How to combat income inequality

Thursday, Dec. 19, 2013 | 2 a.m.

If you’re a low-income African-American with a talent for braiding hair, you might have the idea of making money that way. You could start out doing it for relatives and friends and gradually build a clientele that could provide a decent income without a lot of capital. It could offer a way out of poverty and into the middle class.

But in many states, including Illinois, it’s not so simple. If you want to braid hair professionally, you must be a licensed cosmetologist. And to get that license, you have to get 1,500 hours of training. A poor woman who wants to pick up a little cash off the books can usually get away with it. But if she hopes to earn a living and can’t afford the training, she’s out of luck.

That’s one of the ways in which the American economic system hinders those at the bottom of the income scale. Many of them grew up with bad schools, crime-ridden neighborhoods and boarded-up shopping centers. Lots of the auto and steel plants that used to provide a middle-class lifestyle on a high school education (or less) have closed. So even as America has grown wealthier, many Americans have not.

From 2000 to 2011, reports the liberal Economic Policy Institute, the median income of working-age households fell by 12 percent. Wages now make up the smallest share of national income since 1966. “From 1973 to 2005,” wrote Harvard economists Claudia Goldin and Lawrence Katz in the Milken Institute Review, “the bottom fifth of families realized almost no growth in real income, whereas the top fifth enjoyed an average annual gain of 1.6 percent.”

The issue is gaining prominence. President Barack Obama gave a major speech this month arguing that growing income inequality “challenges the very essence of who we are as a people.” Pope Francis recently rejected what he called “trickle-down theories which assume that economic growth, encouraged by a free market, will inevitably succeed in bringing about greater justice and inclusiveness in the world.”

But highlighting the issue is a lot easier than offering viable remedies. And inequality is not the real problem. The highest earners generally come by their wealth honestly. Microsoft’s Bill Gates and Nike’s Phil Knight got rich by giving people something that made their lives better. Entrepreneurial capitalists usually hit the jackpot only by serving the needs of customers.

Goldin and Katz found that most of the increase in wage inequality came about from “increases in economic returns to investments in education.” In other words, the payoff for college and graduate schools rose, because the capabilities they confer became more valuable in the marketplace.

So the true solution is not to take money away from the rich. Redistribution doesn’t necessarily improve the long-term prospects of the poor and working class. What they need are the skills and habits necessary to succeed in the modern economy, and the opportunity to make use of them.

Occupational licensing and government permits are among the obstacles the government puts in their way. It’s not just hair-braiding but eyebrow-threading, selling meals from food trucks or driving a cab. “Chicago’s rules against operating a business in a garage or making a product that is sold elsewhere would have outlawed Amazon, Dell (and) Microsoft,” writes Elizabeth Kregor, director of the Institute for Justice Clinic on Entrepreneurship at the University of Chicago Law School.

It’s also anti-business local policies that block big box stores offering entry-level employment in areas with few jobs. It’s zoning regulations that require political connections to get around.

One popular but misconceived idea for helping low-income workers, endorsed by Obama, is raising the minimum wage. Any significant increase would be an incentive for businesses to hire fewer workers and to automate any tasks they are currently doing. For many young and unskilled workers, a higher minimum wage would put the first rung of the economic ladder out of reach.

But schools in disadvantaged areas ought to be equipping their graduates for better options than minimum-wage positions. Unfortunately, many of them do a poor job of educating kids, and many of their students never graduate. Higher student performance is not only valuable in itself but likely to confer lifelong benefits in earning power.

Finding ways to make higher education more affordable is also essential. Technology makes it possible for countless students to learn from professors who once could teach only a few dozen or hundred. Used wisely, it could bring down the cost of college while raising the quality of teaching.

The best thing that could happen for low-wage workers is a long period of strong economic growth, like that of the 1990s. When the unemployment rate falls to 4 percent, as in 2000 — compared with 7 percent today — it puts upward pressure on wages and gives these workers a much better set of options.

The widening gap in earnings is the product of complex forces in a national and global economy that can’t be reversed. But to the extent they can be ameliorated, the key is not penalizing those at the top. It’s empowering those at the bottom.