It Takes a Nation.

• Author: Lind, Michael
• Position: Review

Is the income gap a symptom or a cause of our social ills?

CREATED UNEQUAL:

The Crises in American Pay

By James K. Galbraith

The Free Press, $26

The Long Boom of the U.S. economy in the late 1990s has diverted attention from a trend that has continued since the early 1970s: growing income inequality.

For a generation, inequality in both income and wealth has risen dramatically; at the same time, wages for middle-income workers have stagnated and low-income workers have lost ground. In Created Unequal, a brilliant and iconoclastic examination of the major social trend of our time, James K. Galbraith, who teaches at the Lyndon B. Johnson School of Public Affairs in Austin, Texas, argues that the growth in wage inequality is not an inevitable reality to which we must be resigned.

Galbraith's major target is the explanation of rising inequality as the result of differentials in levels of skill among Americans that are rewarded by an efficient labor market. According to Galbraith's elaborate dissection of the dogma of the natural rate of unemployment (or NAIRU--nonaccelerating inflation rate of unemployment), the labor market itself is a myth: "Labor supply, labor demand, the natural rate equilibrium, `market wages': each one of these ideas flows from a simple supply-and-demand diagram. Taken together, they describe conditions in a market that does not exist and never has existed, a market that is only an image, a market for a commodity that itself is only a vague abstraction, a figment of long-dead economics professors' imaginations." How, then, are wages and salaries determined? "The answer is institutions, customs, privilege, social relations, history, law, and above all, power."

The power to set wages can take the form either of economic monopoly power or naked political power. Instead of a single fluid labor market that rewards highly-skilled individuals, Galbraith identifies a "three-level economy" divided between the K-sector (knowledge or high tech), the C-sector (consumption goods), and the S-sector (the service economy). Galbraith argues that technological innovation, by producing monopolies, enriches K-sector workers and industries at the expense of those in the C- and S-sectors. "Both technology and trade strengthen the K-sector at the expense of the C-sector, not because they, `enhance skills'--workers in the C-sector can be just as highly skilled as anyone else--but because they strengthen the monopoly position of K-sector firms, and because they weaken the bargaining power of C-sector workers. Since the C-sector is vast and the K-sector is comparatively small, the result is an upward distribution of income." The unorganized, low-skilled workers in the S-sector--janitors, for example--suffer not so much from technology as from political powerlessness: "Workers are easily...