Politics & Policy

Adding At The Botton

EDITOR’S NOTE: The August 31, 1992, issue of National Review, set out to set the record straight about the Reagan administration’s economic record. We reprint the content of the issue here.

The soundbite about the richest 1 per cent of the population is untrue in itself, as Alan Reynolds demonstrates above; it also lacks context, particularly the historical trends in the share of total income received by the richest 5 per cent of families.

Income was much more unequally distributed in the first half of this century. In 1913 the richest 5 per cent received about 30 per cent of aggregate income (excluding capital gains), and this share held until 1933, when it began a slow but steady decline, followed by a rapid decline during World War II. By 1947 the share of the top 5 per cent had fallen to 17.5 per cent of aggregate income; it declined further (to about 15.5 per cent) in the 1960s and 1970s but increased in the 1980s back to the neighborhood of 17.5 per cent. This small increase in the share of the rich is in sharp contrast with the soundbite’s message of run-away inequality.

Should government attempt to reverse increase in inequality? Those who view any increase in inequality as horrendous are already proposing schemes for redistributing income. However, any response requires that we first know what caused the increased inequality, a relatively small change in historical perspective.

Many commentators attribute the change to the Reagan Administration’s tax policies. But the changes in income distribution look quite similar whether based on pre-tax or post-tax income. Moreover, general increases in the inequality of earning started a decade before the 1982 tax cut. So we must look to other causes.

Accumulating research shows that changes in the labor market have resulted in higher wages for college graduates and depressed wages for young men with lower levels of schooling. These shifts in relative wages are partly due to advances in technology, boosting productivity and increasing the demand for highly skilled workers. This trend occurred not only in the United States, but internationally.

Within the United States, however, another trend is also at work: a huge wave of immigration has reduced the wages of low-skill workers. In the 1970s 4.5 million immigrants were legally admitted, and many more came illegally; in the 1980s legal immigration rose to 7.4 million, with additional millions of illegal entrants. The vast majority of immigrants from Central and South America (who make up about one-half of the total) have considerably lower levels of schooling than native-born Americans. (In 1980 Mexican immigrants on average had completed only seven years of school, five years less than the average worker in the U.S.). The most obvious effect in the U.S. is to add a new group of workers with lower skills who are available for low-wage work (by U.S. standards). This depresses average wages and income in the lowest brackets. The immigrants themselves typically enjoy large wage increases over what they were earning in their native countries. And while some low-skill native-born workers may find their wages lowered still more by this increased supply, many move up into higher brackets.

Not only have relative wages and incomes of Hispanics in the U.S. declined over the past 15 years as the Hispanic population has nearly doubled through immigration, but wage inequality among the Hispanic population has also increased, and this is probably due to the increasing diversity of that population. The earnings gap widened between native-born Hispanics, with higher education levels and English-speaking skills, and the new Hispanic immigrants.

In the past, waves of immigration caused transitional increases in wage and income inequality that faded as the immigrants’ skills increased. The much greater levels of income inequality that existed early in this century were probably partly traceable to the very heterogeneous amalgam of immigrants and native-born Americans. We again appear to be moving through one of these transitional phases of increased inequality due to surges in immigration. Only this time we have an additional factor–increased demand for skilled labor due to technological changes and trade patterns–adding to inequality.

Mrs. O’Neill is a professor of economics at Baruch College, City University of New York and Director, Center for the Study of Business and Government.

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