Economic Inequality: Causes and Solutions

Jun 27 2012

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What policies would ameliorate economic inequality and increase economic mobility? The first in this series of three commentaries discussed the difficulty of measuring economic inequality over time. The second commentary discussed economic mobility. This commentary examines the causes of economic inequality and lack of economic mobility and evaluates the effectiveness of various policy options to reduce economic inequality.

First, individual behavior-especially decisions about completing high school and pursuing a college education or other specialized training, marriage and parenting children greatly affects economic mobility and well being.

Second,the information technology revolution over the last several decades has changed the demand for, and consequently the real wages paid to, different types of workers.   This phenomenon, known as skill?biased technological  change,  has
 increased  the  education  premium  workers receive for a college education and for graduate or professional degrees.  Thus, education achievement is more
important today than it was in the past to economic mobility and well?being.

Third, the interaction between taxes and the phase?outs of social welfare benefits as household income increases frequently imposes an excessively high effective marginal tax on earning additional income. This phenomenon, known as the poverty trap,  disourages individuals in low income households from entering the labor force, working
extra hours, or seeking career advancement that would contribute to their economic  mobility and well?being.         


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