Causes of Income Inequality

Many libertarians argue that we shouldn't worry about income inequality.  I don't think this is a good argument.  If people care about income inequality it will be difficult to persuade them that they shouldn't.  Of course income inequality isn't everything.  There are other things that people care about.  Nevertheless since people care about income inequality it seems reasonable to put some thought into its causes and what can be done about it.

Some people have speculated that inequality results from the structure of our economy.  What they mean here is that it results from the types of jobs that are available.  If this is so we are unlikely to make any progress in addressing the root cause of that inequality.  I'm not sure how we could test this idea.  While it is possible that technological changes might make it so that there were only jobs that would require either a lot of skills or no skill at all, changes that came about as a result of interference in the labor market might have much the same effect.

Some have suggested that the difference is that unions are weaker.  Perhaps this is so, but I'm not sure that that would cause inequality.  Strong unions could raise wages for poor workers.  On the other hand, they might raise wages for people who would have earned greater than average wages.  The impact of unions on income distribution is uncertain.

What's less uncertain is that unions have gotten weaker fairly steadily since the end of WWII.  According to Wikipedia rising inequality in the U.S. dates to the 1970's. 

Interestingly enough net government debt as a percent of GDP declined up until the 1970's and then increased.  It is easy to see how greater government debt could increase the incomes of rich bond holders thus exacerbating inequality.  However, I'm not sure how big the effect would be.  There are many countries that have more government debt than the U.S., but have more equally distributed income.