The rising importance of education
Much has been said about rising inequality in North America and Europe. It is indeed a problem that over the last couple of decades the variation between across incomes in the United States as well as several European countries has steadily risen – and in Europe roughly at the same pace as in the United States. The only outlier in the charts below from a new study by researchers at the University of British Columbia seems to be France, where the variance across incomes has not risen. Note that a higher variance implies a bigger gap between high and low incomes and hence a larger income inequality in that country.
Income variance in different countries
Source: Hoffmann et al. (2020).
However, one source that is commonly blamed for higher income inequality is the stock market. The common perception is that people with higher income invest more in the stock market and thanks to fantastic stock market returns over the last decade, income inequality is mostly driven by investment gains. However, this is not true. The contribution of investments to the variation in total income is very low and has remained very low for decades. No, the variation in income is driven by a rising variation in labour income, not stock market gains.
Contribution of capital income to income inequality is low
Source: Hoffmann et al. (2020). Note: The chart shows the results for men but results for women are very similar.
And when it comes to income inequality in the labour market there is one factor that is increasingly important: education. As we move from a product to a knowledge economy, the educational needs for most jobs continue to rise. Meanwhile, jobs that do not require a higher level of education become rarer, and their payment declines. It is the gap between the highly educated and the lesser educated workers and employees that drive inequality in the Western world. So, stop blaming the stock market and capitalists for rising income inequality and focus on what really matters: education and getting everybody a chance at a better and affordable education.
Contribution of education to income inequality is rising
Source: Hoffmann et al. (2020). Note: The chart shows the results for men but results for women are very similar.