Kenneth Rogoff argues that rising inequality is likely to be a self-limiting trend since the bigger the skill premium gets, the stronger the economic incentive to find ways to conserve purchases of high-skill labor.
As an abstract model, that makes sense. But it seems to me that Rogoff ends up implicitly discounting the extent to which inequality is being driven by rent-seeking factors. Most notably, of course, you’ve got the financial system, which in various complicated ways is very much a creature of the state rather than a competitive labor market. But you’ve also got the fabulous world of intellectual property and the health care system. The Rogoff model would seem to make sense if inequality was, say, primarily a model of architects earning a growing wage premium over carpenters. Then would-be builders would start finding ways to economize on the need for architect-labor, and wages would return to equilibrium. This may even apply to China, where in-country inequality is skyrocketing in the context of rapidly rising overall prosperity. But that doesn’t really describe much of the inequality trends we’re seeing in the developed world, where growing inequality is paired with very sluggish growth and a seeming decline in overall productivity.