Why the World Needs Sweatshops

One dark facet of the global economy that makes many western shoppers queasy is how modern manufactured products are made. While rich nations enjoy cheap goods like clothing and technology, the supply chain behind the production reveals a very shocking and repulsive process. Child labor, hazardous working conditions, long hours, human rights abuse are all involved in the many everyday products we buy like our T-shirts and laptops. Sweatshops, or factories in violation of two or more labor violations, have sparked outrage from human rights groups, media outlets and the average sympathetic consumer who has peered into the ugly side of globalization. Comedian John Oliver had done a popular piece on sweatshops, shedding light on their wrongdoings and also criticizing the companies who purchase from them. And since the 90s, the anti-sweatshop movement has gained a strong grounding in its opposition to what it views as exploitation of impoverished workers. The backlash has involved calls for boycotts of companies that purchase goods from these sweatshops and protests aimed at public awareness.  Intellectual Noam Chomsky described the student anti-sweatshop movement as “In some ways, is like the anti-apartheid movement, except that in this case, it's striking at the core of the relations of exploitation”.

Who can live with a decent conscience knowing that their wardrobe is the product of cruel child labor made in hazardous factories participate? Well, not only should you sleep well, but you should also be patting yourself on the back, as buying products made in these sweatshops plays a part in the development of impoverished nations. Many look at sweatshops and see only the lack of labor rights, safe working conditions, and decent wage. As horrible as these factors are, they rarely look at the other alternative to this, which is unemployment, subsistence farming, or even forced prostitution. While on the surface, sweatshops may seem monstrous and inhumane, they actually are the lesser of the evils. Even though the workers of these factories, many of whom are children, work long hours for little pay, they typically earn more in these industrial jobs, which allows many to escape extreme poverty.

A recent study published by the National Bureau of Economic Research analyzed the effects of Ethiopian industrial labor, or sweatshop work, on the lives and income of Ethiopians. Researchers Chris Blattman and Stefan Dercon compared labor the livelihood of workers who were offered factory jobs and workers who were offered nothing. They found that the income of workers employed in factory jobs was slightly higher than the income of the workers who were offered nothing, or employed in the informal sector. But while the difference was relatively minor, the industrial sector provided something that the informal sector couldn’t: stability. While wages and employment in the informal sector are often unstable and volatile, a factory job provides temporary stability and steady wages for workers in between jobs. In the study, 77% of Ethiopian workers had quit their factory after a year, so while these jobs are dangerous, they are typically short term. In a country that does not provide a social safety net, which many workers in advanced nations take for granted like unemployment insurance, even temporary unemployment can have devastating effects. This makes the short-term, yet stable, industrial jobs so vital for the wellbeing of many citizens in developing nations, who although face a higher risk of disease and injury, rely on these jobs for the social safety net that countries like Ethiopia cannot yet afford to provide. 

 There are few issues where Keynesian economists, like Jeffrey Sachs and Paul Krugman, and libertarian think tanks like the American Enterprise Institute can see eye to eye on. But in the case of sweatshops, they both recognize their role in improving the lives of people living in the developing world. Sachs, who himself has worked as an advisor to many developing nations and has also played a critical role in advancing the United Nation’s Millennium Development Goals, stated: “My concern is not that there are too many sweatshops but that there are too few”.We cannot ignore industrialization’s critical role in advancing the livelihood of the world’s poorest.

Nobel prize winning economist Sir Arthur Lewis, who is known for his work in development economics, pioneered a theory known as the “Lewis Model” or “Dual Sector Model”, emphasizing the importance that industrialization has on production and growth. The theory attempts to explain the process of development within emerging markets. According to Lewis, there are two economies of poor nations, the traditional sector, based on rural agriculture and the modern sector, based on urban manufacturing. The former involves low productivity, as large amounts of workers produce very little and farm for basic substance. The latter, on the other hand, incorporates a higher level of productivity using technology, allowing workers to put their skills to greater use. Lewis stated that because workers in the agricultural sector are so unproductive, labor could move to the modern economy, where it could play a much more productive role and agricultural production would be left unaffected. This would lead to the improved welfare and productivity of the nation. Labor would continue to move from agriculture to manufacturing until it is distributed among both sectors to the point that productivity per each unit of labor is maximized, or until they have the same marginal product of labor, as economists say. As a result, wages would increase and poverty would decrease.

 Lewis’s theory can best have shown in China, where urbanization has led to rapid industrial growth and development. Between 1981 and 2010 160 million Chinese citizens had migrated to the cities from the countryside, the largest internal migration in human history. While the work along China's coastal cities involves harsh, underpaid menial labor, it is still far more productive than agricultural work, allowing workers to earn more than they would have to farm in their home provinces. And the gains have shown, as, since 1981, China’s rate of extreme poverty went from 84% in 1981 to 12% in 2010. India, to a lesser extent, has experienced a similar decline since the 1990s as a result of policies focused on industrialization.

Although there appears to be a trade-off between moral labor standards and economic development, we should all ask: Why can’t we have both? It certainly isn’t too much to ask for implementing basic and cheap safety equipment, like fire extensors or at least stronger enforcement of existing labor laws. Especially when compared with the massive profits gained from outsourcing labor to low wage, low regulation countries, there is certainly room to improve safety without harming development. So long as reforms are modest enough to keep employment in low-income countries attractive, it should not harm growth within those nations. Basic safety measures can go a long way in improving worker’s standards of living and reducing the risk of tragedies. In 2012, just outside of Dhaka, Bangladesh, a fire in a garment factory, claimed the lives of 111 workers and left many more injured. The reason for this event leading to the death of so many was due to the lack of fire exits. Tragedies like these are unnecessary and certainly not the right path to take for development, especially when they could be easily prevented by implementing low-cost safety precautions. And while we cannot ignore the tragedies, we also cannot ignore the miracles. Dhaka is a highly dense mega-city that is at the center of Bangladesh's textile industry, attracting thousands of migrant workers from neighboring nations who come looking for work in its thriving economy. The nation of Bangladesh itself has experienced strong development, with a GDP growth rate of 6.5% in 2015, which has been accelerating in recent years. The country’s GDP per capita has risen from $510 in 2010 to $972 in 2015 . And as shown by the graph below, poverty has been steadily decreasing.

The livelihood of the small nation of 160 million (yet about 1/70 the size of the US) has drastically improved, due in part to the many factories it hosts, which has enhanced the lives of millions who would have otherwise suffered in extreme poverty. Again, Sir Arthur Lewis’s theory proves true. Thanks to outsourcing low skilled labor and western consumerism, development has been rapid in Bangladesh, but the road to development does not need to contain deadly factory fires. And if there is to be any modest reform, it should be made at a global level to prevent countries competing for weaker regulations, known as a “race to the bottom”.  Krugman, as mentioned earlier, stated in his New York Times blog, that if any significant labor regulation were to take place in Bangladesh, it would lose its competitive edge to other low-income nations like Cambodia and China, as its economy which relies upon cheap labor would suffer greatly. He believes that so long as factory reforms are kept modest and are shared among all nations, appropriate reform should be implemented. The Trans-Pacific Partnership goes in the right direction as it attempts to establish labor protection among the member nations. Gradually, more improvements can be made.

Also, this election cycle has focused on the negative effects of outsourcing manufacturing jobs, spreading the idea that his moving jobs to these countries hurt Americans. Many wish for the factory jobs which have left the US to nations like China and India to return to the US. On both sides of the political spectrum, we are hearing the threat and harm that outsourcing has on hard working American workers. This idea, like the anti-sweatshop movement, hurts the people it intends to help.  While many workers, especially unskilled worker, have found themselves unemployed as factories and plants move to low-income countries, the rest of Americans are better off as a result, as cheaper goods allow them to have stronger purchasing power. While a system of compensation should be in place, we cannot forget the key economic principle of comparative advantage. Pioneered by 19th-century British economist, David Ricardo's theory of comparative advantage states that all countries should concentrate their efforts on industries which they can specialize in and can do better than competing countries. If a country can produce a good at a lower cost than another country, it should specialize in producing that good in order to keep prices low and to maximize efficiency and productivity. Because countries like China and Bangladesh have a natural surplus of low skill labor, the theory of comparative advantage states that it these nations should be the ones producing products that require cheap low skill labor, rather than advanced nations like the US. Fighting these market forces and bringing back these undesirable jobs will not only harm global development but unnecessarily raise prices and reduce inefficiency. Not to mention the fact that most of the jobs which have been outsourced have left permanently and no amount of political pressure will bring them back. China, which has received a lot of criticism for taking once American jobs, is experiencing outsourcing as well, as manufacturing jobs move to Vietnam due to the growth of Chinese wages.

However we may feel about sweatshops, boycotts are not the answer and pressuring corporations to bring these jobs back to the US would hinder global development and raise the cost of living for Americans. The feeling of self-righteousness, while noble and well-intended, is harmful to the people it aims to help. If companies were to give in to the anti-sweatshop movement and replace workers with machines, or worse yet, buy garments from expensive US producers, the development that has taken place in the world’s poorest areas would go into reverse. What would be best is to adjust to the forces of the market, rather than resist them.

How Trump Happened: Ideology versus Interests

After Mitt Romney’s defeat in the 2012 elections, Republicans had an existential crisis and were deeply considering a fundamental change of plan. After consistently losing in the popular vote of national elections, Republicans believed that their future laid in inclusivity and modernization. In hopes of attracting the growing diversity of voters, the GOP aimed to become more accepting and to change their platform to be more inclusive of minorities, women and the LGBT community.  They especially wanted to appeal towards the increasing Hispanic vote, by reforming their stance on immigration to become more welcoming of foreigners. Tea-Party leader, Dick Armey, told the Atlantic regarding inclusion that "You can't call someone ugly and expect them to go to the prom with you. We've chased the Hispanic voter out of his natural home”. After 2012, the Republicans looked like they planned on making a move to the left.

This all changed when on June 16, 2016, Donald Trump announced his campaign for the presidency, running on a seemingly futile platform of nationalism and exclusivity which alienated the voters that the GOP hoped to attract. Since Trump’s campaign began, his infamous speech which called undocumented immigrants “rapists” and “murders”, his call for a ban on Muslims, his stance on trade (a cornerstone of conservative economic policy) and so much more has split the Republican base, while attracting a new group of voters. In June, no one had expected Trump to win the nomination and many believed his support would wither, even as his poll numbers went up. This has led many to ask the question: How did Trump Happen?

Trump’s platform and ideology aren’t anything the US hasn't seen during the 1920s and 1970s. After the Progressive Era, which had ended with the election of Warren G. Harding in 1920, the era of the 1920s was best defined by Harding's campaign promise as a “Return to Normalcy”. Under the Harding, Coolidge and Hoover administrations, right wing ideology of laissez-faire economics and nationalism had dominated the political sphere caused by the backlash against the progressive policies prior. Anti-immigration sentiment and protectionist trade policy defined the era, through the Immigration Act of 1924 and the Smoot-Hawley Tariffs of 1930. This period in politics runs contrary to the Progressive era prior, which was the culmination of international trade and immigration, especially low-skilled workers from Southern and Eastern Europe.

                         

The Reagan Revolution of 1980 (the pinnacle of the conservative counter-revolution of the 1970s) was following by trade barriers which placed restrictions on auto and steel imports, especially from Japan. This was encouraged by the growing competition from German and Japanese manufacturing, perceived as a threat to the US hegemony. While the Reagan Revolution did not proceed a period of large immigration like the “Return to Normalcy”, the oil shocks, stagflation (high unemployment and inflation), and especially the backlash against the Civil Rights movement during the 1970’s played a critical role in the re-emergence of conservative doctrine. This current wave of populism and nativism, which neither major political party has been able to adjust to, can be viewed as a reaction to recent developments such as globalization, immigration, the 2008 financial crisis and the recent social movements. These factors have created a shift in ideology which has transcended self-interest. So what has fueled the newest wave of far-right ideology? In order to understand the Trump base, we must first know who they are.

Considering that recent trade policy, immigration and the 2008 financial crisis has adversely affected low-income Americans, many of whom struggle finding decent paying jobs, the typical Trump voter is imagined to be the displaced, blue collar worker who has suffered at the hands of the economic policies of the establishment. Trump’s campaign has centered on protecting American jobs, which would resonate with many struggling workers whose vote would be based on their best interests at heart. But the actual Trump base is not what his platform would make many believe. The median household income of Trump voters is $72,000. While less than that of the typical Cruz and Kasich voter ($73,000 and $91,000 respectively) it is still higher than that of the typical Clinton voter of only $61,000 and much higher than the national average of $51,000. Trump supporters are relatively well off and the low-income vote has largely gone to Democrats and has even increased since 2012. Voters with incomes below $30,000 prefer Democrats over Republicans by a 29 point margin opposed to the 24 point margin of 2012. Yet while almost every demographic has leaned more to the left since 2012, men over 50 have moved slightly to the right along with voters with incomes between $75,000 to $100,000. Political Scientist David Brady states in reference to the current Republican voter base “About half are between 45 and 64 years of age, with another 34 percent over 65 years old and less than 2 percent younger than 30”. So not only are Trump voters typically well off financially, but they are also more likely to be retirees than Clinton voters and therefore do not even need the jobs that Trump is campaigning on. So what about the low skilled, poorly educated struggling worker we all imagine when we think of a Trump voter? Most are voting Democrat (Although as Bernie Sanders accurately noted, poor people don’t vote). Since 2012, voters with a high school degree or less currently prefer Democrats over Republicans by a fairly wide margin (7 points as of June 2016). And while Trump has made job creation one of the central themes of his campaign, the average Trump supporter is more likely to already be employed or even in retirement compared to the average Clinton voter, who is more likely to be looking for a job. And while Trump voters do tend to be poorly educated, they also tend to be older, and therefore they at least have work experience under their belt which helps account for their high incomes. Poorly educated youths, on the other hand, lack the same experience and are more likely to be voting Democrat. 

 Not only that, but Trump’s healthcare plan would also adversely affect the elderly, his own base. NPR correspondent Joe Neel states “Trump would repeal and replace Obamacare with Health Savings Accounts. HSAs are being more widely adopted by employers as a way to save money. According to the Mayo Clinic, HSAs have pros and cons. Basically, if you’re young and healthy, you’ll come out ahead; if you are older and have chronic health problems, probably not”. If voters voted solely based on personal self-interest, Trump's healthcare plan would attract younger voters while alienating the older ones. Yet the opposite holds true, emphasizing the role ideology plays over that of self-interest. Trump’s own immigration policy would harm his base as well. While the current immigration backlash is viewed as the fear of losing jobs or having wages reduced as foreigners come into the US, the low skilled labor immigrating from across the border isn't competing with the typical Trump voter who makes $72,000. But instead, they would more likely be competing against the workers who makes $30,000 or under, a group that leans strongly towards Clinton (however evidence is scant on whether low skill immigration harms the wages and employment of low skill domestic workers). And the low-wage labor caused by immigration has benefited Trump’s base, as their cost of living has been reduced due to the savings for businesses who are able to hire cheaper foreign labor. Trump supporters aren't low-income workers voting for their best interests. Many are high-income retirees voting against their own interest. This wave of ideology overpowering self-interest is similar to the “Reagan revolution” of 1980, and while Trump is certainly a unique candidate in terms of how explicit he is with his views, the connotation is still similar to that of Ronald Reagan’s. During Reagan’s 1980 campaign, he gave a speech at Neshoba County Fair, in Philadelphia Mississippi on the issue of “States Rights”, just a few miles away from where three civil rights activists had been killed in 1964. He stated “I still believe the answer to any problem lies with the people. I believe in states' rights. I believe in people doing as much as they can for themselves at the community level and at the private level, and I believe we've distorted the balance of our government today by giving powers that were never intended in the Constitution to that federal establishment”. “States’ Rights” was the justification for George Wallace’s segregationist platform, and the South’s justification  for slavery, which had led many to believe that Reagan had utilized the “Southern Strategy”, to attain to vote of southern whites by using the backlash against the federal Civil Rights Act (Or “Civil Wrongs Act” as it was dubbed by many Reagan voters). Parallels can be drawn between Reagan’s speech and Trump’s announcement of his presidential campaign, which he refers to undocumented immigrants coming from Mexico as murderers and rapists. Both use the discontent of inclusiveness to attract voters who are angry at the changes of the nation, and in both elections, wanted to “Make America Great Again: The current backlash against immigration is quite similar to the previous backlash against Civil Rights. And while the justification of the backlash laid in seemingly legitimate grounds, like states’ rights and the call for secure borders, the connotation behind them are very clear and present. The Southern Strategy was also a major factor in causing the South, which traditionally voted Democrat for economic interests, to vote reliably Republican, against those very same interests. And the “Trump Strategy” also seems to be attracting voters from across party lines just the same. 

Considering many members of the Trump base had voted Democrat in 2012, what explains their current shift in ideology? There are several factors responsible for the change. The financial crisis of 2008 has eroded the trust many have for the banking system. The deregulation of the financial sector carried out under the Reagan, Clinton and Bush administration were touted as a pathway to economic growth. Unfortunately, it led to an increase in inequality and financial instability which had been responsible for causing the financial crisis. Voters of all demographics found themselves unemployed and many haven’t forgiven the political establishment, both Democrats, and Republicans, for peddling the American people policies which benefited Wall Street at the expense of Main Street. The crisis proved significant through its reinforcement of public discontent towards the government, the status quo of the economy, immigration and foreign imports. The extremist ideology that came as a response to the crisis, from the Occupy movement to the Tea Party movement, have found their outlet in the political outsider, Donald Trump. Also, the recent wave of Civil Rights movements has outraged many older conservative voters, who feel threatened by the changing ways of the nation. The third wave of feminism, the Black Lives Matter movement, and the LGBT rights movement, which culminated in the landmark Supreme Court case of Obergefell v Hodges, effectively legalizing gay marriage (leading to further distrust of the federal government) have taken the US on a path that the Trump base is resisting. Just like how the Civil Rights protests and riots of the 1960s lead to the rise of conservatism in the 70’s and to Reagan’s election in 1980, the current social movements are triggering a strong counter-response from more conservative Americans, especially from the politically influential baby-boomer generation. Also, similar to the fear of the rise of Japan during the conservative revolution of the 70’s, Trump voters hold a fear of the rise of China. Trump’s base is far more skeptical of trade and tends to hold a more negative view of globalization. Trump’s platform on high tariffs, leaving the World Trade Organization and his rejection of NAFTA and the TPP reflect a growing concern Americans have towards the benefits of international trade. Free Trade has been a major goal for by Republican and Democratic administrations alike. The reaction of Trump’s base can be viewed as a backlash against the mainstream political agenda which both sides of the aisle agree on. And of course, there’s immigration. As shown by the graph earlier, a large influx of immigration since the end of the Cold War and especially since NAFTA has fueled an anti-immigrant backlash similar to the “Return to Normalcy” era of the 1920s. And economic self-interest fails to play a role. If there's any argument that low skill immigration would hurt employment and wages, it would be towards the low-income Clinton voters, rather than the upper-middle-class Trump voters. There’s also the fear of terrorism, the second biggest concern Americans have, just below the economy, which many view as radical Islam. Also, the false perception of crime in America, creating a similar backlash as well. It is not the economic self-interest which explains the Trump base, but rather their views, especially on diversity. According to the Pew Research Center, “Clinton supporters (72%) are far more likely than Trump supporters (40%) to view the nation’s increasing diversity positively”. As the nation becomes more ethnically diverse, the appeal of the Trump campaign becomes more attractive towards more conservative and especially white voters. Trump is addressing issues that the GOP establishment has failed to do, for fear of being viewed as racist, xenophobic, sexist and intolerant.  But his views resonate so strongly with many Americans, Republicans and Democrats alike, that view Trump as an outlet to voice their “not-so-PC” opinions. So what does this movement mean?

The political zeitgeist tends to act like a pendulum, and while Trump’s policies will likely be overall harmful to the US economy and especially to the Trump base, a rise in populism helps remove the political discontent created by more liberal and internationally focused policies. They also force policymakers to question the mainstream agenda. Free trade agreements, overseas military bases and our relationship with China are not sacred cows which should be free from debate, especially when they have garnered criticism from the populous, and Trump’s campaign has brought them closer into the political spotlight. Professor Dani Rodrik of Harvard University’s School of Government stated in reference to the protectionism of the 1980s “What looked to contemporaries like damaging protectionism was, in fact, a way of letting off steam to prevent an excessive buildup of political pressure”. While Trump’s policy prescription will harm the US, the issues he highlights have the potential to let off the political steam if they are addressed, which will allow our congress to be more open-minded and productive in the future. And history has shown that policies which have addressed the concerns of the populous, allow the political pendulum to keep swinging. The Smoot-Hawley tariffs highlighted the failures of nationalist policies in the 1920s and led to the formation of the General Agreement on Trade and Tariffs (GATT), where nations were successfully able to negotiate in an international forum to expand trade. Reagan’s protectionist policies led to the globalization of the modern age which has been accompanied by high levels of economic growth and an influx of cheaper goods. And the current reactionary zeitgeist can help us reevaluate and question conventional policies, like trade deals and foreign relations, to have more successful and well-received policies in the future. When the two major political parties begin to converge in ideology and move against the sentiments of the masses, it's healthy for a functioning democracy to question the established values. And the political steam that this movement can let out has the potential to pave the way for a more inclusive and progressive ideology in the future.

The Trump base is well aware that their candidate is far from perfect, with a new controversial statement and scandal from the real estate mogul being brought to light regularly. But this has had little effect on the movement. As the conservative pundit, Ann Coulter recently told Bill Maher “No one is voting for Donald Trump because of his character or personality… it was always about his issues”. The Trump ideology resonates too strongly with Americans of both political parties, that they would be willing to vote against their own interests as well as vote for a dangerously flawed candidate, so this ideology can be represented. Hopefully, the Trump movement will also teach the established politicians that they can't ignore the wishes of their base, as it will only come back to haunt them. Regardless of how people feel about the Trump movement, the voices of millions of frustrated voters do need to be addressed, especially one as strong politically as the baby boomer generation. According to recent polls, it is more than likely that Hillary Clinton will become the next president and she will have a responsibility to appease the Trump vote in order to have anything passed. Otherwise, her presidency will be met with a potentially stronger wave of populous emotion which will feel even more ignored and betrayed than today, and the pendulum with remain stuck in gridlock and dissatisfaction.

The field of economics focuses on incentives and how people make decisions. This election focuses heavily on the role ideology plays, even over self-interest in the choices that voters will make come November 8th. Political and social forces play a large role; a role many tend to overlook in favor of economic incentive. But history has shown that these forces have been responsible for fundamental changes to the US, making them critical to focus on in order to understand how future politics will become shaped. This wave is likely to be short term, but only if it's addressed and concessions are made. If they are, the US has the potential to have a less gridlocked congress and more progressive public policy.  If not, it will only get worse. 

Income Inequality: What's Fueling the Divide?

Income Inequality: What’s Fueling the Divide?

In 1955, economist Simon Kuznets pioneered a hypothesis attempting to explain the trend of income distribution through what is known as the “Kuznets Curve”. The Kuznets Curve takes the form of a bell curve (shown below), meant to illustrate that as the income of a developing nation increases, its level of income inequality would increase along with it, but then as the nation continued to develop and its income kept increasing, the level of inequality would peak and then decline. Kuznets’ explanation for this phenomenon was that as a nation grew from its early form of development, its economy would transition from being agriculturally based to industrial based, as workers would flock from the countryside to the cities. As this continued, the divide between labor (workers) and capital (owners), would widen, due to the increased income of owners from profits. As incomes would rise, the level of income inequality would peak. The higher national income would be used to finance public investments aimed to narrow the gap between labor and capital, such as public education, healthcare, and a social safety net, which would lead to decreasing income inequality and thus the downward slope of the Kuznets curve.

The Kuznets Curve

Kuznets would go on to win the Nobel Prize in Economic Sciences in 1971 for his work on growth and national income. His model on inequality had been widely received, as at the time, western nations had experienced a downward shift in the level of inequality from the early to mid-20th century, after a period of highly unequal industrialization. But something started happening in the late 1970s which the Kuznets curve failed to explain: income inequality began increasing in advanced nations.

                                 
                      

As shown in the graph above, the strongest upticks of inequality came from the US and the UK, likely influenced by the “Reagan-Thatcher Revolutions” of 1980. But even societies considered more egalitarian like Canada, Australia, and Sweden experienced notable increases in inequality starting at around the same time, presenting increasing inequality in advanced nations as a systemic global phenomenon rather than a unique national one. This has led many to ask the question: What happened after the 1970s? Notable scholars such as Thomas Piketty, author of Capital in the 21st century, and Branko Milanovic, author of Global Inequality: A New Approach for the Age of Globalization, have made great strides in bringing the topic of income inequality to the mainstream and have attempted to answer this question through large-scale data collection and analysis. And of course, as income inequality has been increasing for decades in advanced nations, many have criticized the legitimacy of the Kuznets Curve for failing to predict this sudden reversal. Piketty goes so far as to say that the reduction of inequality which the Kuznets Curve documents was a unique circumstance unrelated to the natural forces of the market. He states in his book Capital “The sharp reduction in income inequality that we observe in almost all the rich countries between 1914 and 1945 was due above all to the world wars and the violent economic and political shocks they entailed (especially people with large fortunes). It had little to do with the tranquil process of intersectoral mobility described by Kuznets.” (Piketty 15). The factors Piketty lists did not only reduce the capital of the rich but fostered a political climate aimed at providing more public programs for the low and middle class, which were financed by progressive income taxes that placed a large tax burden on the top earners. Piketty goes on to state that rising inequality is a fundamental part of capitalism, which will continue to increase as the gap between the rate of return on capital and economic growth widens (which I will go into more detail later on). Milanovic takes a different approach, instead of dismissing the Kuznets Curve, he builds on the hypothesis, viewing the level of inequality as a series of waves rather than a single curve, which he refers to as “Kuznets Waves”. While the first wave is the transition of an economy from being based on agriculture to industry, facilitated by an industrial revolution, the second wave, which Milanovic believes that advanced countries are currently on, is explained by a transition from manufacturing to services, facilitated by an information revolution. He states in Global Inequality “The 1980s ushered in a new (second) technological revolution, characterized by remarkable changes in information technology, globalization and the rising importance of heterogeneous jobs in the service sector…..the increasing inequality happened in part because the new technologies strongly rewarded more highly skilled labor: drove up the share of, and the return to, capital” (Milanovic 54). While these economists disagree on the inherent trend of inequality, they both mainly agree on the causes of rising inequality in advanced nations, which include technological, economic, social and political forces. These forces are certainly not independent of one another and there exist some overlap and mutual reinforcement between them. Looking at each of these forces will help us understand the current trend of growing income inequality, what the future may look like and most importantly, whether or not the current distribution of income is justified. I will look specifically at the US because it is what I know best, but inequality in the US is (more or less) an amplified version of inequality in the rest of the advanced world, where the forces of inequality listed are all present, they are just stronger in the US.

Technological

Since the 1980s, the US has undergone a revolutionary technological change that has launched the nation into what many call the “Information Age”, which has led to massive breakthroughs in robotics, computers, and telecommunications.  These advances, in turn, have increased overall productivity and living standards of Americans, but it has also been a strong force for income divergence, as the gains in the new technology have disproportionately favored high-skilled workers. This phenomenon is known as “skills-biased technological change”, a shift in technological advancement that benefits skilled workers through increased productivity and demand for their services. Workers in fields such as healthcare, computers, and information technology have benefited greatly from recent advances and have seen their overall wages and job prospects increase. But technology has also led to automation, which has reduced the wages and job prospects of low-skilled workers who have found themselves being replaced, thus creating a widening gap between high skilled and low skilled labor. While Americans enjoy cheaper goods and businesses are earning larger profits as a result of advancement, it has come at the expense of a lower standard of living for many low-skilled workers. As shown in the graph below, there has been a clear and sharp divide between the wages of highly educated and low educated male workers, presenting the losers and winners of the inequality trend. 

 But technology doesn’t always have a skills bias, for instance, the industrial revolution made skilled laborers such as weavers and hand spinners obsolete due to machines like the Spinning Jenny and the Water Frame. The newly invented machines also benefited low-skilled workers, who had stronger job prospects as a result because they were able to work machines which required little skill to operate, and for a lower wage than skilled workers, who the machines replaced. The machines allowed workers to use their labor to generate greater productivity, thus increasing their wages. It is certainly possible for technological advancement to benefit low-income workers (a low-skilled biased technological change), but that is not the case with the Information Age and the current skills bias trend will likely continue into the near future. This has led economists like Milanovac, as stated earlier, to theorize that we are on a second Kuznets wave, which will (hopefully) peak at a certain level and then decrease. Yet for the moment, and likely the near future, technology will continue to benefit the skilled and replace the unskilled, exacerbating inequality.  But while the income divergence of the information age would have many convinced that current inequality is solely a result of advancement in technology a study by economists David Card and John Dinardo show that while skills-biased technological change has played a large role in the trend of divergence, there is much that the rise of technology fails to explain. Card and Dinardo state “we believe that a narrow focus on technology has diverted attention away from many interesting developments in the wage structure that cannot be easily explained by SBTC”.  Clearly, other forces must be looked at as well to fully understand what's shaping inequality.

Economic

A central theme of Piketty’s book Capital: In the 21st Century is that the larger the gap between the rate of return on capital (interest, rents, profits, dividends, royalties etc.) and the growth rate (annual GDP growth of the economy), then the greater the level of income inequality becomes. This is summed up by his prominent equation: r>g. This would not hold true if capital (real estate, buildings, deposits, stocks, securities, patents, etc.) was distributed more equally than the distribution of labor income. First, I want to make the distinction between capital (and wealth), labor income and total income. While wealth is the amount of assets owned, like the assets listed earlier, labor income is the amount of annual earnings from employment (wages, bonuses) and total income is simply the sum of income earned from wealth and income earned from employment. Wealth is what you own, labor income is what you make from your job a year, and total income is what you earn from your wealth and your job in a year. If wealth (or capital) was MORE equally distributed than labor income, and if the gap between r and g rises, the inequality of total income (labor and capital) would actually decrease as the return on capital would be more evenly distributed throughout the income brackets. But this is not the case, as wealth is much more unequal than labor income and heavily concentrated within the top income brackets. According to data collected by Piketty, the top 10% own 70% of American owned wealth, while the bottom 90% own just 30% of the American owned wealth. But for labor income, according to Piketty’s data, the top 10% receive just 35% of total US earnings, and the bottom 90% of Americans earn 65% of earnings (Piketty 248). This shows how vastly unequal wealth ownership is as compared to labor income. So as wealth is more concentrated among a small portion of Americans, it has also been playing a stronger role in our economy, at the expense of labor. According to a study by researchers Karabarbounis and Neiman, the labor share of income has been falling since the 1980s, meaning that for the past three decades, out of all the income that the US generates, a smaller portion of that income has been going to labor while more have been going to returns on capital. The study states that as the Information Age has reduced the costs of technology and machines, financiers are getting a larger return on investment, increasing the income being generated from capital. Businesses are seeing their profits increase as a result, while many low-skilled workers are seeing a decrease in their wages and job prospects. And while capital is heavily concentrated among top earners, the returns on capital are mainly going to them. The shift in the economy to be more capital focused, as well as the substitution of labor for capital, in order to finance new, more productive technology, have widened the income divide. An economy where capital plays a larger role will inherently become be more unequal, due to the fact that the distribution of capital is inherently unequal.

Social

While market forces have been playing a strong role in shaping inequality, non-market forces like social norms, have been reinforcing the trend. As women continue to play a more active role in the labor market and take on higher paying professions, they tend to be marrying men who are in the same income bracket as them. This is known as “assortative mating” and these high-income couples are often referred to as “power couples”. Today, more couples are to be of the same socio-economic than in the past few decades, according to a study by the Institute of the Study of Labor, which measures the effects of  assortative mating on income inequality in the US. The study concludes that  “technological progress in the home is an important factor for explaining the rise in married female labor-force participation.....higher levels of educational attainment, stronger positive assortative mating, and the hike in married female labor-force participation magnify the rise in household income inequality”.  While the rise of power couples and of women in the labor force hasn’t been the driving force of inequality, it certainly is a reinforcing force. It is also not an area that public policy can or should play a role in countering, as no one wants the government dictating or even influencing who they should marry.

Political

What is widely believed to be the cause of the uniquely high level of US income inequality, is its political structure. The US suffers from a form of plutocracy, where the government, although democratically elected, over represents the interests of the rich at the expense of the rest of Americans.  It should be no surprise that when rich attain a larger level of wealth, they will likely use their newly gained wealth to influence the political system in their favor. And why wouldn't they? To ignore the circumstance of the rich using money to shape the government for their own gain is to ignore a fundamental aspect of economics: People act on incentives. And if the rich will benefit by lobbying congress and providing campaign donations, in hopes that politicians will provide them with public policies they support, even if it conflicts with the wishes of Americans, it makes perfect sense economically to do just that. Just as the rich seek a return when investing in a business, they also seek a return when investing in a campaign. Supreme Court Justice Louis Brandeis said it best “We may have democracy, or we may have wealth concentrated in the hands of a few, but we can't have both”. The findings of political scientists such as Larry Bartels and Martin Gilens, who have studied the effects of wealth on politics, agree with Brandies and both conclude that politicians disproportionately cater to the interests of high-income constituents rather than middle and low-income constituents. Bartels links economic inequality to potential political inequality, each of which builds upon one another through a vicious cycle. He states “These disparities are especially troubling because of the potential for a debilitating feedback cycle linking the economic and political realms: increasing economic inequality may produce increasing inequality in political responsiveness, which in turn produces public policies increasingly detrimental to the interests of poor citizens, which in turn produces even greater economic inequality, and so on” (Bartels). The issue with inequality is that it has negative effects on democracy, because as the wealth of a group increases, it is in their best interests to use that wealth to further increase their gain, at the expense of democracy. In the graph below, created by Gillens to illustrate his findings on the effect of wealth on public policy, he presents a direct relationship between the policy wishes of high-income voters and the likelihood that the policy will be enacted and the lack of that correlation among low and middle-income voters

                        

Gillens states in his blog that if public policy was more founded on the wishes of Americans, we would have “a more progressive tax structure, higher unemployment benefits, stronger regulation of business and industry”. The fact that a high concentration of wealth threatens democratic institutions cannot be ignored as the rich actively fight against policies which will reduce inequality, such as a more progressive tax system and more public benefits, which Americans tend to be in favor of. If the trend of rising income inequality continues, a less democratic government will likely follow suit. 

In summary, technology has driven the economies of the advanced nations to be more capital based, increasing the return on investment for the rich, who have used their newly found gain to influence public policy (Especially in the US), exacerbating inequality, and this is being reinforced by social trends such as assortative mating. I have neglected the role of globalization, falling union membership and low economic growth for creating inequality, but that will be for another time. While income inequality is an essential aspect of a healthy economy in order to provide incentives, the level of inequality must also be justified by the values of society. When the level of inequality goes beyond what a society views as just, it must be put into question and public policy should play a more active role.