Alan Reynolds

President Bush recently announced that inequality has "been rising for more than 25 years." But what did the president mean by inequality? And when, during that 25- year period, was inequality rising?

Edward Lazear is chairman of the President's Council of Economic Advisers, so he seems a likely source for the president's impulse to be mistaken for a Democrat. In a speech last May, Lazear said, "There is little doubt that there has been a 25-year trend of a growing gap, sometimes called income inequality, between the wages of the skilled and the unskilled."

"College graduates," he explained, "earn about two-and-a-half times as much as high school drop-outs." If that weren't the case, why stay in school?

The "skill gap" between earnings of college graduates and dropouts is not what "income inequality" means. Economists who try to explain differences in household income by differences in earnings among full-time workers are ignoring huge differences in the number of such workers. There were 16.7 million full-time workers in the top fifth in 2005, but only 3.2 million in bottom fifth. The emphasis on earnings inequality also ignores the source of most income of the bottom fifth -- namely, more than $1.5 trillion of government transfer payments such as Social Security, unemployment benefits, the Earned Income Tax Credit, Medicaid and food stamps.

Even if wage gains are still growing much faster among college grads than among high school grads and dropouts (which has been unclear since about 1993), that certainly would not imply larger numbers of Americans are stuck in low-wage jobs today than in the past. In 1980, only 14 percent of the workforce had four or more years of college, while a third had less than a high school diploma. By 2005, a third had graduated college and only 10 percent had less than a high school diploma. The relative wages of college grads and dropouts are far less significant than their relative numbers.

Fed Chairman Ben Bernanke joined the presidential chorus in a recent speech. He too said, "Rising inequality ... has been evident for at least three decades." Like Lazear, he quickly changed the subject from income to some gap in "real weekly earnings" between the top and bottom 10 percent of "full-time wage and salary workers" in 1979 and 2006. Average earnings of those narrow slices of full-time workers cannot possibly measure actual income inequality, unfortunately, because very few low-income households contain anyone who works full-time.

Alan Reynolds

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