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Chapter 18: Problem 13

(Related to the Apply the Concept on page 626) In an article in the Wall Street Journal, Edward Lazear of Stanford University was quoted as saying, "There is some good news.... Most of the inequality reflects an increase in returns to 'investing in skills." Why would it be good news if it were true that most of the income inequality in the United States reflected an increase in returns to investing in skills?

Short Answer

Expert verified
Most of the income inequality in the United States reflecting an increase in returns to investing in skills could be seen as 'good news' because it implies that the income distribution is largely merit-based, stimulating individuals to invest more in their skills, and promoting a more educated and skilled workforce. However, this argument assumes that there equal opportunities for skill development, which may not be the case in reality.

Step by step solution

01

Understand the premise

First, carefully break down the statement made by Edward Lazear. He is arguing that most of the income inequality in the United States is due to differences in returns to investing in skills. This may seem counterintuitive, as income inequality is often perceived negatively.
02

Identify the significance of investing in skills

Income inequality resulting from differences in returns to investing in skills means that those who have invested more in their skills (through education, training, etc.) are reaping greater benefits in terms of higher income. This is a basic principle of market economics, where skills are rewarded based on their market demand and supply.
03

Explain why this could be 'good news'

If most of the income inequality is due to differences in skills, it implies that the income distribution is largely merit-based and not arbitrary. This has several potential benefits. For instance, it encourages individuals to invest more in improving their skills, thus promoting a more educated and skilled workforce. Additionally, by rewarding skill investment, economic productivity and growth are likely to increase over the long term.
04

Discuss potential caveats

It's important to note several caveats. First, while skill-based income distribution may be generally good, extreme income inequality can have negative socio-economic impacts. Second, it assumes equal accessibility and affordability of skill acquisition opportunities, which may not be the case in reality. Therefore, while it's good news that returns from skills investment are increasing, concurrent efforts should exist to ensure equal opportunities for skill development.

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