T Nation

Poor Get Richer?


Is shrinking income inequality a good thing in and of itself? I'm not certain. I do think that outsourcing/globalization is a good thing overall -- the income numbers have to be looked at vis a vis cost of living, not just in vaccuum.

However, as the article says, be careful what you wish for... you just might get it.


The Poor Get Richer
Blue-collar workers are making salary gains -- but don't cheer yet.

By Geoffrey Colvin, FORTUNE senior editor-at-large
March 13, 2006: 10:13 AM EST

(FORTUNE Magazine) - I have good news and bad news. The good news is that income inequality in the U.S. -- after 30-plus years of steadily increasing -- may be decreasing. The bad news is why that trend is reversing. It looks like another lesson in how profoundly a globalizing economy is upending what we thought we knew.

Rising income inequality has settled comfortably into America's big economic picture as a reliable--and much lamented--megatrend. Starting around the late 1960s, U.S. incomes started to become more disparate. The trend was remarkably steady. Recessions might slow it down or briefly reverse it, but mostly it just marched on.

While such a large tendency has many causes, the chief explanation centered on education and skills. The late 1960s were arguably high summer of the era in which a man with 12 years of schooling could work in a unionized factory or trade and earn a solid middle-class or even upper-middle-class income. Then began the age of the info-based economy in which higher education really started to pay. The "skill premium" began growing dramatically. The college graduate's income started beating the high school graduate's income by a wider margin every year--and income inequality began to swell.

That explanation makes sense, and the data support it. But now it appears just possible--based on the latest research available--that the whole chain of causation is falling apart. Wait before you cheer.

The evidence is in a new Fed study of family finances, the latest in a triennial series. It shows modest but clear signs of incomes converging rather than diverging. Between 2001 and 2004 (the most recent year for which data are available), incomes of the poorest 20 percent of families increased while incomes of the richest 20 percent fell. Basically, the poorest families' share of total incomes grew, and the richest families' share shrank. Incomes became just a little less unequal.

What could that trend reversal mean? The most obvious explanation seems highly counterintuitive: The skill premium, the extra value of higher education, must have declined after three decades of growing. The Fed researchers didn't pursue that line of thought, but economists Lawrence Mishel and Jared Bernstein at the Economic Policy Institute did, and they found supporting evidence in the new Economic Report of the President, issued within days of the new Fed survey. It cited Census Bureau data showing that the premium had indeed fallen sharply between 2000 and 2004. The real annual earnings of college graduates actually declined 5.2 percent, while those of high school graduates, strangely enough, rose 1.6 percent.

That is so contrary to the conventional view of this major economic trend that it demands explanation. One possibility is that it's just a blip. Could be, but remember that 2004, when the readings started going haywire, was a year of strong economic growth, low unemployment, and rising productivity, offering no obvious reason to expect weird results.

The other main possibility is that something unexpected and fundamental is changing in the way the U.S. economy rewards education. We don't yet have complete data, but anyone with his eyes open can see obvious possibilities. Just maybe the jobs most threatened by outsourcing are no longer those of factory workers with a high school education, as they have been for decades, but those of college-educated desk workers.

Perhaps so many lower-skilled jobs have now left the U.S.--or have been created elsewhere to begin with--that today's high school grads are left doing jobs that cannot be easily outsourced--driving trucks, stocking shelves, building houses, and the like. So their pay is holding up.

College graduates, by contrast, look more outsourceable by the day. New studies from the Kauffman Foundation and Duke University show companies massively shifting high-skilled work--research, development, engineering, even corporate finance--from the U.S. to low-cost countries like India and China. That trend sits like an anvil on the pay of many U.S. college grads.

We need more evidence before concluding that we're at a major turning point in the value of education to American workers. But it certainly feels like one, based on what we can observe. Higher education still confers an enormous economic advantage. Just not as enormous as it used to be.

As for income inequality, pretty much everyone has always hated it, and its growth was a certain cue for handwringing and brow furrowing. Well, it's not growing anymore. Because our best-educated workers are earning less, and the incentives for higher education may thus be declining, the result could be a more uniform--and lower--standard of living. Be careful what you wish for.

FEEDBACK gcolvin@fortunemail.com Top of page
From the March 20, 2006 issue


That's the socialist goal, right? Bring everyone down to the same level...


ehh... A four year study on our economic system during a trying part of our history is hardly enough info to go off of.

I have read several articles that claim that the big corporate structures are becoming a thing of the past. Paving way for more and more home based business that operates over the internet.


Yes, because many jobs that entail thinking can be outsouced to India, for example, or anywhere else that has a good educational system.

However, let's not mischaracterize the fact that the fairly well paid are hitting wage pressures as an indication that the poor are better off simply because the better off are less better off than before.

Oh wait... sorry, I know that mischaracterization is really the only tool available to counter rational thought.


I think that is a funny way of looking at things

for instance 80% of the population is middle - lower class

Middle would take up the majority of that percentage.

leaving us with two extremes and one normal class.

strangly enough though only 2% are able to fully retire (which in my opinion means 98% are broke).

All 98% share one thing in common they have debt which doesn't add to their income. The only difference between all groups below the 98% mark is one thing what they overspend on.

There really is only two classes 98% and 2%


Quack! Quack! I smell a huge mischaracterization being thrown on the back of liberals again...

While I am very readily able to admit that social programs have been poorly done in the past, creating vast entitlements and dependency, it is silly to imagine that is what anybody actually wants.

What is probably wanted, at least I want this, is to make sure that the people at the bottom have a better chance at becoming productive members of society so that they can contribute instead of being a drain. If that happens, we are ALL better off!

Now, yes, I know, we all have the same country to play in, so that opportunity exists for all -- but the reality of the situation is that too many people end up not getting anywhere.

Instead of crowing about how some of us are much better human beings than others, surely there are ways to combat this high failure rate without developing dependencies and entitlements?


My comment was a joke, not a systematic refutation of socialism.

There may be ways to combat this "high failure rate." However, socialists tend to advocate stealing from the few to give to the many, creating poverty for all (except party leaders, of course). So great, if you think there are ways, go ahead and try to think them up... that doesn't change what socialism has been and continues to be in the real world.


Maybe not the goal but it sure seems to be the result.


Yes, because nobody can get rich in a western country?

We'll have to inform Bill Gates immediately!


If we would allow more people to die or become slaves due to an inability to calculate income to debt ratios the world would be a better place.


Good point; I mean, we really do have to do something with all these people becoming slaves and starving to death in the US.

Oh, wait...


This sounds kinda like guesswork. This is only a four year period, and the numbers aren't that large. The other thing is the question is how much this trend will continue. That is, is it a short correction, or is the value of a college diploma going to continue to fall?

Oh yea, in the field of REALLY disturbing trends of intellectual outsourcing. Some hospitals are having x-rays sent to India to be read. Genius idea that, send your x-rays to a country where you don't need a medical license to practice. Not to mention the docs will never really get to know the x-ray techs, and will never have a face to face conversation with them. Makes you feel safe, eh?


Outsourcing is a powerful tool that when used correctly will enable us to invent.

i.e. we get rid of our jobs that are holding us back in some way, and create new jobs through the advancement of our technology.