Why We’re Unequal: 6 Facts You Need to Know

Geoffrey Sanzenbacher received his PhD from Boston College in Economics in 2010, and since 2014 has taught a course on the Economics of Inequality. Dr. Sanzenbacher is Associate Professor of the Practice with the Economics Department at Boston College, and a Research Fellow at the Center for Retirement Research.

This week we talk with our friend Geoffrey Sanzenbacher, an econ professor and Research Fellow at the Center for Retirement Research at Boston College. In addition to working with students, Geoff researches the role of inequality in late-life finances, the retirement savings decision, and the transition from defined benefit to defined contribution pensions.

Geoff has an interest in how these issues relate to low-income workers. In this piece, we talk about his new book entitled Six Facts that Matter: Understanding Inequality in the United States.

Geoff, why this book?

At Boston College, I began teaching a class on what economics has to say about why there is inequality. And, in particular, why inequality in the United States has worsened. To support the class, I looked for an economics-type book that would help explain everything I thought was important.

I discovered a few available books that were good, but not quite right for my class. Many only covered a specific angle, like racial or gender inequality, the middle class, or the very rich. Also, most books had strong points of view which were quite political. That wasn’t what I wanted to teach from.

I needed something that would summarize the most important facts about inequality in the United States but from a balanced perspective.

The way economists would look at it. I also wanted a book that strives to be as truthful as possible. And it needed to be very readable and relatable. That inspired me to create this new piece.

You successfully reduced the inequality equation to six facts. How did you get to six?

Initially, my classroom teaching was not designed around these six facts at all. It was like today I'm teaching about unemployment, then discrimination the next day. The topics were diverse.

However, I realized as I taught that everything I was covering aligned with one of six topics.

These topics include racial inequality, gender inequality, the middle class, the very rich, the impact of lower marriage rates, and differences in opportunity. These are the key elements that matter most to inequality in America.

Let us start with fact one, the falling middle

You have a lot of different pressures on workers, and they’re all falling on the same workers. For example, you have the introduction of technology that is automating certain processes, and those processes were done by middle-income people in the past.

You also have globalization, which tends to advantage higher educated people and disadvantage lower educated people. The reason is that we have a relative abundance in higher-skilled workers, so that’s what we offer to other countries and those workers benefit from that bigger market. Less-educated workers on the other hand suffer from the extra competition.

Also, we have the decline of unions, the decline of bargaining power for workers, and larger firm sizes, and all of these tend to push more on people in the middle than people up the ladder.

So, you have all these trends that all tend to push on the same people, and in the same direction. Simultaneously, some of the trends actively benefit the higher income people.

Trade definitely benefits more educated workers, who now have entire markets where they are in demand. Automation tends to augment the skills of higher educated people who might be able to become a computer programmer or work with a lot of data, or whatever the case may be.

So, there are all these forces: some lifting up people in a certain segment of the population while also simultaneously holding down people in the other segment.

And, it’s not like anyone’s made a conscious choice – a lot of it is simply change. But we need to do something, and there are things we can do. (See the book for more!)

Related: Higher Ed: What Went Wrong – from the Risk Talking podcast with Allison Schrager

Related: The End of the Starter Home – Emily Badger in the New York Times

You point out a couple of things that would be useful in this space.

To me, we are not doing a very good job of ensuring we have competitive labor markets. I want to see labor have the ability to compete. I think that means making sure employers can’t keep workers from competing. This means getting rid of non-competes where they’re not necessary, getting rid of no-poaching agreements. Those things need to go. And we need to do a better job of enforcing anti-trust.

Plus, our tax structure benefits capital over labor.

Automation is more appealing than it needs to be, because our tax code favors capital over labor. There are a lot of technologies that aren’t really as good as a person but we use them because they’re cheaper than a person. Part of the reason they’re cheaper is because of the tax code.

Housing: we just have bad policy. Some places are working to get better, but many towns are not interested in changing the availability of housing that isn’t large, single family dwellings.

Finally, when the Fed raises interest rates to try to tamp down inflation, we need to realize that it’s low income people that are going to pay for that. They’re the ones that are more likely to lose their jobs. They’re the ones that are more likely now not to be able to afford the house because of those higher interest rates.

When we fight inflation the point of it is to make labor markets less hot. That lack of heat hurts people in the middle and the bottom the most. While we do need to fight inflation, we need to recognize that the burden of that falls disproportionately on these lower segments.

On the policy side, you have an Earned Income Tax Credit (EITC) that cuts off at $44,000 per household, which is low. You could easily extend that up toward the median household income of $65,000+, and at least give those households some sort of offset that doesn’t disincentivize work and that does recognize that the economy has grown without those people. The EITC tends to get bi-partisan support. And while it’s true that you’ve got to pay for that somehow, you could bring taxes on capital more into alignment with taxes on income. That would kill two birds with one stone.

Related: Does the U.S. Tax Code Favor Automation? – Acemoglu, Manera, and Restrepo from Brookings.

We’ve got five topics to go, let’s pick one more.

The one that I would like people to know the most is that the racial income gap is pretty much stuck where it was in the 1970s. I had no idea until I started writing the book. And I believe that for me not to know about implies that most people probably don’t know it. I think that this fact should trouble all of us.

We've had a Black president. We may think that we must have made some progress. And I know there has been some progress in many ways. But it hasn’t showed up at all in income.

A lot of the forces that affect middle class Americans affect Black Americans more, because Black Americans are even less likely to be in the upper tiers of the income distribution, and more likely to be in the middle and the bottom.

There are still tremendous amounts of inequality in education in this country. That stems from inequality in housing policy that is a century old at this point. And then there still is labor market discrimination. I think the fact that all those things work together is something that people need to appreciate.

We are where we were in 1975, and even behind in some places. And that should bother us.

Related: Black Workers Stopped Making Progress on Pay. Is it Racism? Eduardo Porter in the New York Times.

Since funding affects inequality, what if each school receives the same amount to educate kids? Tell us about some things you believe may be useful.

Part of the issue is that, if you truly wanted to address some of the inequalities, you would have to spend more money in low-income areas than in high-income areas. But we do exactly the opposite. We channel less in low-income areas than in high-income areas.

There are funding models available that perform better. New Jersey is an excellent example of a state that uses a better funding model. The state does funnel more money to lower-income schools than it spends on higher-income schools. It has better student-to-teacher ratios in low- and middle-income schools than it does in its high-income schools. New Jersey has really put its money where its mouth is with respect to pre-schools.

Every state, I believe, has some room in its policy to do some of this redistribution but the extent to which they do it varies widely. States like New Jersey provide a useful model.

As a note, I believe their funding model is non-linear in that it begins with a lot for high-income schools and then drops, and then rises for the very poorest schools, which is at least something. I think that type of funding model is what other states should seriously consider, and New Jersey does do a pretty good job of moving people up the economic ladder relative to some other places.

So, there are models. We could do it. I assume we don’t do it because we don’t want to do it. But we can. And places do.

What else is productive from a policy standpoint?

The big thing is that we have to do better with preschool and early childhood education. There is ample evidence that this is an effective way to spend public money, and that it probably pays for itself. That, I believe, would certainly alleviate racial gaps and would certainly alleviate some income gaps and opportunity, to have good quality preschool for everybody. I think it would also help to close the gender wage gap. I think there’s not a bad thing about it, to be honest. I think you could probably make it voluntary but widely available.

Then, from a policy standpoint, there is the housing issue and zoning. I think it is starting to get more attention, but we spend significant resources to keep people out of schools outside their neighborhoods. If you are not going to fix the school systems, you should allow lower-income people move to the good school systems, which we also do not do. So, I think early childhood education and zoning are the two most significant barriers.

Final word?

I'd like to point out that this is supposed to be a book for everybody. It's supposed to be honest, it’s not supposed to be biased. I'm trying to use an economist’s perspective. And so I'd like people of all stripes to read it and give it a fair shot.

Thank you Geoff! We recommend!

Dr. Sanzenbacher is the author of over twenty peer-reviewed academic articles in the fields of Economics and Policy, including in The Journal of Health Economics, Demography, The International Economic Review, The North American Actuarial Journal, The Monthly Labor Review, and The Journal of Pension Economics and Finance.

He has also published over forty Issues in Brief designed for a lay audience through his work at The Center for Retirement Research at Boston College. These briefs have covered topics related to the asset accumulation of low-income workers, rising inequality in mortality, and the difficulties less-educated workers face in extending their careers.

Additionally, he has contributed an Op-Ed to The Hill on racial wealth inequality. He has been cited in newspapers, including the New York Times and The Wall Street Journal, financial magazines such as Kiplinger’s, and has appeared multiple times on National Public Radio.

His book, "The Six Facts that Matter: Understanding Inequality in the United States," is available on Amazon and linked here.

This piece was featured in the October 6, 2022, edition of Retirement Security Matters. For more fresh thinking on retirement savings innovation, check out the newsletter here.