What can governments do to slow or reverse the trend of rising income
inequality? Some economists argue that increasing taxes on high-income
individuals would be an effective way to reduce the inequality of after-tax
income. This is undoubtedly true. Other economists, however, argue that
such measures do little to address the underlying causes of the pre-tax
inequality, and thus do not really solve the problem.
Some argue that policies designed to restrict firms’ ability to outsource
labour to foreign countries, or to prevent consumers from having such
ready access to low-price foreign products, would help reduce income
inequality. This is unclear. While the effects on the labour market may
work in the desired direction, it is also true that these kinds of trade
restrictions reduce consumers’ overall well-being by raising the prices
paid for products. The overall effect on the income distribution is difficult
to predict.
Many economists also agree about the importance of education and the
acquisition of skills in determining an individual’s earnings. As we saw
earlier in this chapter, greater educational attainment is strongly
correlated with higher earnings. Such greater skills or training may also
help workers adjust to the inevitable forces generated by technological
change and globalization, and help them avoid having to compete for the
economy’s lowest-skilled jobs. But policies aimed at improving education
and skills only pay off over the longer term, and do little to change the
current degree of income inequality.
Few economists would suggest that the process of globalization or the use