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Income inequality a matter of the 99 percent, not the 1 percent

It would be an understatement to claim that income inequality is much discussed these days. And if you have read the Internet in the last few months, you surely witnessed the fawning, obnoxious adoration heaped upon Thomas Piketty’s “Capital in the Twenty-First Century.” Often bought, seldom read, Piketty’s 700 pages shine a big, bright light on the fortunes of the top one percent, and have made him a hero in the eyes of the inequality left.

But should most of our attention be on the one percent? Hillary Clinton seems to think not. In a recent interview with Der Spiegel, Clinton argued that “the crux of the concern in our country” has “never been” the fact that some people earn very high incomes. “We’ve always had people who did better than other people. That’s just accepted,” she said. “The question is,” she continued, “how do we get back to having an economy that works for everybody.”

Clinton’s focus on “the 99 percent” is exactly right — and so refreshing. The Washington Post reports that many on the left are coming around to this position, too.

In the aftermath of the Great Recession, it is easy to see why the fortunes of the top one percent would receive so much attention. The public has the sense that folks at the very top — including many who got us into this mess — are making out like bandits, while the rest of us are suffering. And in general, it’s hard for many Americans to understand why the top one percent “deserve” their extremely high incomes. But that doesn’t change this basic reality: If you’re worried about income inequality, you should be more worried about the bottom 99 percent than the top one percent.

To see why, you have to understand what drives inequality by looking at each of these groups, the one percent and the 99 percent.

Imagine that the economy has two types of workers, high-skill and low-skill. High-skill workers earn higher wages, and the demand for them increases faster than their supply, causing their wages to increase further. The wages of low-skill workers, meanwhile, remain stagnant, lifting inequality, which worsens dramatically when the wages of low-skill workers are falling while those of high-skill workers are increasing.

The data confirm this story. The economists Claudia Goldin and Lawrence F. Katz find that about two-thirds of the increase in wage inequality from 1980 to 2005 can be explained by the growing wage premium from acquiring more skills through education. And the wage premium from going to college has increased largely because the growth of education attainment has slowed.

While this has been happening within the bottom 99 percent, the top one percent has been pulling away from the rest at a rapid clip. Is what’s happening with the top one percent quantitatively more important than what has been happening within the bottom 99?

The economist David H. Autor finds that if the gains of the top one percent between 1979 and 2012 were redistributed to the bottom 99 percent, each household would receive a one-time payment of about $7,000. This is a large sum, but not nearly as large as the increase in the skills premium. For example, Autor calculates that the earnings gap between a college educated and a high-school-educated two-earner family increased by about $28,000 between 1979 and 2012 — an amount four times as large as our hypothetical redistribution from the one percent to the rest. In 2012, this earnings gap was about $58,000. Clearly, tooling up a high-school educated family would make them much better off than simply giving them their share of the excess gains of the top one percent.

In other words, for the vast majority of Americans, inequality is being driven by the skills gap — not by whatever is happening with the top one percent. If you’re worried about inequality, then your most pressing concern shouldn’t be about the top one percent, but instead the bottom 99.

And our national conversation shouldn’t focus on the fact that some folks are doing much better than others, but instead should work towards creating the social and economic conditions wherein everyone can better their situation. This means addressing falling employment rates and earnings of less-educated workers, particularly men; fixing our broken, failing schools; creating post-secondary options in addition to the four-year BA that address the needs of 21st century firms; healing broken communities, and returning to a culture that feels comfortable discussing duties and responsibilities; reinvigorating civil society and the local institutions that subtly encourage work and responsibility; and more.

Enough with soaking the top one percent. Let’s focus on the 99. Clinton 1; Piketty 0.

Michael R. Strain is a resident scholar at the American Enterprise Institute. This column first appeared in The Washington Post.

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