Is Inequality Designed or Preordained?

Abstract

The conventional explanation of raising income inequality is often referred to as the market forces hypothesis. Global forces have led to structural economic changes in which we now have a two-tiered economy: a highly skilled and highly paid economy at the top of the income distribution and a poorly skilled and poorly paid economy at the bottom of the income distribution. In recent years, however, the conventional theory has been called into question by what can be characterized as the public policy hypothesis that holds that it is because of public policy, both active and passive, that labor market institutions that served to bolster incomes of the poor and middle class deteriorated. As a consequence of this deterioration, income inequality has only risen. Through an examination of data from the Current Population Survey during the 2000s, this article seeks to address to what extent these two hypotheses are related. Although there is no question that the data does support the market forces hypothesis, the data also show that these forces may have been exacerbated by the deterioration of important labor market institutions.