I. Income Inequality

In section F we found faster growth in disposable income in RTW states. In this section we examine income inequality to more accurately determine changes in the distribution of income.

Neither economic theory nor history suggests that a market economy should lead to an even distribution of earnings. In free markets, prices adjust to equate supply and demand. When demand for skilled workers outstrips supply, the wages of those at the top of the distribution grow faster than the wages of those at the bottom.

In other words, rising income inequality is not necessarily an unhealthy sign in a growing economy. Such a rise occurred in the second half of the 1800s, a period of strong economic growth and rising real incomes for most Americans. Falling income inequality, conversely, is not necessarily positive. Inequality remained relatively high going into the 20th century but declined rapidly during the Great Depression. Nevertheless, income inequality, examined in context with the other statistics, may yield some additional insight into the differences between RTW and non-RTW states.

Income inequality, as measured by the Gini Coefficient (see Appendix III), ranges from zero to one, with zero indicating perfect income equality (all income distributed equally to all households) and one indicating perfect income inequality (all income accruing to one household). The Gini Coefficients for RTW states, non-RTW states and Michigan are shown in Chart 13 for 1977 (first year available) and 2000. See Table IX in Appendix I for the Gini Coefficient for the years 1977, 1985, 1993 and 2000.5

Like poverty rates, income inequality started significantly higher in RTW states.6 While inequality rose for both over the past quarter century (as a trend, it has risen in the United States), it has risen significantly faster for non-RTW states. By 1992, the positions had reversed: RTW states had, on average, lower income inequality than non-RTW states.

Lower income inequality in the RTW states would have seemed unthinkable a generation ago. A quarter century of superior economic growth in the RTW states adds to the increasing evidence that economic growth is the best way to raise the incomes of all Americans.

Michigan's Gini coefficient rose from .387 to .436 over the same period. In 1977, the state ranked 17th in income inequality (i.e., 16 states had lower income inequality). Michigan's income inequality widened rapidly during late 1970s and early 1980s, and by 1985, its state ranking had dropped to 33rd. Since then, however, Michigan's income inequality has risen less rapidly than most states. By the turn of the millennium, its state ranking had risen to 18th.7

These results contradict the widely held belief that the presence of unions and the power of collective bargaining mitigate income inequality by distributing earnings more evenly. Although this may be true within individual unionized companies, it is not true for any state's economy as a whole. The favorable economic climate produced by RTW laws appears to be responsible for general income growth that benefits all workers and reduces income disparity.