Incentives and Rewards

Economic inequality is the subject of Chapters 13 and 14 of Social Economics, rounding out Part II, goals of economic systems. Inequality of both wealth and income in the U.S. is greater than in most other economies, though Americans are least likely to believe that their inequality is “too large.” This chapter explores the reasons for economic inequality and why we tolerate it. The well-known education premium is part of the explanation for widening inequality. Added to this are changes in marriage patterns and changes in trade patterns and technology. Should inequality be considered a problem? One argument for why inequality, perhaps even large inequality, is necessary and beneficial is that the potential for a much higher income serves as a motivator—for everyone along the distribution. New research provides some evidence for this, though we see that the type of inequality matters. Economic mobility is a key. Examining mobility from several angles, we see that it is not as great in the U.S. as in many other countries. Factors slowing mobility are discussed. An important aspect is the “Parental Pull”—the tremendous influence, both positive and negative, that parents have on the economic success of their children.