The inequality snowball effect


That prestige thing, perpetuating inequality. (Linda Cicero/Stanford News Service)

Nathan Wilmers, a reedy 25-year-old in the second year of a sociology PhD program at Harvard, had sports cars on the brain last fall. Sports cars and wage inequality.

"Initially I was thinking about high-end goods, like Ferraris, Lamborghinis, that you must pay workers a lot more for building them," Wilmers says. "Which is not where the paper ended up."

Where he ended up in a working paper published today, though, is far more interesting: The idea that as the wealthy people who buy high-end sports cars start to account for more and more consumer spending in certain industries, they tend to pay exorbitant prices for the most sought after professionals within those industries, while everyone else has a hard time getting by. It's a disturbing find -- the rich are getting richer, and their preferences drive wages to polarize even further, creating a self-perpetuating cycle of inequality.

Heavy stuff! But so wait, how does that work?

Say, for example, you need some legal defense or advice. If you have lots of money, the marginal proficiency of a lawyer will matter a lot more to you, because you've got more money on the line -- and since you've got the money to burn, you're willing to pay exorbitant rates for the very best, or those that convey the highest status. Same goes for a real estate agent, investment banker, or even a household servant: The most sought-after people get bid up in price to a degree that exceeds how much better they actually are than everyone else. Those who don't fall into that category, however, are consigned to earning lower wages in service of an increasingly strapped middle class.

That's the services side of things. Wilmers's theory might also be extended to goods, like wine: You don't have $1,000 bottles because they're actually 100 times better than your average ten-buck-chuck. You have them because the ultra-rich can afford to pay. "These findings can be explained with status consumption of high end wines leading to insensitivity to price, which in turn allows an inflated distribution of prices for high end wines," Wilmers writes. 

Those are all interesting cases. The sector where Wilmers's findings might have the broadest implications, though, is one in which he finds himself today: the academy.

Two major things are happening in the economics of education.

First of all, the proportion of total spending on school that's supplied by top income earners has been rising:

Rich people now account for a higher percentage of spending on education. (Bureau of Labor Statistics, Consumer Expenditure Survey, analysis by Nathan Wilmers)
Rich people now account for a higher percentage of spending on education. (Bureau of Labor Statistics, Consumer Expenditure Survey, analysis by Nathan Wilmers)

That phenomenon shows up in several forms. As competition for jobs increases, the name brand of the school you went to matters more. This is especially true in graduate school  fields like law, where many firms don't look beyond the top 10 law schools for new hires. And meanwhile, as state spending on public universities shrinks, more of them are recruiting out-of-state students who can pay full freight. That keeps costs down for in-state students, but also means there are fewer seats available. Private universities, as well, have had to weaken their "need-blind" admissions policies in order to admit more students who don't need financial aid. As much as schools like to talk about having diverse student bodies, all but the richest have strong financial incentives to admit only those with the highest stats.

"The higher number of applications you get, and the lower your admit rates are, the higher the scores and grades of the kids you ultimately accept, which correlates to higher income folks, that leads to a higher bond rating, which leads to how much you can borrow at what rate," says Wendie Lubic, a college consultant in Washington, D.C.,  "That gives you the money to build the buildings that can attract the students, etc. etc."

And here's the second thing happening in education: Superstar professors are raking in higher salaries, while most of the teaching gets done by low-paid, part-time, non-tenure track faculty. According to Ronald Ehrenberg, director of Cornell's Higher Education Research Institute, although overall universities haven't increased spending on faculty, salaries have become more polarized, with those at the top making a very comfortable living while those at the bottom scrape by making a few thousand dollars per course.

Are those two things related? It's hard to say. Theoretically, big-name professors factor into the nebulous concept of "prestige," which is the single largest factor driving where parents without cost constraints want their kids to go.

"Students who come from families with really high willingness to pay are willing to pay for the prestige factor of going to a really high-end university," Wilmers explains. "That leads them to compete over top faculty. You want to attract the top researchers who'll build your academic brand."

But Wilmers's education dataset isn't just about teachers -- it also includes administration, which has ballooned in recent years. The American Association of University Professors has documented that executive salaries have increased proportionally much more than those paid to academics, since they're competing with those in the private sector. Those are the people who engineer large real estate projects, found campuses in the Middle East, and generally run universities like the businesses they are.


So, if it looks like America's increasing inequality problem creates a snowball effect through the consumption preferences of the super-rich, is there anything that can stop it?

Well, it may be possible at least to ameliorate the effects. For an example of how that can work, look again to higher education, where adjuncts have been rapidly organizing to bargain with universities for better pay and working conditions. Even tenured faculty -- those who won the academic lottery -- see the benefit of slowing the inexorable slide towards a less formal workplace, since full-timers are the ones saddled with departmental administrative work.

"We see it as trying to fight back against this 40-year trend, by creating a disincentive for institutions to continue to casualize the teaching profession," says Anne McLeer, research director for SEIU Local 500, which has organized adjuncts at many of the universities in Washington, D.C. "You're less cheap, less dispensable, less flexible, so that pushes back on this trend from the bottom up."

Lydia DePillis is a reporter focusing on labor, business, and housing. She previously worked at The New Republic and the Washington City Paper. She's from Seattle.
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