From: Ian Wright (iwright@GMAIL.COM)
Date: Mon Oct 04 2004 - 12:22:27 EDT
Hi Jerry Thanks for answering the questions. The objections you raise to tendencies to equalisation are not germane, primarily because I would expect pronounced income inequalities in a market economy, as I stated in a previous post. Hence, I do not expect: > On the contrary, we would expect -- given existing inequalities -- > that if there were such a tendency than it would manifest itself > empirically in a long-term _decline_ in wage disparities rather than > relative stability in wage disparities. I have never claimed that a tendency would manifest as a long-term decline in income dispersion, because I think that income inequality is a property of the statistical equilibrium state of the economy, and therefore invariant over time. I agree that a market economy produces income inequality; indeed, I provided an explanation that accounted for the functional form of this income inequality, an explanation very different from the enumeration and classification of causal factors that affect wages. The link between the real tendency to equalise wages and its empirical manfiestation is complex, but I mentioned two possible manifestations, one counterfactual, one actual. First, the income dispersion may be narrower than would otherwise be the case if workers did not try to exit low-pay and enter high-pay jobs. Second, the unimodality of the income distribution I think indicates that workers equal in their productive capabilities are distributed around a single mode. Both of these possibilities require more careful work to evaluate, but they were my responses to your original question of how this tendency might manifest empirically. I mentioned in a previous post that the exponential distribution is a reasonable fit for 90-95% for the income of all groups in industrialised countries over a period of several decades. As with all empirical data, there are other fits, such as lognormal or gamma, and also slightly different measures can be employed, but that is not too important here. There is no trend, because this is a functional form. As I also mentioned previously, the dispersion may wax and wane (maybe with the business cycle, an interesting question), and the mean may change, but the functional form is invariant. I provided a theoretical explanation for this fact, that it is a maximum entropy distribution under a money conservation constraint. This kind of explanation is probabilistic, and so it can take a little getting used to. The important point, however, is that this explanation is intended to include many if not all of the concrete determinations that have been mentioned as causal factors that affect wages. It is a highly parsimonious explanation because it collects all those concrete determinations together and assumes they contribute entropy-increasing noise. Contrast to the methodological approach of enumerating all the possible events that can occur in the labour market. It becomes difficult to understand how all these factors interact. It can be very complex. A better approach is a top-down one: assume that all events can happen, subject to global constraints, and then start counting probabilities. We then get the most probable statistical state of the complex system. This is why I asked for other possible explanations of the exponential form of the income distribution, so we can compare and evaluate them to the maximum entropy argument. I think that listing lots of causal factors without a theoretical scheme to put them back together in order to explain empirical data is incomplete. Enumeration and classification is only a step towards understanding. Also it is too hasty and has a hint of empiricism to reject a real tendency even if its empirical manifestation may be obscured. Would the claim that there is a tendency to equalise profits raise similar objections? Best wishes, -Ian.
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