Compensating Differentials Likely Temper Any Growth in Income Inequality

As a law professor, I earn a lot less than my law school classmates who graduated with similar records, and a small fraction of the income earned by those at the very top.  But I am compensated in other ways.  In the loveliest line of the wonderful song “If I Were a Rich Man,” from Fiddler on the Roof, Tevye says that the “sweetest thing of all” from becoming wealthy would be the leisure gained to “discuss the Holy Books with the learned men seven hours a day.” The secular equivalent is what I get paid to do.

My situation illustrates what economists call compensating differentials. I get less income from my job because I get more enjoyment than I would in a job requiring similar skills and education. Thus, as Tyler Cowen and Alex Tabarrock note in a recent video,  the market would pay a sewer inspector a lot more than a lifeguard even if it had to attract equally skilled job takers. Similarly, if a job creates risks of death, injury or ill health, it will have to pay more to workers to compensate.

This simple observation suggests that focusing only on earned income from employment can provide a misleading picture of  any growth in inequality.Overall satisfaction from a job comes not only from earnings but also from the amenities it provides and the risks it presents.  If our economy is improving lower income jobs by reducing risks and providing a more enjoyable environment this trend could compensate for at least some of any growth in income inequality.

And there is reason to believe that this trend is in fact occurring.  Since 1970 workplace deaths have plunged 65 percent and workplace illnesses 67 percent.  The rise in amenities is harder to gauge, but the move from an industrial economy to a service economy has made jobs less back breaking and relentlessly repetitive. It has also permitted more personal interaction and most people like being with people more than moving inanimate objects or cutting plants.  .

These economic transformations differentially help those on the lower income part of the scale. The one percent never faced much risk from their duties and almost always worked in pleasant surroundings.   It is hard to measure how much difference this makes, although most people would pay something to avoid even a small risk of death and likely something as well to avoid the boredom of repetition.  But it does show that focusing on income measures may misguide us.  Man does not live by bread alone, and thus changes in income equality cannot completely capture changes in economic equality more broadly understood.