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The Jackpot Ecomony

Widening wage inequality is not just a function of a better education or great technological skill. Dumb luck may be even more important.

May 09, 1999|David Friedman | David Friedman, a contributing editor to Opinion, writes frequently on economics and development

Amid soaring stocks and tightening labor markets, last month's disclosure that U.S. wage growth fell to a 20-year low sharply challenges popular justifications for this decade's staggering income inequality. It's time to refocus on one of the era's most striking developments: the unprecedented cleansing of working-class concerns from America's once-progressive politics.

The widespread, but surprisingly unexamined idea that technological change chiefly accounts for rising global poverty, falling real wages and astounding wealth concentration highlights the new political elitism. Wealth inequality, it turns out, is just the birth pain of the Information Age. The PC revolution heavily rewards Internet savvy and punishes those with "old economy" skills: construction workers, aerospace engineers, service employees, farmers and the like. Worldwide assets naturally flow to the high-tech elite. Huge wealth differentials are the result.

Part of this "technology story" is undeniably true. Even in the booming United States, let alone struggling Asia or Central Europe, wage inequality is dramatically growing.

According to Economic Policy Institute economist Jared Bernstein, median inflation-adjusted U.S. wages fell by 3.1% during 1989-1997. Hourly pay, meanwhile, stagnated or fell for the bottom 60% of the U.S. work force, including 80% of all male workers. Real wages fell by 6.7% for male workers and rose by just 0.8% for women, about one-tenth as fast as in the 1980s. U.S. poverty rates rose to nearly 14%, historically quite high, while middle-class wealth fell by 3%.

Concurrently, the share of total national wealth held by the top 1% of U.S. households ballooned from 37.4% to 39.1%. The wealthiest 10% of all households pocketed nearly 90% of the profits from the '90s' stock-market run. Average corporate-ex-.ecutive pay has doubled since 1989 and is now a record 116 times what a typical worker earns.

There's little evidence that a microchip-induced "technology shock" unique to the 1990s can even remotely account for all this. Research by Bernstein and colleague Lawrence Mishel shows that technology's impact is now a less significant factor affecting wages and is actually more favorable to many lower-wage workers than in previous decades. Productivity rates, which should be exploding if the computer revolution were generating huge returns for high-tech skills, grew no faster in the 1990s than in the 1980s; they are now lower than in the precomputer 1950s and 1960s.

More telling still, throughout the 1990s, average starting wages for college graduates, the most technically advanced and computer-literate workers, fell by a stunning 10%. Newly minted biologists, chemists and physicists saw their starting salaries plummet from 11% to 14.5%. Offers to computer programmers dropped by more than 9%, and from 2% to 3% for new computer scientists and engineers.

These findings decisively contradict claims that education and computer-related skills explain contemporary wealth disparities.

But if the technology story is so weak at explaining wage inequality, why is it so popular? In previous decades, after all, "trickle down" and other rationales for wealth inequality were relentlessly attacked.

What's different today is the unparalleled influence that a new, fabulously privileged elite--including Web-site and computer gurus, actors, directors, media magnates and financial power brokers--wields over the mainstream left. To be sure, the wealthy, such as the Kennedys or Roosevelts, long played influential roles in U.S. progressivism. Never before, however, have their interests been so dominant, yet less scrutinized.

Cheered by a star-struck media, the new elites have redirected the left's focus from working-class survival to matters of suburban "livability." Welfare was easily expendable, but racial and gender preferences even the wealthiest might claim were religiously defended. Hundreds of thousands of manufacturing jobs were sacrificed by a Democratic administration so that bargain-basement luxuries could be imported.

Everyone seemed to win. As the stock market rose during 1993-1997, the super-rich got even wealthier and paid taxes at far higher rates than if the same income were spread among more people. According to the Congressional Budget Office, had U.S. wealth distribution stayed the same as in 1993, the country would still suffer a multibillion-dollar federal deficit. Instead, the budget miraculously balanced.

The technology story conceals what, in many ways, is an old-fashioned jackpot economy. Great wealth flows to the few corporate executives, celebrities, professionals and Internet hustlers who catch the fancy of cash-flush U.S. investors. It's much nicer to attribute good fortune to better education, or a high-tech revolution, than to low interest rates, global impoverishment, social connections and dumb luck.

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