Rebirth of Reason


The Justice of Inequality
by William Scott Dwyer

Liberal media pundits, like Lou Dobbs (see his recently acclaimed book War on the Middle Class) bemoan the increase in income inequality, because they view equality of wealth and income as a moral ideal and a standard of economic justice. But if income equality is the standard of economic justice, then it follows that producers have no right to the product of their work, since those who produce more than others will earn more than others and, by that very fact, create disparities in wealth and income.

It should be recognized that income is a function of wage rates and that a wage rate is simply a price for the value of one’s labor services. If income inequalities constitute an injustice, then so do price inequalities. If differences in wages are unjust, then so are differences in profit. But just as some goods are valued more highly than others, so some labor services are valued more highly than others, with their value reflected in the prices that people are willing to pay for them, which is why professional basketball players earn more than medical doctors or surgeons more than secretaries.

Moreover, relative prices for various goods and services can change as their supply and demand change. A change in wage rates for a particular service reflects either a change in demand for the service relative to its supply and/or a change in supply relative to its demand. It is precisely this ever-changing disparity in prices and wages that reflects the changes that occur in people’s needs and desires for various goods and services and enables their needs and desires to be consistently met.

Why inequality of wealth and income is increasing

It is often noted with some alarm that income inequality has been increasing since the mid-nineteen seventies. But rather than reflexively condemn this phenomenon, it behooves us to ask why? If we want to explain any increase in the inequality of incomes, we must look for changes in the supply of and demand for labor services.

SUPPLY SIDE: On the supply side, we are experiencing slower increases in the number of college graduates entering the workforce than in the number of high school graduates entering the workforce. Other things being equal, this change in supply will tend to widen the gap between the average wages of college graduates and those of high school graduates.

Secondly, we are experiencing a greater influx of foreign workers, who are willing to work for lower wages, because these wages are higher than they could earn in their home countries. Although these immigrant workers are now better off, their willingness to work for lower wages shows up statistically as an increase in the inequality of wealth and income. Income statistics can be misleading in another respect, in that they fail to differentiate between people who earn little at the beginning of their careers but a lot later on, and people who continue to earn low wages throughout their entire lives.

DEMAND SIDE: On the demand side, several important changes are occurring.

The manufacturing sector has been shrinking as the service sector of the economy has grown. Because wages in manufacturing tend to be less unequal than wages in other sectors, the decline in the relative size of the manufacturing sector has increased wage inequality.

In addition, the most rapidly growing industries have been ones that traditionally employ college graduates, which means that the demand for higher salaried workers is increasing relative to those with lower salaries.

The predictable result of all this has been an increase in the difference between the wages of skilled and well educated workers, on the one hand, and the wages of those with fewer skills and less education, on the other. In other words, the increase in inequality of wealth and income that we are seeing is simply the result of a change in the supply of and demand for different kinds of labor services. This inequality is exactly what we should expect and desire, if we want our economic and material needs to be met.

The forces of supply and demand also explain the exceptional salaries that some executives are earning, salaries which are often denounced as “exorbitant” and “morally obscene,” as if there were something immoral about bidding up an employee’s salary in competition with other buyers of his or her labor services. It is, after all, this very process of competition which accounts for the wages and salaries that people typically receive in any job or profession in a free labor market, including the “exorbitant” salaries received by professional athletes who, in addition to business executives, are another target of envious mediocrities.

Inequalities in wealth, no matter how beneficial, cannot be tolerated

If income inequality really were an injustice, then any increase in inequality, no matter how beneficial to the people involved would have to be viewed as undesirable.

Suppose, for example, that you are making $75,000 a year and I am making $100,000; and suppose that our respective incomes double, so that you and I are now twice as well off as before. Would anyone condemn this doubling of income as undesirable? Probably not, but observe that before the incomes doubled, there was only a $25,000 difference. Now there is a $50,000 difference. The gap in our incomes has widened, which by the standard of income inequality constitutes an injustice, even though we are both twice as well off.

Or suppose that two people are making the same income, but one of them decides to acquire additional skills by going back to school and getting an advanced degree, while the other one decides that it’s too much trouble and prefers to work at the same salary. And suppose that after receiving his degree, the more ambitious of the two workers is hired at a higher salary. Who, in that case, is responsible for the income inequality? It is the person who went back to school and improved his earning potential. But if income inequality constitutes an injustice, then it is he, the more industrious and ambitious of the two, who has committed the injustice and should therefore be condemned as immoral.

What these examples illustrate is that if anything is morally obscene, it is the notion that equality of wealth and income is a moral ideal and a standard of economic justice. But try telling that to the chorus of liberal egalitarians who persist in condemning capitalism for its economic disparities.

There is, of course, one important equality that liberals seem impervious to: equality under the law. For further details, see the history of compulsory discrimination masquerading as civil rights legislation.
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