Holt 7525-9 S15_IT

Overstating the Inequality of Wealth Distribution
The inequality of wealth distribution is overstated in two ways. First, the distribution of wealth is
measured at a point in time just like the distribution of income. Thus, wealth distribution compares
persons at different career stages. Comparing the wealth of 65-year-olds to the wealth of 35-yearolds
overstates the inequality of wealth distribution.
The second way that the inequality of wealth distribution is overstated is that the value of human
capital is not included in measuring wealth. For most people, human capital is by far the most
valuable asset owned. According to economist Gary Becker, human capital makes up 75% of the
wealth in a modern economy.
Example 9: A 25-year-old recent graduate of Harvard Law School may have very little wealth in
terms of physical assets. But a Harvard Law School degree is very valuable human capital. A 65-
year-old retiree may have a large accumulation of physical assets, but their human capital is not
going to be generating any further income.
Causes of Continuing Income Inequality
There is a large degree of economic mobility in the U.S. economy. Many people who start out
with a low income level eventually reach much higher income levels. Most people prefer higher
income to lower income. If most people are striving for higher income, why don’t all people
eventually achieve equal income? Why is there continuing income inequality? There are six
causes of continuing income inequality:
1. Natural ability. People differ in their natural abilities. Some people are born with a high level
of natural ability in an area such as mathematics, or music, or athletics. A person with a high
level of a marketable natural ability may earn higher income than a person with a lower level of
that natural ability.
2. Human capital. People differ in their development of human capital. Human capital is
developed ability that increases a person’s productivity. Human capital is developed primarily
through education and training and through work experience. Not all education and training
provides the same value of human capital. A degree in chemical engineering may increase a
student’s earning power more than a degree in elementary education. Also, a person with
more natural ability will gain more human capital from a course of education or training than a
person with less natural ability. Still, earnings increase as the education level increases.
Example 10: In 2012, 12.9% of households in the Lowest Income 20% included a person with at
least a bachelor’s degree. 77.2% of households in the Highest Income 20% included a person
with at least a bachelor’s degree.
The table below shows the median weekly earnings for full-time workers with different
education levels in 2013. The information is provided by the Bureau of Labor Statistics.
Median Weekly Earnings by Education Level for Full-time Workers Age 25-64 in 2013
Not a high school graduate $472
High school graduate $651
Some college or Associate’s degree $748
Bachelor’s degree $1,108
Advanced degree $1,389
FOR REVIEW ONLY - NOT FOR DISTRIBUTION
Work experience is another source of human capital. Not all work experience provides the
same value of human capital. Fifteen years of experience as an attorney will likely increase a
person’s earning power more than fifteen years of experience as a truck driver. Still, median
earnings increase over the average worker’s career. The main reason that earnings increase
Income Distribution and Redistribution 31 - 4