A comment on inequality and regulation

Let me be blunt by stating my position so that you don’t have to guess which side of the fence I am on: I don’t believe that inequality in earnings is a problem. Well, more precisely, I don’t believe that ismuchof a problem. What I wonder is what share of all earnings inequality is explained by choices regarding education and labour supply decisions.

For example, my girlfriend works longer hours than I do and will likely earn a  much much much much greater income (and a consequently larger tax bill) than I will. However, she and I allocate different value to our free time. I enjoy coming back from work on Mondays around 6PM to grab a coffee and read some boring books on economics, history or whatever fancy-shmancy thing my brain craves. On the other hand, I accept that I will earn much less than she will. Some men might freak out if their girlfriend made more than them, but heh, I am a post-modern man! To be very honest, once I reach the income I feel adequate for my need, I don’t feel the need to work more and I will prefer to spend my time on having geeky fun (from watching Star Trek to reading and writing).

In a two persons economy, my girlfriend faster income growth rate would create a widening earnings gap. Yet, I don’t care. She found happiness in her own choices and I found mine. Earnings gaps are not a problem as long as they reflect choices. Now, why am I saying all this?

Because recently I stumbled upon a fabulous paper by Nicolas Pistolesi in the Journal of Economic Inequality that studies inequality of opportunity in the United States. Circumstances like being born in an economically challenged area (short for “ghettos” and “hoods”) or in poor and uneducated families might affect your chances at upward mobility and creates a permanent income gap. This would be an “inequality of opportunities” because some individuals, by virtue of birth, lack access to opportunities at upward social mobility. Yet, Pistolesi found that the share of earnings gap (which has increased since 1968) explained by circumstances has declined since 1968 and stood at around 18% in 2001. The remaining explanatory factors are those linked to goin’to’skool (yes, I can spell mommy!) and labour supply decisions.

Yet, I am wondering (on a blog…) about what part of “labour supply decisions” is affected by labour regulations. You see, since the 1950s, the share of the US workforce that requires a permit to work has grown from below 5% to above 20%. If regulations are considered “endogeneous circumstances” where certain interest groups attempt to limit entry (and competition) under the pretext of “protecting the public” (yes, I need to be protected from a bad haircut…wait…I am bald), they could be limiting the ability to make choices about supplying labour in the most productive ways for workers.

Hence, I am wondering out loud (well…”out written”)  about the possibility of replicating the Pistolesi study but by adding in a possible way to measure the effect, probability as an instrumental variable, of the regulation of trades and crafts on labour supply decisions and hence on “inequality of opportunity”. Does it make any sense or am I sounding like an evil bald-version of Mitt Romney who says that “regulations are stiffling the economy”?

2 thoughts on “A comment on inequality and regulation

  1. Income inequality is just another fancy word socialists use for jealousy. You probably know of the statistics in China : Gini of 0,29 in 1980 but extreme poverty at 85%; in 2005 the figures were 0,42 and 35%.

    For the rest : it seems to me that complaining about income gap is saying that a janitor should earn the same as a cardilogist

  2. Incorrect Moutongris.Complaining about the income gap can be a good thing to do if inequalities are long-lasting in the sense that your path in life is determined. However, I don’t believe (and I am stating a philosophical point here) that there are any “natural barriers” to mobility that cannot be quashed, destroyed or removed eventually. Most barriers are fiscal and regulatory in nature.

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