21st Feb 2012

Regulated income inequality

We discussed income inequality in the USA and Toronto already as well as its severe effects on the society. Unexpectedly, this is not only due to liberated markets as one might think, moreover also trade and money policy adds to income inequality.

The free trade policies carried out by the US put a large part of the non-college educated workforce in direct competition with low-paid workers from developing countries like China. However, highly educated professionals, like for example lawyers or doctors are often not part of this competition.

As Greg Mankiw lays out in his blog post:

The ratio of the average income of U.S. physicians to average employee compensation for the United States as a whole was about 5.5. Germany’s was the next highest, at only 3.4; Canada, 3.2; Australia, 2.2; Switzerland, 2.1; France, 1.9; Sweden, 1.5; and the United Kingdom, 1.4.

Similar data can be surely also found for lawyers and similar professions.

Additionally the world market value of the dollar which is based on the policies by the Fed has a huge effect on this. The high paid professionals, which are not subjected to international competition profit from a high dollar, since they can even buy more for their money, whereas it forces the small workers to accept even lower salaries in order to stay competitive.
Finally, we all know that dollar policy and trade agreements are largely controlled by politics and finance and not the outcome of a free market.

(inspired by Dean Baker)