A Simple Value-Neutral Model of Rising Income Inequality

Suppose that the range of options has expanded in both directions. There are more ways to make a lot of money, and there are more ways to live comfortably without earning much or without earning anything at all. Next, suppose that people vary in their preferences. Some prefer more income with less leisure, and some prefer more leisure with less income. Think about what happens to naively-measured “income inequality” in this world.

I’m nearly certain both conditions in the above paragraph are true. Incomes (conditional on working) have risen, and it’s easier and much more common these days to be a “live-in-your-parents’-basement-playing-video-games” man-child. I don’t think that the corporate lawyer and the under-employed man-child were cast into their roles by a cosmic role of the dice. People choose their professions in large part based on their preference for the leisure/income trade-off.

If annual income is the metric on which we’re to measure “inequality” (and it’s a phenomenally bad one), then we should expect it to increase as the world gets richer and more prosperous. If we picked a more relevant measure of economic well-being (like consumption, while perhaps monetizing leisure to put it on the same level as other forms of consumption), we’d see that the world is much more equal. 

I don't have a ton of data to bring to bear on this simple model. I have read that when you measure the activity of unemployed men of prime working age, they are spending a lot of time playing video games (citation needed). Anecdotally, I know a lot of people who could have earned more but deliberately chose not to. They picked a b.s. (lower-case) major in college, or they picked a decent career path but weren't "gunner" enough about it, or they finished their undergraduate degree but decided at the last minute not to go on to law school. As the title says, my explanation is value-neutral. I'm not judging these people for not working harder and I'm not going to insist that they all made mistakes (though I suspect that some of them didn't act in their own long-term self-interest).

Now think for a moment who is likely to attribute their success mostly to chance versus mostly to effort. Think about who will be more apt to notice and remember obstacles to their success. Who is more likely to rationalize bad decisions? I'm guessing that lower-income, lower-status folks are more likely to perceive (imagine?) barriers to their success.