How Much Ineqality is Ideal?

[david_myers]

Originally posted on December 9, 2014.

Economic inequality is a fact of life.  Moreover, most folks presume some inequality is inescapable and even desirable, assuming that achievement deserves financial reward and that the possibility of making more money motivates effort.

But how much inequality is good?  Psychologists have found that places with great inequality tend to be less happy places, and that when inequality grows so does perceived unfairness, which helps offset the psychological benefits of increased affluence.  When others around us have much more than we do, feelings of “relative deprivation” may abound. And as Kate Pickett and Richard Wilkinson document, countries with greater inequality also experience greater health and social problems, and higher rates of mental illness.

So, how great is today’s economic inequality? Researchers Michael Norton and Dan Ariely invited 5,522 Americans to estimate the percent of wealth possessed by the richest 20 percent in their country. The average person’s guess—58 percent—“dramatically underestimated” the actual wealth inequality. (The wealthiest 20 percent possessed 84 percent of the wealth.)

And how much inequality would be ideal?  The average American favored the richest 20 percent taking home between 30 and 40 percent of the income—and, in their survey, the Republican versus Democrat difference was surprisingly modest.

Now, working with Sorapop Kiatpongsan in Bangkok, Norton offers new data from 55,238 people in 40 countries, which again shows that people vastly underestimate inequality, and that people’s ideal pay gaps between big company CEOs and unskilled workers is much smaller than actually exists.  In the U.S., for example, the actual pay ratio of S&P 500 CEOs to their unskilled workers (354:1) far exceeds the estimated ratio (30:1) and the ideal ratio (7:1).

Their bottom line:  “People all over the world and from all walks of life would prefer smaller pay gaps between the rich and poor.”