Updated: Feb 26
Take a guess. How much more does the top 20% of US households earn than the bottom 20%……...Okay, what did you come up with? If you guessed 17 times more, then you would be correct. But as we will quickly see, this is not the whole story.
Next question, if there are two workers, one in the top 20% and one in the bottom 20%, what do you intuitively think would be a fair difference in income? Okay, remember that number for the next few paragraphs.
That 17 times figure seems like a lot; but what is a household? Not all households are the same. For instance, in the top 20% there are about 2.1 people earning wages per household. In the bottom 20% it is less than half of a person- last time I checked it hovered around 0.45 earners in a household, in the bottom quintile.
If we hold wage earners constant, the difference between a person’s earnings in the top 20% and a person’s earnings in the bottom 20% plummets to a mere 3.6 times more. This doesn’t even take into account hours worked. In the bottom quintile the average work week is about 29 hours. In the top quintile it is around 42 hours. If we hold hours constant we find that per hour earnings are 2.5 times higher.
Wait, what about taxes? After tax, that number falls again to a take-home amount of 1.85 times for the top compared to the bottom!
We could go on and hold constant years of education (which represent foregone wages), risk, and debt. I could hold constant location of the earners, experience, or a host of other factors. I took out the effect of taxes, but not transfers. The value of government support for the bottom 20% of earners is greater than the total earnings of the middle 20% of households! Yes, you read that right.
Let’s stop here for a moment. Did you have any idea that income inequality was so low? Are you starting to think that it might even be too low? What was your “fair” number? What you just read were facts, not media bluster, not propaganda, not woke memes, and not the prevailing narrative from the Marxist hordes.
Here’s another question, for every millionaire in the US, how many people are living in poverty? 50? 20? 100? Again, this is a test to see if your impression of the state of equality in America is grounded in reality or if you need to make adjustments. The answer is 2. Only 2 people live in poverty for each millionaire. What was your guess?
Maybe you have heard that the working class hasn’t seen a real wage increase since the 70s. Lots of economists say this, but it ignores the fact that total compensation has increased and at a faster rate for the lower income earners. What they are ignoring is the rise in benefits cost. In fact, health care cost is the number 1 reason for stagnant take-home pay. Does the health care system need to be fixed? Oh yeah, don’t get me started…
Quality of goods has changed too. Cars are faster, safer, and more efficient than in the past. The Internet is of enormous importance to our lives. Things like Google maps are free to use but deliver huge value. None of these types of changes are being taken into account when economists and politicians say the “working class” is better off in the past. Such statements are absolute hogwash. If you believe this stuff then ask yourself, would you rather be poor in 1970 or poor today?
Whoever you are, if you are reading this you are one of the luckiest human beings to ever exist on planet earth. Seriously, the wealth we take for granted allows even the poor to live with material comforts emperors and kings of the past would be envious of. What has made this possible is the free market system or, as the Marxists pejoratively refer to it, “Capitalism”.
We began by addressing the price paid for labor. Let’s look at a few factors that determine how wages are set in a market system. Marxists would tell us that capitalists pay the least amount possible. So why aren’t wages at 0? Well, it is true that employers seek to pay less, but it is also true that employees want more. If employees want super high wages, then why don’t all employees get super high wages?
It’s simple; the two incentives balance each other out through supply and demand. This isn’t an Econ 101 class, so I’m not going to walk you through diagrams, equilibriums, demand and supply shifts, and all that fun stuff...instead, let’s address this as a story.
Ed is a worker with no skills. He finds that he can become employed at 12 dollars per hour in his local economy doing a task called, “average job”. Ed is very ambitious and looks at other jobs he could take. Here are a few:
Pro basketball player:
Ed estimates that if he trained every day, there is a 1 in 1,000 chance that he could go pro. He thinks those odds are actually pretty good. Ed sits down and calculates that the job would have to pay 1,000 times his current yearly full-time wage of $24,000 to compensate for the 1,000:1 risk of failure. Therefore, it would only make sense to leave “average job” and train to go pro if it paid $24 million per year. He finds out that it only pays $7.7 million on average, thus his chances would have to be 1:320...but Ed knows he is not that good.
Sewage treatment tech:
Ed hates stinking things. He values a non-stinking job at 4 times the value of a stinking one when it pays over his subsistence wage. He estimates that he could basically survive at $16k per year, therefore he would only take the job at $48k and no less. The job pays $44,400, so Ed stays at “average job”. However his friend, Noseless-Ned can’t smell stink and happily gets paid over the rate of “average job” because he is especially suited for this type of work.
Ed has a knack for law and knows he could pass law school. He prices it out and sees it costs $150,000 for his education over 3 years. He knows he would be giving up 3 years of wages, which represents another $72,000. Combined, it would cost him $222k. Ed estimates his internal rate of return at 6%, meaning this investment must yield $13,320 per year in addition to paying back his investment over the next 35 years of work, so Ed calculates he will need $19,669 per year over his current wage to justify the expense. Therefore, the jobs must pay a minimum $43,662 to make it worthwhile. Ed is excited- until he realizes that all the jobs are in big cities and the cost of living is 35% higher than where he lives. He pulls out his calculator again and finds out he must earn $59,000. He currently works 40 hours a week...but lawyers work 60, so the job would have to pay $88,500 to make it worth it.
Ed loves the outdoors, but he does recognize his own mortality. He knows the risk of death is relatively high in logging, so he won’t settle for anything less than twice his current pay to compensate him for the risk.
The animal shelter:
Ed sees the shelter will pay less than his current job, but he knows all his friends and acquaintances will think well of his wonderful work with the animals. Plus, he gets to play with cute animals and do good rescuing innocent creatures. He seeks to balance the intangible aspects with the lower pay.
Those are some (and not all) of the ways that income inequality comes to be. Let’s imagine that Ed trains for the basketball player job at the lower 320:1 odds. A new tax on the rich drops take-home pay from $7.7 million to $4.3 million. What does that matter for a rich player? That’s not the point. The value of Ed’s work to be that player, along with his 319 competitors, plummets to the risk-adjusted pay of only $13,400- which is under minimum wage.
Good-hearted and soft-minded policy-makers think they heroically reduced income inequality by taking some of the income of the super rich player. What they actually did was devalue the proverbial lottery ticket that all other players had so that their labor is now unfairly compensated. Of course, they never see those 319 players who got cheated, only the 1 they had their envious eye on. Of course, sports aren’t the only place the lottery effect on wages exists. CEOs and actors would be other examples.
Likewise, if the wages of Ed the lawyer were taxed and redistributed to remove inequality, this too would be unjust. Those wages represent more than just hard work or intelligence, though in many cases they do include those factors. They represent real factors based in the wage rate of the worker at “average job” along with the time value of money.
Remember when Ed thought about working at the sewage plant? The pay gap between him at $24K and the sewerage worker at $44,400 is the same difference between the top 20% and the bottom 20%: 1.85 times. Would it make any sense for Ed to be upset at this difference? I think Ed would be happy that Noseless-Ned took the job.
In a Marxist system, objectionable jobs are either given to people the party doesn’t like (often minorities), or everyone is forced to take a turn whether they like it or not. In the free-market system, the wage will rise until people think that job would be worth doing...otherwise the job won’t be filled. If noseless-Ned didn’t exist, the job may have to pay $48k, which is when Ed’s unique stink-valuing preference leads him to take the job.
In a market system price and preferences sort people into jobs. The more likely basketball pros take the chance, those with lower time-value of money are more likely to become educated, people without noses will be the ones in stinky places, risk tolerant or particularly nimble people will engage in logging, kind-hearted people will become teachers, and people who like living in the city will work there. People get the opportunity to use their talents to serve others where they are best suited. It doesn’t always work perfectly, but people are free to make a change and are not under coercion by the state.
In the US, job satisfaction has been rising for decades and is at the highest level ever recorded. Ask a Venezuelan baker how satisfied he is with being unable to get flour to bake bread and instead opening only to sell scrap food picked out of trash cans in Caracas. Ask the Ukrainian farmers during the Soviet famine how satisfied they are with their state-directed labor. How about asking the millions in Soviet work camps who were worked to death by their Marxist slave masters? Here’s one more: ask the North Koreans if they would rather work in prosperous and happy South Korea. Marx would have you believe that his communist and socialist ideas will create a worker’s paradise. The opposite is true, the capitalists made the paradise and the Marxists make a living hell everywhere their vicious lies take hold.
When Marx died in 1883, the average English worker which he believed was terribly oppressed was 300% richer than at Marx's birth in 1818. Were their real abuses during that time? Yes, of course. Were their real problems with the way the industrial revolution played out? I am not doubting that either. What I am saying is that the idea that workers would remain a permanent underclass as the rich capitalists exploit them has been so thoroughly debunked by history, the idea is laughable now. Reflect back on the fact that you live better than kings and queens of old. That is the result of the incredible wealth explosion from free-markets. The middle class sprung from those difficult years in the Industrial Revolution- and we are the ungrateful beneficiaries.
Marx would be astounded to hear that after 150 years of capitalism since his death, our nation has widespread wealth and happiness, not widespread oppression by capitalist overlords. I wish I could tell him that for every 2 people in poverty, there is one millionaire. He wouldn’t believe me.