The quality of inequality

The debate over inequality launched two years ago by the “Occupy Wall Street” movement is enjoying a resurgence, including at the Davos meeting currently underway. The debate remains focused on income inequality, which seems to have increased substantially since the 1970s across the industrialized world, and particularly in the United States.

Yet, there are other ways of measuring inequality than simply comparing income levels, and these other kinds of inequality are not evolving in the same manner. If we dig a little deeper, we discover that in fact our society may be less unequal than we think, and that it is becoming even less so because these other forms of inequality are not growing — and some are actually diminishing.

Income is a poor measure of inequality since it varies greatly throughout an individual’s life and does not necessarily correspond to one’s level of well-being. Comparing what people consume is a much more appropriate way of measuring inequality of real well-being.

Individuals have a tendency to keep their long-term consumption levels more constant than their income levels. For example, a retiree might have a low income because he or she is no longer working, but nonetheless maintain a high consumption level thanks to savings, and also thanks to no longer having to take on major expenses like buying a house.

Inversely, a student, even one with a very low income, will more often than not have a consumption level higher than his or her income would justify, thanks to having borrowed in order to finance current consumption and invest in training that will increase the probabilities of him or her getting a good job in the future. We can therefore see how consumption paints a more accurate picture of standard of living than income does.

According to economists Bruce Meyer and James X. Sullivan, between 1980 and 2011, income inequality in the United States increased by 45% while consumption inequality increased by only 19%. According to other researchers, consumption inequality has not increased significantly since 1984.

We can also use a more subjective but perhaps more relevant notion, that of life satisfaction, to measure inequality. As societies become wealthier, individuals have more and more opportunities to specialize and more and more means at their disposal for achieving happiness. A wealthy society allows its members to meet their basic needs with relative ease, and then to satisfy their desires for personal fulfillment in ways that are not necessarily directly related to their incomes, nor to their gross consumption levels. One doesn’t need to throw millions of dollars around to become happy.

For example, taking a yoga class, developing one’s talent as a watercolourist, or being part of a virtual community of people who share a passion for the chivalrous traditions of the Middle Ages are all activities that may not cost very much money but that can provide deep satisfaction.

When we examine the data on life satisfaction, then, it should come as no surprise that even as income inequality has increased, happiness inequality has fallen. This is the conclusion of a study from the prestigious National Bureau of Economic Research.

Finally, in analyzing the phenomenon of inequality, we must also consider the effect of personal choice. Some individuals choose to work long hours and to study for many years to ensure high incomes. Others set an income target to meet their needs, and once they reach it, prefer to use their free time for other activities.

Income inequality resulting from these choices is in no way illegitimate, and we would have to actively discourage individual effort in order to reduce it. We can, however, consider inequality resulting from factors inherited at birth or other factors over which individuals have no control to be types of inequality that are clearly bad.

As it happens, since 1968, the importance of these bad kinds of inequality has diminished in the United States. While 33% of all inequality in 1968 was due to factors inherited at birth, this proportion had dropped to 18.6% by 2001.

In short, certain forms of inequality, undoubtedly the most important ones from the perspective of personal flourishing, have tended to be stable or to diminish. Others are the result of legitimate personal choices. It is perhaps time to admit this in order to have a better understanding of how to address the truly deplorable kinds of inequality.

Michel Kelly-Gagnon is President and CEO of the Montreal Economic Institute. The views reflected in this column are his own.

Back to top