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Income Inequality

In order to become more prosperous we need to become more productive. Greater productivity requires more capital (e.g. machinery, software), and better methods. Both require the workers at every level to develop skills to operate in higher productivity environments. This guarantees to a mathematical certainty that income inequality will increase as our overall standard of living goes up.

As we become more productive prosperity increases as defined by a rise in the median income (half earning more than the median and half earning less). Participating in step with the rising median income requires increasing ones skills.

In particular, to keep pace, we must increase our intellectual skills. The reason for this is that, beyond a very basic level of productivity, rising prosperity means intellectualizing the production process. Muscles and stamina give only a small boost to productivity. The difference in output between the strongest and average human being is small by comparison with the intellectual harnessing of the power of machines.


We all start life with a labor market value of zero. Some never develop much in the way of skills. Business owners (especially small business owners) will tell you that it is not uncommon for employees lacking even the simplest skills like showing up on time. Such people continue to have a minimal value in the labor market.

With the median income rising as we become more productive and skilled, it therefore follows that those who never develop skills will fall further and further behind. This is the most basic reason for rising income inequality. It is a metaphysically required byproduct of rising prosperity. The same analysis applies to every level of skills as each skill set becomes increasingly valuable as productivity and prosperity rises.

There is another aspect of this analysis which relates to uniquely talented individuals and the increase in the total output of the economy. When the average person earns barely more than subsistence, there is little left for discretionary purchases like a movie ticket, music album, a day at Yankee stadium or an I-Phone. As the economy grows the money available for discretionary spending grows faster. However, the number of uniquely talented individuals barely increases at all. The number of professional football players in the NFL has grown perhaps four fold in the last 50 years while the economy has grown more that twenty fold. Therefore, the best (even average) players must experience a much sharper rise in income than the median. Also, the number of top 10 songs each week have not increased at all.

The fairness of this situation is a philosophical, not an economic issue. Future installments will show that any attempt to reduce this inequality effect will do significant damage to the economy as a whole and make everyone worse off. Only relatively poor or small homogenous economies can have muted inequality effects.

Ask yourself which economy is better for everyone (given that the poorest get enough to eat, clothes and basic shelter) – one where the deciles increase arithmetically or geometrically? The arithmetic progression is 1, 2, 3, 4, 5, 6, 7, 8, 9, 10. An example of a geometric progression of income deciles is 1, 2, 4, 8, 16, 64, 128, 256, 512, 1024. This example used a geometric factor of 100% difference in deciles. A stark difference would also occur at substantially smaller differences.

Even the lowest incomes today earn a standard of living far superior to even royalty 250 years ago. Not long ago poverty meant not having enough food. Nobody has to be concerned with enough to eat (obesity is the problem today) and no matter how rich you were back then you could not travel faster than a horse, and you had to defecate into a pot or a pit with no plumbing.

2 Responses to Income Inequality

  1. Clint

    July 21, 2009 at 1:22 pm

    “Not long ago poverty meant not having enough food.”

    It still means that, though less. It also means typically resorting to eating cheaper, lower quality food.

    But a far bigger problem is that it also means not having access to health care, which means having a shorter life expectancy.