Monday, July 21, 2014

Exporting Income Equality and Importing Income Inequality

Recent OECD statistics show that the USA and Canada are becoming more unequal in income distribution, i.e. there is a bigger gap between high earners and low earners.  This is of interest because the stability of a society seems to be correlated with some degree of income equality.

The Gini index measures the extent to which the distribution of income or consumption expenditure among individuals or households within an economy deviates from a perfectly equal distribution. A Gini index of 0 represents perfect equality, while an index of 100 implies perfect inequality.

In 1983, according to the OECD, the USA had a Gini index of 33.6, in 2012 it was 38.9 (more unequal).  The trend in Canada is similar but less pronounced.  Why is society becoming more unequal in terms of income?  Here in the USA, this kind of question usually engenders a lot of crackpot theories from the left and right, with names like Ayn Rand, Marx, and Hedge Funds being thrown about.

My idea is that perhaps we have exported our income equality.  In the early to mid 20th century, Western countries manufactured most of the goods they consumed.  We have an old ironing board that is "Made in Canada".  Try to find an ironing board made anywhere but China today.  If you only had a high school education in the 1960's or 70's, you could usually get a job in manufacturing, transportation, or services.  The well-paying jobs that provided a better living were the manufacturing jobs, making cars, appliances, and electronics.  

Today, most low tech manufacturing is done offshore in China, Mexico, or other low cost countries - we exported those jobs to reduce labor costs.  The people who do these jobs offshore make a comparatively good middle class living in their countries - they can afford a small apartment, appliances, decent food and clothing.  So these countries, like Mexico and Brazil, are becoming more equal, although nowhere near as equal as the USA.  

Today, in western countries, the majority of low skill jobs are in service industries that cannot go offshore - food industry, retail, customer service..  These jobs pay less than the old manufacturing jobs of the 60's and 70's.  At the same time, our rate of high school graduation in the USA is unchanged at 70% from 1990 to 2009 - this means that 30% of people do not graduate from high school and must take unskilled jobs.

So my theory is that moving manufacturing offshore and not producing more skilled workers (high school graduates) means that the USA will inevitably have more income inequality.  The solution is to increase the skills of workers through training and education so you can retain as many high value-high paying skilled jobs as possible.

4 comments:

  1. The big part from the tax should be invested in the education department by the govt Because the education in a country make the country able to take a part in a progressive nation as college paper writing service.Through education the people can increase their living standard and also help their country to be a progressive nation.

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  3. Good explanation of equality and inequality. A perfect example of how things should be explain, something that business students via resume writing service reviews can use as reference.

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