What are the sources of inequality? The first place we would look for an answer is labor incomes, which account for about 75 percent of factor incomes.Even if property incomes were distributed equally, much inequality would remain. The forces that produce inequalities in earnings are difference~ in abilities and skills of labor, in intensities of work, in occupations,and in other factors.

Abilities and Skills

People vary enormously in their abilities-in physical, mental, and temperamental dimensions. However, these personal differnces are of little help in explaining the puzzle of income dispersion. Physical traits (such as strength or height or girth) and measured mental traits (such as intelligence quotient or tone perception) explain relatively little of the difference among the earnings of people.

This is ‘not to say that individual abilities matter little. The ability to hit a home run or charm an audience greatly enhances a person’s earning potential. But the skills valued in the marketplace are varied and often difficult to measure. Markets tend to reward willingness to take risks, ambition, luck, strokes of engineering genius, good judgment, and hard work-none of which is easily measured in standardized tests. As,Mark Twain might have said, “You don’t have to be smart to make money. But ‘you do have to know how to make money.”

Intensities of Work

The intensity of work-varies enormously among individuals.The workaholic may log 70 hours a weekon the job, never take a vacation, and postpone retirement indefinitely. An ascetic might work just .enough to pay for life’s necessities. Differences in income might be great simply because of differences in work effort, yet no one would say that economic opportunity was therefore genuinely unequal.


One important source of income inequality is people’s occupations. At the low end of the scale we find domestic servants, fa-stood personnel, and unskilled service workers. A full-time, year-round employee at McDonald’s or at a car wash might earn $10,000 a year today.

At the other extreme are the high-earning professionals.What single profession seems to make the most ‘money? In recent years it has without question been medical doctors. Physicians had average earnings of$199,000 in 1997, up almost 70 percent since 1986.’\11 at’is the source of such vast differences among occupations? Part of the disparity comes from investments in human capital, such as the years of training needed to become a doctor. Abilities also plays role, for example. in limiting engineering jobs to those who _ have some quantitative skills Some jobs pay more because they are dangerous or unpleasant (recall the discussion of compensating differentials in Chapter 13). ,And when the supply of labor is limited in an occupation, say, because of union restrictions or professional licensing rules, the supply restrictions drive up the wag~ and salaries of that Occupation.

Other Factors

In addition to ability, intensity of work, and occupation,other factors affect the inequality of wage earnings.We saw in Chapter 13 that discrimination and exclusion from certain occupations have played an important role in keeping down the incomes of women and many minority groups. In addition, the home life and community experience of children have a major impact on later earnings.Children of the affluent benefit from their environment at every stage. A child of poverty often ‘experiences crowding, poor nutrition, run-down: schools, and overworked teachers. The scales are tipped against many inner-city children before they
are 10 years old.

Some economists believe that. changing technology,immigration, international trade, and the increasing prevalence of winner-take-all markets are creating greater inequality. To take the first-of these, recall Chapter II’s discussion of how technology is leveraging individual performance so that it reaches many more people. As a result, while talented ~athletes made little more than the average factory worker three decades ago, signing bonuses for basketball’s free agents today are approaching $100 million. Similar trends’ are seen in other sports, in entertainment, and in salaries of corporate _officers.

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