Richard Freeman’s paper “A Tale of Two Clones,” is the latest in a series of ahead-of-the-curve, groundbreaking pieces published through Third Way’s NEXT initiative. He has shown why the “more skills and education mantra” may not be enough to reduce the growth of inequality, and he has challenged the policy community to find ways to bring the earnings ofĪll skilled workers closer to the market average. “Employers,” says Freeman, “matter massively in the upward trend in inequality.” In the 15 years of data Freeman studied he concludes that “establishments moved further apart in revenue per worker than in earnings and did so in every sector.”įreeman has done the policy community a great service with his research. Using a series of complex statistical operations on large data sets from the Current Population Survey and the Census, Freeman shows that the increase in inequality between workers is mirrored by the increase in inequality between companies. The labor market has been dominated by economic forces that pull the wages of firms further apart from each other, motivating our analysis of the role of employers in increasing inequality.” Forty or so years of rising inequality would seem time enough for the centripetal forces of competition to pull earnings toward market-clearing levels. “The big surprise in recent decades,” writes Freeman, “is that the competitive forces that limit pay differentials failed to do so. Their differing fortunes after a decade are emblematic of a rising trend throughout the country in the relative fortunes of companies and the people who work for them. Imagine a set of clones, posits Freeman, with one starting work at Facebook in 2005 and the other at MySpace. Why? Because there is a widening income gap among people who have similar, if not identical, skills. While this is important in any growth scenario, Freeman shows that this is not enough to solve the current problem with inequality. “Conventional wisdom about inequality,” he writes, “focuses largely on imbalances between the supply and demand for skills.” If that is the underlying cause, then the solutions offered by policy makers should focus solely on increasing the skill level of the entire population. Richard Freeman, a distinguished economist with the National Bureau of Economic Research, argues that at the root of income inequality between individuals are large and important differences in wealth between the companies they work for.įreeman’s analysis turns a key economic precept on its head. And indeed, the income gap between those with a college degree and only a high school diploma has steadily widened.īut against this backdrop comes a new and very different explanation for rising inequality-one that should challenge the conventional wisdom in many ways.
Conventional wisdom has argued that globalization, particularly the global labor glut, and the need for more skills are at the root of America’s seemingly intractable problem with inequality. It’s not what you do it’s where you do it.įor some time now, policy makers have been eager to find a solution to rising inequality, but divining an answer depends on determining the underlying causes.