A follow-up on income inequality

A quick follow-up to a post on income inequality from earlier this month. Part of the concern that some bloggers/economists have voiced about the rise in inequality is that it's a secular trend that shows no sign of stopping. Which brings us to an interesting fact -- in recent years, income inequality in the United States has been falling. Geoffrey Colvin explains in Fortune: Rising income inequality has settled comfortably into America's big economic picture as a reliable--and much lamented--megatrend. Starting around the late 1960s, U.S. incomes started to become more disparate. The trend was remarkably steady. Recessions might slow it down or briefly reverse it, but mostly it just marched on.... But now it appears just possible--based on the latest research available--that the whole chain of causation is falling apart. Wait before you cheer. The evidence is in a new Fed study of family finances, the latest in a triennial series. It shows modest but clear signs of incomes converging rather than diverging. Between 2001 and 2004 (the most recent year for which data are available), incomes of the poorest 20 percent of families increased while incomes of the richest 20 percent fell. Basically, the poorest families' share of total incomes grew, and the richest families' share shrank. Incomes became just a little less unequal. What explains this? Colvin proposes... wait for it... offshore outsourcing: What could that trend reversal mean? The most obvious explanation seems highly counterintuitive: The skill premium, the extra value of higher education, must have declined after three decades of growing. The Fed researchers didn't pursue that line of thought, but economists Lawrence Mishel and Jared Bernstein at the Economic Policy Institute did, and they found supporting evidence in the new Economic Report of the President, issued within days of the new Fed survey. It cited Census Bureau data showing that the premium had indeed fallen sharply between 2000 and 2004. The real annual earnings of college graduates actually declined 5.2 percent, while those of high school graduates, strangely enough, rose 1.6 percent. That is so contrary to the conventional view of this major economic trend that it demands explanation. One possibility is that it's just a blip. Could be, but remember that 2004, when the readings started going haywire, was a year of strong economic growth, low unemployment, and rising productivity, offering no obvious reason to expect weird results. The other main possibility is that something unexpected and fundamental is changing in the way the U.S. economy rewards education. We don't yet have complete data, but anyone with his eyes open can see obvious possibilities. Just maybe the jobs most threatened by outsourcing are no longer those of factory workers with a high school education, as they have been for decades, but those of college-educated desk workers. Perhaps so many lower-skilled jobs have now left the U.S.--or have been created elsewhere to begin with--that today's high school grads are left doing jobs that cannot be easily outsourced--driving trucks, stocking shelves, building houses, and the like. So their pay is holding up. Now, this would certainly be a reversal of course. Most economists allow that trade is responsible for a small increase in income inequality (though it's not all that important compared to other factors). I'm pretty dubious of this assertion, since it's my understanding that IT salaries have been increasing again ever since demand for IT went up. So mu hunch is that Colvin is over-extrapolating from the reduction in income inequality that came with the brief 2001 recession. Still, I eagerly await my reader's reaction to the offshoring hypothesis.