Studer Community Institute

Viewpoint: Income distribution

November 24, 2014
/ Rick Harper
/ government

Increased global trade and improvements in technology contribute strongly to greater household incomes around the world. But the improvements aren’t uniform either across nations or within nations. The hollowing of job markets in wealthier nations that is associated with globalization and automation contributes to greater income inequality within those nations. Data from the IRS allow us to examine some of these income changes over time in the U.S. The Statistics on Income dataset provides data at the ZIP code level. Publicly available data go back to 2001, although later years report a greater variety of information for each area. For Florida, we can identify 895 ZIP codes with enough returns in both 2001 and 2012 to allow for meaningful comparison. These data reflect the prevailing wisdom that inequality is increasing. Households that had higher adjusted gross income before tax in 2001 showed a higher income growth rate over the next dozen years. There is a highly statistically significant 34.9 percent correlation between income in 2001 and subsequent income growth rates. If we look at those 446 ZIP codes that had the highest income in 2001, they registered an average cumulative income growth rate of 38.4 percent over the following years until 2012, while the bottom 446 registered a 27.3 percent growth rate. Though 27.3 percent growth is hardly trivial, the challenges of slow income growth become apparent when looking at inflation-adjusted measures of income. Using the consumer price index as a measure of inflation, a household would have needed a 29.6 percent increase in income just to keep 2012 purchasing power equal to 2001 purchasing power. In Florida, 486 ZIP codes, or 54 percent, failed to beat inflation over that period. There are several economic drivers at work. With technology prices falling and the cost of hiring rising, traditional middle-class jobs in high-income economies are increasingly at risk. The job categories with the best growth are those that create or manage the new technologies and those that require face-to-face contact and can’t be automated. Less-skilled workers, particularly those with outdated skills, face intensified competition even as the demand for their services stagnates or falls. This change is a primary driver of increased income inequality. Many skilled workers can sell directly (the NBA will play before crowds in China, Brazil, Germany and Turkey this season) or indirectly (via profitable export markets) across national borders, and the demand for their services grows rapidly. The newest Maersk Triple-E series ships can carry 18,000 20-foot containers across the Pacific Ocean in about two weeks and only need 22 crew members. Fast and efficient shipping from the factories of Southeast Asia has revolutionized the global geography of manufacturing, allowing wages to rise in new manufacturing hubs around the globe. But shipping cost changes are small compared to the impact of automated processes on the way goods and services are produced. A commonly used rule of thumb in industry is that it makes sense to replace a worker with a robot if the cost of that robot is less than double the annual wage for displaced worker(s). Automated technology becomes more cost competitive with labor every year. Research shows that our tax system then alleviates some of this inequality, although not to the extent seen in other developed nations. The net result is an increase in income inequality that can be seen in Florida and around the nation.

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Viewpoint: Income distribution

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