More Truth About Income Inequality

A new study says the more you work, the more skills you gain, and the more you earn

WSJ editorial.

"A certain kind of politician loves to rail about income inequality and the corporate greed and injustice that supposedly cause it. It won’t surprise anyone who’s ever held a job in the private economy that the truth is more complex, and a new study adds to our understanding of how labor markets really work.

The headline conclusion from the working paper published last month by the National Bureau of Economic Research is that the more you work over your lifetime, the more you earn. So far so obvious, but the surprises lurk in an explanation that’s more complex than you’d think.

The authors (from the Federal Reserve Bank of St. Louis, Vanderbilt University and Princeton) use a rich vein of survey data tracking individuals as far back as 1979. They find that a major determinant of total lifetime hours worked is individual choice—some people just prefer to work more, while others might prioritize other activities.

Going a step further, the paper finds that those who work more earn more because they accumulate more skills during the extra time they work. The overlapping effects of different preferences for work and different levels of skills acquisition account for a hefty share of overall differences in lifetime earnings, and operate independent of other factors such as the level of education or skills an individual gains before entering the labor force. In other words, income inequality is in part a matter of choice rather than intractable economic or social forces. Sorry, socialists.

The study isn’t a comprehensive overview of labor-market behavior, and the authors don’t claim it is. Their survey sample examines only men who have been “highly attached” to the labor market over their full working lives, meaning working at least 520 hours per year.

The conclusions might be relevant to debates about gender pay gaps—where different preferences for paid work versus working at home to raise a family often come into play—but that awaits further study.

One implication is that a labor market is too complex to bear simple analyses—or blunt-force regulation. The economists note as a stark example the failure of French efforts to boost earnings by limiting the work week. Politicians always hope this will force companies to hire more workers, and Sen. Bernie Sanders wants a 32-hour work week. But such laws prevent those who want to work more from doing so, and boosting their skills in the process, while not requiring those who prefer to work less to spend more time on the job.

This is a good argument for more humility from politicians—not that this will be forthcoming. But it’s always good to know the truth, even if politicians ignore it."