the UK look very suspicious. And I suspect changes in the political economy of macroeconomic regulation from good old fashion union busting resulting in the break-down of collective bargaining along side tight money, privatization, regressive tax shifts, in the context of increasing international competition—in short politically driven restructuring—provide a more promising description of the forces responsible for the rising GINI and their relative timings than any technical explanation rooted in some natural process of technological change which privileges highly skilled workers. Indeed, in Sweden despite the increasing levels of income inequality there still remains a relatively high degree of wage compression (that is, there is a narrower spread in the initial distribution of income). But that said all four trends are up with Canada appearing to have come a little late to the rising income inequality party. And that too seems odd given the trend in the US. If this were some shift in the mix and composition of some aggregate production function why was Canada so out of step with the US? If anything Canada has been more dominated in the past by services than the US. So yes institutional variation (including juridical regulation) matters but there seems nonetheless to be some kind of broader force at work here, which appears to be engineered.
But then Smith was out to prove that god was an engineer and Marx perhaps was right: god is us. Now for Kuznets. Here is the riddle: why does the Canadian income inequality index look like an inverted Kuznets curve when plotted for the last 35 years? I thought the richer we got the more egalitarian income distribution was suppose to be. Give that man a faux Nobel Prize. I wait for a REAL economist to explain it away.
Source data can be found here: http://www.lisproject.org/keyfigures/full_kf.xls