Opinion and Economic Analysis

Hicks: Labor markets respond to choices, good or bad

January 18, 2014

Income inequality is hardly a new issue, but the many signs of a widening gap between rich and poor will fuel debate for some time to come. So it is good to try to understand some of the dimensions of the matter.

There are many causes to income inequality, most significantly that labor markets value different skills in different ways. Tending bar pays less than teaching finance, which is far less well compensated than pitching in game six of the World Series.

The overwhelming difference between these skills is not a gift of birth, but the result of hard work over many years.

Technology plays a role in income disparities. A century ago, teaching finance was more lucrative than baseball. Now that millions of people can watch a baseball game, there are fewer, far-better-paid athletes. Bartending remains largely unchanged from its low-tech days, and the pay has not changed much, either.

Personal choice plays heavily into lifetime earnings. The decision to try a highly addictive drug, drop out of high school, or have a child while in your teens is a virtual guarantee of a life on the edge of poverty. Indeed, for healthy adults in persistent poverty, effectively all have made one or more of these three choices.

High earners also make choices. They forgo short-term benefits for longer-term gains, enduring years of education or training. Most of this is not aimed at getting rich, but out of love for medicine, invention or baseball.

Perhaps most important, nearly every one of us could make more money elsewhere, doing something else, but choose to live different lives, perhaps raising children and living near family or in a place we like. Again, these are choices.

Chance also plays a part. For those who are ill or disabled, wealth will be far harder to acquire than it is for those who are essentially healthy.

While any number of policy tools can move wealth around, aggressively transferring wealth from those who’ve made one set of choices to those who have made others will never form the basis for a fair or enduring government.

I can already hear the accumulated voices of the poverty lobby screaming at my callous pronouncement that income inequality is the result of choices. Yet, these are powerful truths that urge us to action. If we really want to reduce poverty (and I am not really sure everyone does), we are going to have to help people make better choices, not just subsidize them when they do not.•

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Hicks is director of the Center for Business and Economic Research and a professor of economics at Ball State University. His column appears weekly. He can be reached at cber@bsu.edu.

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