Fairness and the Income Distribution

Mark Thoma has a piece on whether or not the current income distribution is fair. He concludes that because we lack perfect competition in many (most) of our markets (especially the labor market), the distribution of income is not fair. Workers are no longer receiving the increases in labor productivity in the form of rising wages. Instead, that increase in productivity seems to be going only to the top of the income distribution.

I think this is accurate, but it is possible to tell a story that the gains are going to the top because only those at the top are really increasing their productivity. In Thoma’s view, if this were the case, then our current income distribution would be fair.

This is almost certainly not the case, but even if it were, I don’t think we should be happy with such high levels of inequality. It is not as if we are all doing piece-work in which we get paid for how many widgets we produce. Most of us for for medium-to-large businesses which create some level of value. That value needs to be split between the workers (from the CEO to the janitors), capital, land, etc. While the janitor may be easier to replace than the CEO, the janitor position is still needed for the company to operate efficiently. I think this is a stronger argument against inequality.

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