Friday, November 24, 2006

More on Greg Clarke: Why inequality isn't necessarily a bad thing

If Greg Clarke wants the Conservatives to replace a concern for absolute poverty with a concern for relative poverty, which is largely a measure of inequality, it is worth considering whether or not a rise in inequality is necessarily a bad thing. Clearly it could be, there may be a diminishing marginal utility to wealth or increasing inequality could mean people becoming poorer in real terms.

However, the growth in inequality since the 1980s has taken place largely thanks to a growth in the earnings premium on skills and education (as Clark notes in his report - this opens a Word document). This is still the pattern internationally now as Becker notes in this, brilliant, post from a few months back. He goes on to describe how the increased rates of return on human capital (education and skills) are a part of rising productivity and, while they will produce rising inequality in the short term in the long term they create a greater incentive to education which the public will respond to. The final result is people doing more interesting work for more money.

Greg Clark acknowledges that one of the causes of rising inequality is a decline in demand for unskilled work. However, while in the short term this causes hardship in the medium to long term a reduction in the numbers in unskilled work is emphatically a good thing; skilled work is better. The end of the coal mines was a temporary tragedy for those put out of work but, in the long run, mining coal is no fun and Britons no longer having to do such a job is a good thing.

Of course, as Becker notes, this can break down if people aren't able to respond to a fall in unskilled or low skilled work by gaining skills but the key is to attack the real disease in the education system (school vouchers maybe) rather than responding to the symptoms by providing hand outs which may be necessary but don't attack the causes of inequality or poverty. However, it is important to note that in Britain the system would appear not to be entirely broken. We have seen a lot more people going to university and a decline (if a slow one) in inequality in recent years. Are we not, therefore, better off for the incentives that the growth and end of subsidies in the eighties produced?

A rise in inequality, if the source is a rising return to education, is a cause for hope rather than fear; our caravan wasn't falling apart but moving forward.

1 comment:

Praguetory said...

Brillian post. Offers hope. Thank you.

PS - Can you believe this guy has a PHD in economics?