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Normal growth in inequality

November 29th, 2002

Jeff Madrick observes that unemployment pinches hard at the bottom of the economic ladder. As he observes the steady growth in US inequality observed over recent decades was briefly reversed, or at least halted, in the late 1990s when the unemployment rate fell to 4 per cent. Beginning in 2000, the growth in inequality has resumed.

Maddrick concludes correctly that the rate of unemployment is a major factor in driving the growth in inequality. But he is over-optimistic in saying that the experience of the 1990s proves that unemployment can be pushed down to 4 per cent and kept there. The late 1990s represented an unsustainable and probably unrepeatable bubble. At least under its current economic institutions, the US can’t hold unemployment much below 6 per cent. It follows that the same institutions generate steadily increasing inequality.

Of course, other countries haven’t done notably better on unemployment. Allowing for distorting factors like disability benefits, and differing propensities to imprison the unemployable, there isn’t a lot of difference between US, European, Australian and Japanese unemployment rates. But at current unemployment rates the US, and other English speaking countries have seen a lot of growth in (already high) inequality, whereas inequality in Europe and Japan has been much lower and fairly stable.

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