The Upside of Income Inequality

Income inequality in China substantially wid­ened, particularly between households in the city and the countryside, after China began its rapid rate of economic development around 1980. The aver­age urban resident now makes 3.2 times as much as the average rural resident, and among city dwellers alone, the top 10 percent makes 9.2 times as much as the bottom 10 percent.[1] But at the same time that inequality rose, the number of Chinese who live in poverty fell—from 260 million in 1978 to 42 mil­lion in 1998.[2] Despite the widening gap in incomes, rapid economic development dra­matically improved the lives of China's poor.

Politicians and many others in the United States have recently grown concerned that earnings inequality has increased among Americans. But as the example of China—or India, for that matter—illustrates, the rise in inequality does not occur in a vacuum. In the case of China and India, the rise in inequality came along with an acceleration of eco­nomic growth that raised the standard of living for both the rich and the poor. In the United States, the rise in inequality accompanied a rise in the payoff to education and other skills. We believe that the rise in returns on investments in human capital is ben­eficial and desirable, and policies designed to deal with inequality must take account of its cause.

The Upside of Income Inequality

American.com

Tue May 8

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