Episode #17 – Income and Wealth Inequality, Part 2

We’re back for part 2, and we’re just going to jump right in.  Here’s the episode if you missed it:

Income and Education


In the last thirty years in the US, the number of college-educated people living in poverty has doubled from 3% to 6%, which is bad! And then consider that during the same period of time, the number of people living in poverty with a high school degree has risen from 6% to a whopping 22%.

Crash Course jumps from discussing the causes of income inequality (see part 1) to the statistical results.  I assume this is to imply that technology is widening the income gap so fast that even college graduates are living in poverty.

These numbers are designed to be shocking, and they are.  Aren’t schools supposed to give students skills to be successful in real life?  And shouldn’t colleges do this to a greater extent, considering students are spending tens of thousands of dollars on it?

If you’ve been to college (or high school for that matter) in the past 10 years, you already know the answer to this: High Schools and Colleges, with some exceptions, are not teaching students the skills they need to survive in the modern economy.  Crash Course implicitly blames the number of high school and college graduates in poverty on technology (and other causes they cite which we’ll also get to), while there is no responsibility placed on the failings of these educational institutions.

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Over the last fifty years, the salary of college graduates has continued to grow while, after adjusting for inflation, high school graduates’ incomes have actually dropped. It’s a good reason to stay in school!

Crash Course’s argument here implies that going to college will give you steady salary growth because college classes give you the skills to get a higher paying job.

This (again with some exceptions) is not necessarily true.  High-paying employers might discriminate against those who haven’t graduated from college, which would also explain the statistics.  Many employers see a college degree one of the few ways to judge a candidates ability, since they often shy away from real skills-testing for job applicant since it might be considered an illegal form of discrimination.

This is not to say that someone couldn’t learn marketable skills in college.  There are many areas (engineering and computer science come to mind) which actually give students the skills they need for the job market.  It’s no surprise that these majors are also the highest paying for college graduates.  But the majority of college students do not choose these skills-based majors.

Other Causes of the Income Gap

There are other reasons the income gap is widening. The reduced influence of unions, tax policies that favor the wealthy, and the fact that somehow it’s okay for CEOs to make salaries many, many times greater than those of their employees.

Let’s look at each of these in turn:


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Unions, by themselves, are collective bargaining groups for employees that generally demand higher wages from the employer.  Originally, they served as a centralized mouthpiece for a large group of workers whose individual voices might not be heard.  Their greatest power is the threat of striking if their needs are not met.

In economic theory, unions would help the employer and employees identify the market rate (what the employer is willing to pay and the employees are willing to work for), but it wouldn’t necessarily reduce income inequality.  Let me give you two simplified examples:

In scenario 1 there is a company with 10 employees and 1 employer.  Employees demand a $1/hour raise or they will strike, and the employer obliges, taking the money from either his own salary (which is rare) or from investor equity.  The workers are paid more and there is less income inequality between the employees and employer.

In scenario 2, the workers demand $5/hour more.  The company cannot afford this price and remain profitable, so they invest in machinery that will reduce the number of employees needed to 3.   The remaining employees might get that $5/hour raise, or the employer might look outside of the union for employees, since it’s now easier to fill the fewer positions available.  In scenario two, 7 or more employees are now being paid $0/hour, which widens the income gap.

Unions today, due to abundant legislation related to them, are not the unions of economic theory, and they if they were, they do not necessarily narrow income inequality.  Although people might show you a graph of union membership next to a graph of income inequality, one can only speculate that this correlation equals causation.

Tax Policies That Favor the Wealthy

As Mr. Clifford points out later in the video, the United States has a progressive tax system, meaning that the rich pay a greater share of their income above a certain level to taxes.  Occasionally, the rich may receive a tax cut.  For example, the Bush Tax Cuts lowered the taxes on income over 400k from 39.6% to 35%.  In this case, Mr. Clifford is 100% correct, since higher taxes on the rich (absent everything else) does reduce income inequality as a whole.

“Somehow It’s Okay for CEOs to Make a Lot More Money Than Employees”

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How about the framing of this sentence?  It may not seem “okay” for someone to make more money than someone else, but as economists, the Crash Course hosts should know that wages are not decided by comparing them to other people in the company.  We’ve talked about this before on this blog, but wages are decided by the amount of value you produce to the company (as a wage ceiling), as well as how much the employer (in this case the board of directors) and the prospective CEO negotiate for.

I am incredibly surprised that Crash Course implicitly argues that it’s not okay for two people to negotiate a salary irrespective of two other people negotiating a salary for a completely different position in the same company.  How did this script make it passed the editors on Crash Course?  Isn’t someone there an economist?

I think Mr. Clifford gets it, since later in the video he says:

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When different jobs have different incomes, people have incentive to become a doctor or an entrepreneur or a YouTube star – you know, the jobs society really values.

This doesn’t really talk about how wages are determined, but I’ll take it.

Wow guys.  There is still a lot more to say, so we’re going to have to make this a three-parter.  Thanks for reading and look forward to part three soon (Sunday hopefully)!

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Episode #17 – Income and Wealth Inequality, Part 1

What a fantastic topic this week: Income and Wealth Inequality.  I don’t think I ever go a week without seeing an infographic online that shows data on wealth or income inequality, some sort of scale or graph to illustrate the differences, and a quote from Bill Gates or Warren Buffet on why taxes should be raised on the rich.  #FeeltheBern.

Since Crash Course did a pretty great job talking about productivity, capital, and technology in Episode #6, I was hoping that they would revisit these topics in explaining what wealth is and how people (rich and poor alike) become wealthier without doing much work.  They more or less covered this topic before: greater capital accumulation allows businesses to take risks by investing in research for technological upgrades.  These upgrades make goods cheaper and more accessible to consumers.

In this episode, however, Crash Course took a completely different angle.  This episode was more like a Bernie Sanders infographic than a real discussion of the pros and cons of income inequality.  Arguments advocating for government intervention were given consideration, while arguments against were either strawmen or described in a way to discredit the idea.  While this episode does not explicitly advocate for one side, it certainly does it implicitly.  All of this will be explained in this two-part blog post on this week’s episode, but let’s get started at the beginning:

Difference Between Wealth and Income

Crash Course started off great by distinguishing between wealth and income: wealth is current assets, and income is the new wealth that is flowing in.  They accurately show the difference in wealth between continents (and major countries like China), and then followed with a video graphic showing the differences in income quintiles throughout the world.

Crash Course never really makes a major point with this.  It seemed a bit rushed (they have to keep every episode around 10 minutes, after all), but I wish they had discussed how income taxes only affect new money coming in and not old money already earned.  In other words, when Warren Buffet or Bill Gates argues to increase the income tax, they are not advocating for taxes that would affect their wealth, but rather the income of others.

(side note: Crash Course messed up their graphic.  They mentioned how Europe and North America account for less than 20% of the world’s population, but in the graphic they put a greater than sign)

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Globalization Helps Everyone

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Most economists agree that globalization has helped the world’s poorest people, but it’s also helped the rich a lot more.   Harvard economist Richard Freeman noted, “The triumph of globalization and market capitalism has improved living standards for billions while concentrating billions among the few.

Last week Crash Course talked about how Globalization significantly helps the poor and is the greatest contributor to ending extreme poverty.  This week however, helping hundreds of millions of people out of extreme poverty pales in comparison to how much richer the rich are becoming.

It was very surprising to see two very different emphases on globalization in consecutive weeks on Crash Course.  It is no doubt accurate to point out that globalization creates greater income inequality (just as the Industrial Revolution did, as they note), but it’s not necessary to put this fact in such a dark light.  Crash Course here is supposed to be talking about the causes of income inequality, not editorializing it as good or bad.  This comes later in the episode (and in this blog post).

Skills and Income

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Economists point to something called “skill-biased technological change.” The jobs created in modernized economies are more technology-based, generally requiring new skills. Workers that have the education and skills to do those jobs thrive, while others are left behind. So, in a way, technology’s become a complement for skilled workers but a replacement for many unskilled workers.

Crash Course does a great job at explaining how technology affects the job market.  Technology raises the salaries of skilled workers, as one person can create more revenue (or work product) for his/her business.  Meanwhile, the technology puts unskilled workers out of their current job.  This widens the difference in income between skilled and unskilled workers.

But this is not the same as saying that unskilled workers have no jobs now because of technology has made them obsolete.  On the contrary, technology has made thousands of unskilled jobs available (Taskrabbit) in addition to millions of low-skill jobs (Uber, Airbnb hosting).  As we’ve mentioned before on this blog, technological developments create shifts in the economy, moving people from certain areas of the economy to others.

In economic theory however, it is possible that one day, technology will reach a point where all desired tasks under a certain value will be performed by technology.  But in an economy where you can still get paid to stand in line, there are an unlimited amount of unskilled or low-skilled jobs.

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The end result is an ever widening gap between not just the poor and the rich, but also the poor and the working class. As economies develop and as manufacturing jobs move overseas, low skill low pay and high skill high pay work are the only jobs left. People with few skills fall behind in terms of income.

People with certain skills are put out of work by technology.  This phenomenon has been happening for centuries, but especially after the industrial revolution.  Technology has always been putting people out of work, just ask the horse and carriage industry.  Is today any different from other times in history?

As stated above, one way it is different is that technology is also creating millions of low-skilled jobs.

There’s still a lot to say about this episode, and a lot of questions still to answer.  For example, what should be done (if anything) about income inequality?  Stay tuned later this week (possibly Friday) for the second part of this post.

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