Mankiw and Krugman on Inequality

Mankiw attacks Krugman's stance on Unions and inequality on his blog today. Krugman argues in a letter to Economist's View, that government policy and the decline of unions plays a large role in the increased US inequality. Mankiw obviously disagrees and says that globalization and technology are more important factors.

To test the hypothesis that policy is behind the slide in Unions and the rise in inequality, one can simply look across the pond to Europe.

Europe has faced the same globalization trends as the US, but has a much lower Gini coefficient. I haven't read anything about whether this is due to greater redistribution or union bargaining power (my guess is that it has more to do with Europe's generally socialist policies).

Prof. Mankiw also claims that corporations have less profits to share with lower labor; however, senior executives have received unprecedented compensation and Wall Street earnings have been strong. It is true that some of these record profits are due to shifting production overseas, but this does not mean that US employees remaining in country could not take a larger share of the pie.

Take Walmart v. Costco as an example. Costco shares more of its profits with labor, whereas Walmart takes every penny it can from its lowly workers. Wall Street punishes Costco for this move, but Costco still does healthy business and is Walmart's main competitor.