Paper #: 97-05-047
The last decade has seen a resurgence of interest in issues of inequality by the economics profession. The sources of this increased interest are straightforward to discern. First, both increasing cross-section wage inequality as well as the apparent intractability of inner city poverty have placed inequality-related issues at the forefront of public policy debates. Second, advances in economic theory have provided new ways to formally analyse the properties of heterogeneous populations of economic actors and in turn have allowed many aspects of inequality to be rigorously modeled. In this paper, I argue that a wide range of recent empirical and theoretical advances within economics, taken together, represent a new perspective on the nature of inequality. To be clear, the emergence of this new paradigm does not imply that more traditional explanations of inequality are invalid; rather, it means that these older explanations may be usefully supplemented. What are the key features of this perspective? The memberships theory of inequality is based on three general propositions. 1. Individual preferences, beliefs, and opportunities are strongly influenced by one's memberships in various groups. Such groups may be fixed, such as race, or may be determined by the economy or society, such as neighborhoods, schools, or firms. 2. Positive interaction effects occur between members of a given group, so that group level influences generate common outcomes among group members. 3. Greater societal stratification by income, race, education, or language leads to divergence in group characteristics which results in greater cross-section inequality and decreased social mobility. This new perspective emphasizes the role of influences on individual outcomes of an array of groups whose memberships are themselves determined endogenously in the economy/society. Taken as a whole, this new perspective may be referred to as the “memberships theory of inequality.” In contrast to the memberships theory of inequality, previous models of the evolution of the income distribution (circa 1980) emphasized individual characteristics with at most little attention to group memberships. For example, the human capital model still best exposited in Gary Becker (1975) typically emphasized the connection between individual productive ability and wages; similarly, models of intergenerational mobility such as those of Becker and Nigel Tomes (1979) or Glenn Loury (1981), typically focused on within-family effects of human capital investment, so that the income histories of family dynasties evolved independently of one another. In what sense is the memberships theory distinguished from the more traditional formulations of the human capital perspective? The key difference lies in the level of aggregation at which one describes the influences on an individual which affect his life prospects. To be clear, the memberships approach does not mean that the atomistic human capital approach is not important. Indeed, as seen in work such as that of Roland Bénabou (1993,1996), both perspectives can be integrated in interesting (and elegant) ways.