Academic journal article AEI Paper & Studies

Eight Market-Oriented Proposals That Reduce Income Inequality

Academic journal article AEI Paper & Studies

Eight Market-Oriented Proposals That Reduce Income Inequality

Article excerpt

Debates over economic policy are often framed as conservatives supporting market-oriented policies, while progressives support government interventions. However, there are many market-oriented policies that can lead to more equality, an important goal for most progressives. This paper outlines eight policies that are likely to lead to greater equality through an increased reliance on the market.

Progressives have generally looked to government interventions in the market as a way to limit income inequality and reduce poverty. These interventions can be useful, but there is a limit as to how far they can go. A minimum wage can help boost the income of low-end workers, but undoubtedly at some levels a higher minimum wage will increase unemployment among less-skilled workers. Progressive taxation can lessen some of the extremes of inequality produced by the market, but high levels of taxation will have negative behavioral effects and divert substantial resources to tax avoidance and evasion, which are a complete waste economically.

For this reason, it is important to ask about ways in which the market is structured to produce inequality. If a different market structure would lead to less inequality, without reducing efficiency, it would be preferable to addressing inequality through tax and transfer policy.

This paper outlines eight policy areas in which it is arguably possible to structure markets differently, without reducing efficiency. These are not fully worked out policy proposals. Rather, they are intended to provide a basis for discussion.

Reducing Protections for Highly Educated Professionals

There is a large gap in pay between the mostly highly educated professionals in the United States and their counterparts in other wealthy countries. This is the result of both domestic protections, such as licensing standards that limit the number of people in the profession, and restrictions on foreign professionals' ability to work in their field in the United States. There would be large potential gains from eliminating unnecessary restrictions and getting the pay for US professionals more in line with the rest of the world.

This gap is clearest for physicians. Doctors in the United States earn close to twice as much on average as their counterparts in other wealthy countries. Part of this gap is because primary care physicians and specialists are paid more in the United States, with the gap being far larger for specialists. (1) However, much of the gap is attributable to the fact that the United States has a much greater ratio of specialists to primary care physicians. In other countries the ratio of primary care physicians to specialists is close to two to one, whereas in the United States the ratio is two to one in the opposite direction.

There is little evidence that the greater use of specialists in the United States leads to better health outcomes in most circumstances. The more plausible explanation is a simple case of rent-seeking, in which medical specialists can determine a standard of care that requires using specialists to make diagnoses and provide treatment in contexts in which primary care physicians would be entirely competent.

If doctors in the United States were paid in line with the average for physicians in other wealthy countries, the savings would be close to $100 billion a year. There are approximately 900,000 doctors, with an average saving of more than $100,000 per doctor.

To a lesser extent, the pay of dentists, lawyers, architects, and other highly educated professionals is also out of line with the pay of their counterparts in other wealthy countries. There are enormous potential gains from making the pay of these professionals more comparable to the pay in other wealthy countries.

The key to bringing the pay of highly educated professionals in the United States in line with their counterparts in other wealthy countries is to reduce unnecessary supply restrictions. …

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