Inequality is a primal threat to sustainability. For evidence of this, one can look to politics: the notion that a shrinking middle class threatens American progress is central to presidential campaigns this election cycle. Or, one can look to research: it has been argued that rising inequality is leading the world’s nations inexorably away from democracy and meritocracy, and towards a system in which power and wealth are concentrated among the few.
If we were to listen only to political rhetoric, we might come away with the idea that economic inequality is simply a consequence of politics – as though a desire for, a platform of redistribution among those in power is all that is necessary to fix the problem. That is not true; it is also about policy design. A wealth of research on the effects of progressive policies, both in theory and in reality (where possible), shows us how hard it can actually be to make the worst off better off.
The unfortunate reality is that economic behavior makes it hard to help one constituency while holding the rest of the ‘market’ constant. We have a wealth of examples showing this, from disparate policy areas. Here are three:
In 2014, 15% of U.S. citizens were living below the poverty line, and the bottom 40% of earners accounted for only 11% of total income earned. It is these sorts of numbers that rationalize continual interest in raising the minimum wage, both federally and at the state level. It is natural to think that raising the minimum wage would put more money in the hands of the most poorly-compensated workers. This, in turn, would erode economic inequality.
Economic theory, however, says that wouldn’t necessarily happen. A rise in the minimum wage is also a rise in the cost of labor for certain employers. Those employers are free to reduce hours or lay off workers if they think it is better for business. The research community is divided on whether this actually happens in reality. Some studies show evidence that employment and/or wages indeed dropped after a minimum wage hike, while others show evidence that no such drop occurred. There are major minimum wage hikes in the works in both New York City and California, and nobody can truly know what changes they will bring to the bottom of the wage distribution.
I have a friend who is thinking about volunteering for the “Fight for Fifteen” movement, which targets a $15.00 per-hour federal minimum wage. She is motivated by a loved one’s long and frustrating experience working at the minimum wage. But it is simply not clear whether a successful campaign would bring a much-deserved windfall to her loved one, or a devastating cut in hours.
Fair Trade is another instrument through which, it is hoped, some of the most marginalized workers in society can be made better off. The underlying idea is that some of the world’s consumers prefer and are willing to pay for products that are guaranteed to provide fair wages to those who made them. Today, the supply and consumption of Fair Trade-labeled coffee, bananas, and other products is widespread; for example, there are 580,200 Fairtrade-certified coffee producers and workers globally.
Studies show that Fair Trade-certified producers do appear to receive higher prices. But are the distributional outcomes of Fair Trade truly favorable? According to the World Fair Trade Organization, Fair Trade seeks to contribute “to sustainable development by offering better trading conditions to, and securing the rights of, marginalized producers and workers.” Producers and workers, here as in the aforementioned statistic on certification globally, are lumped together. But these two groups are not the same; the hired workers are generally much poorer than, for instance, farm owners. There is limited evidence on how workers on Fair Trade-certified farms fare, but what data do exist suggest that such workers do not receive any better compensation as a result of certification. While Fair Trade certification is associated with significantly greater incomes for farmers, it is not associated with increased incomes (or ancillary benefits like medical care and pension) for hired workers.
Urban public schools are, on average, quite poorly performing. Vast differences in school quality are often seen as the worst form of inequality – that of opportunity, not just outcomes. Outrage at this inequality is strong motivation for radical reinvention of public schooling. This is the context in which charter schools – which are part of the public system but have significantly more autonomy than incumbent schools – have emerged.
The charter movement is wildly contentious, but the best peer-reviewed research suggests that charter schools can drastically improve educational achievement. Indeed, the greatest improvements may come in the urban districts in which poverty is highest. On some level, this is wonderful news for enemies of inequality. Nevertheless, there are rampant concerns about who actually wins and loses from these educational interventions. For example, the success of charter schools has attracted the attention of relatively wealthier urban families, whose resources can give them a leg up in securing very limited seats in such schools. That leaves the poorest students isolated in the worst schools.
Moreover, a student leaving an underperforming school takes valuable funding with her. Public school funding tends to be provided by governments on a per-pupil basis, but there are large fixed costs associated with running a school – for example, the costs of paying a school principal and keeping the lights on do not go down when students (and their funding) go elsewhere. Thus, a school with fewer students has less funding to spread across vital educational needs. Ultimately, the fear is that even while many students gain from improved school quality, the poorest children are actually being made worse off.
The Common Thread
These three examples from very different areas of public policy – employment, trade, and education – bear a strong similarity. First, attempts to help those at the bottom of the wealth distribution have the potential to instead help those further up the distribution and exacerbate poverty at the bottom. The problem has little to do with political or moral preference, and everything to do with ‘rational’ economic behavior. All too frequently, well-intentioned policies fail to consider the likely response of all participants in a ‘market’, whether for jobs, schools, or a host of other goods and services. Fuller consideration of these markets – the forest, not just the specific trees we’re targeting – is the only way in which we will collectively figure out how to effectively address rising inequality.
Image courtesy of Flickr. Originally published by S&S on August 2, 2016.