Author: Vincent Geloso

Who would want the income equality observed in the 1950s and 1960s? According to most datasets, the lowest point of income inequality was achieved in those years, during the heydays of the welfare state. These years were also years of great economic growth (although I have my doubts on the speed of growth because of the way national accouting statistics estimate the input of female workers) and technological advance. Most people would want to go back to those days, I really don’t.

Why? Because everyone was the same and because everyone was the same, inequality was low! At that time, most workers were employed in industrial activities, had very similar consumption habits, similar time spending habits and very few opportunity for leisures. According to Michael Cox, you entered the workforce below age 18 and spent roughly 49 years on the job. In short, mostly everyone worked 45% of their “awake lives”. We were a homogeneous society.

Where was the time for hobbies? In fact, what were the hobbies of those days? Limited in numbers, the choices about where to spend your remaining free time (under the constraint of having to meet some basic needs) did not leave great room for personal self-accomplishments. Now, we spend 28% of our awake lives at work. The rest of the time, we are studying, travelling, reading, drawing, painting, exercising, competing in sports, relaxing, cooking for fun, etc.

In the growing multiplicity of choices offered to individuals as productivity increased (we now need fewer and fewer hours to meet our basic needs), we have become a society where preferences are more heteregeneous than ever before. Isn’t it completely normal that “income inequality” has increased in such a society? With so much free time and opportunities, income is not the best measure of the utility derived by individuals. True, we need to be rich as a society to be happy in order to possess the luxury of free time and personal accomplishments, but dollar signs do not measure the gap in inequality of “pleasure”, “happiness” or “life satisfaction” enjoyed by many.

I would trade “Homogeneous Egalitaria” for “Heteregeneous Inegalitaria” any day of the week.  In the second, income inequality rises as happiness inequality diminishes. In the first, income is better spread but utility and personal wellbeing is not…

Francis Fortier de l’IRIS poste récemment un billet qui démontre que les changements de prix de l’alimentation affecte principalement les plus pauvres. Il a absolument raison, les fluctuations de prix des denrées alimentaires ont tendance à affecter les ménages pauvres démesurément. Cependant, M. Fortier se base sur une mauvaise compréhension de la réalité des ménages pauvres et oublie une réalité importante.

Premièrement, l’étude qu’il cite vise à démontrer que l’offre de produits est plus vaste dans les zones plus aisées. Le problème, c’est que les individus pauvres ont beaucoup plus tendance à se déplacer et à magasiner les prix en raison du fait de la sensibilité qu’ils ont à l’inélasticité de leur demande face aux changements de prix. Aux États-Unis, lorsqu’on tient compte du biais de substitution dans les données sur les prix, on remarque que les indices de prix surestiment l’inflation d’environ 0.6 points de pourcentage et que ceci enfle artificiellement les statistiques sur la pauvreté d’environ 20%. Au Canada, ce biais de substitution est généralement plus bas – aux alentours de 0.2 points de pourcentage –  mais il est beaucoup plus gros chez les ménages à personne unique – catégorie ou la majorité des plus pauvres se retrouvent. L’étude que M.Fortier cite ne tient absolument pas compte de la capacité des consommateurs à se déplacer, ce qu’ils ont tendance à faire comme le démontrait l’étude américaine mentionnée plus haut.

Deuxièmement, le phénomène décrit par M.Fortier n’est pas un phénomène d’inégalité, mais bien de revenu réel qui est complètement indépendant du niveau d’inégalité entre les individus. Les quartiers économiquement pauvres auront des commerçants qui offrent des biens à la hauteur du revenu réel desdits habitants. Une augmentation du revenu réel de ces personnes conduira à une augmentation de la diversité des produits offerts aux plus pauvres. Et à cet égard, le Québec est effectivement champion. Le panier le plus élementaire de consommation (recommandé par Santé Canada) est 11% plus dispendieux en termes de temps de travail qu’il ne l’est en Ontario et 24% plus dispendieux qu’il ne l’est en Alberta. C’est pour cela qu’on voit que les Québécois, indépendemment de leur revenus, doivent allouer une portion plus importante de leurs budgets à l’acquisition de l’alimentation jugée nécessaire.  La réalité décrite n’a aucun lien avec les inégalités, mais bien avec la productivité réelle absolue.

I’ve been thinking about income inequality recently and I’ve just noticed something about public employment and inequality. In general, a ceteris paribus, public sector workers obtain a wage premium. In short, two identical workers (same characteristics) will not have identical wages if one of them works in the public sector. In Canada, that wage premium stands at roughly 10%. It ought to be mentionned that this it does not include the value of employment security and non-cash benefits (retirement funds payments).

If someone is paid a 10% premium above what productivity would justify (considering age, experience, education, marital status), taxpayers must end up paying the bill. Hence, there is a transfer from private sector workers to public sector workers which is not at all linked to productivity. This creates a form of inequality. An inequality which is morally offensive because it is not an inequality resulting from merit. It is an inequality that results from the greater ability of public sector unions to lobby for working conditions improvements which are not justified by productivity growth.

In the debate about inequality, why is nobody considering this form of inequality?

I am less and less convinced about inequality as the result of markets producing “unfair” results. I am more and more conviced that governments have a lot more to do with rising inequalities. I got this idea from left-wing economist James K. Galbraith at the University of Texas who pointed out that there was a positive relationship between defence spending and inequality. This lends some backup to the libertarians who favour strategic disengagement in order to reduce defence spending (I am one of those who actually thinks that US spending levels on defence lead to substantial crowding-out) since one of the benefits of controlling defence spending would be a reduction in inequality. Similar results have also been found in the case of Turkey, where the army is itself an interest group lobbying for power.  In another country where the army has a lot to say about policy, Iran, the same result has also been observed.  

If some of you don’t see the public choice argument I am making, here it is in simple words:  where politicians stand to gain from posturing about defence, they will do so and will promise gains to industries that are politically connected. The result? More income inequality…

Again, this takes me back to my critique of Miles Corak argument that “outcomes influence process”. True, inequality begets more inequality, especially if the inequality is the result of government decisions to allocate public funds to a given set of politically connected individuals. But the answer in that case is not more redistribution but less intervention, period.