TCS Daily

For Better or For Worse: Entrepreneurs, Families, and Inequality

By Arnold Kling - November 29, 2006 12:00 AM

"Many entrepreneurs I know say that they could not have done it without a supportive spouse. The same goes for people who are successful in established business. Your choice of spouse is, first of all, a choice! It is the most important decision you will make, and involves a lot of risk. If it is the right choice, the returns will be extraordinary."
-- Carl J. Schramm, The Entrepreneurial Imperative, p. 81

In this essay, the second in a series on entrepreneurship and the economy, I am going to argue that marital choices interact with trends in entrepreneurship to tend to increase inequality of income. Since World War II, our economy has evolved in ways that reinforce the financial differences between strong families and weak families. As the earnings of women have risen, "assortive mating" (men and women of similar educational levels tending to marry) tends to widen income differences. The surge in entrepreneurship further rewards strong families. Finally, the rise in divorce and single motherhood puts severe stress on the lower part of the income distribution.

Most economists believe that disparities in income and wealth across households have risen sharply in the United States over the past several decades. This is particularly true for pre-tax income, not including government transfers and benefits. Whatever government has tried to do to make the distribution of income more equal, this has been more than offset by changes taking place in the economy as a whole.

Economists are less certain of the cause of greater income disparity. One prominent theory is that the relative importance of knowledge has risen, leading to greater differentials between more-educated and less-educated workers. However, many economists doubt that this hypothesis is sufficient to fully explain recent trends. I should point out that the hypotheses that I will be discussing in this essay are even less well established.

Assortive Mating

Before the industrial revolution, inequality was certainly affected by family behavior. By marrying one another, aristocrats could solidify or increase their dynastic holdings.

From about 1850 to 1950, however, a large working class emerged. Within this working class, men were paid for their physical labor and women's time was taken up by household work. Household incomes were not affected by the woman's capacity to earn income in the market. Only men's earnings affected the income distribution, and on the assembly line the income disparities were relatively small.

Since 1950, women have entered the labor market in increasing numbers, as labor-saving devices have caused a shift away from housework. In addition, the proportion of women among college graduates has increased, at a time when the proportion of jobs that require higher education has been rising.

With women earning a higher share of family income than was the case in 1950, inequality is now affected by assortive mating (or assortative mating). Assortive mating means that men with high earnings potential tend to marry women with high earnings potential. David Brooks, author of Bobos in Paradise, pointed out that wedding announcements in the New York Times have begun to resemble reports of law firm mergers. In a sense, we are back to the pre-industrial era, except that today's elite marriages combine high salaries rather than large landholdings.

Many choices that young people make are influenced by assortive mating. You go to an elite college in part to be among others with high aspirations. You take a first job in a high-cost city in order to increase your chances of meeting someone in the upper income bracket.

The effect of assortive mating is multi-generational. We are now seeing children and grandchildren of two-income families enter the labor force. These progeny of well-educated, highly-skilled couples enjoy many advantages in terms of genetic endowments, good parental decision-making and role modeling, and a higher likelihood of finding themselves in peer groups that encourage high achievement. Thus, it would not be surprising to see an even greater impact of assortive mating on inequality in each succeeding generation.

Recently, The New York Times Magazine had an article on this phenomenon.

Americans are increasingly pairing off by education level, according to the sociologists Christine Schwartz and Robert Mare. In an article published last year in the journal Demography, they reported that the odds of a high-school graduate marrying someone with a college degree declined by 43 percent between 1940 and the late 1970s. In our current decade, the researchers wrote, the percentage of couples who are "educationally homogamous" — that is, share the same level of schooling — reached its highest point in 40 years. Assortative mating by income also seems to be on the rise.

...A 2003 analysis by Gary Burtless, an economist at the Brookings Institution, found that a rising correlation of husband-and-wife earnings accounted for 13 percent of the considerable growth in economic inequality between 1979 and 1996.

The Entrepreneur's Spouse

The paragraph that I quoted from Carl Schramm at the beginning of this essay had personal resonance for me. My one experience as an entrepreneur demonstrated the importance of a supportive spouse. At one point, I was ready to give up altogether, and my accountant, to whom I went for advice, was equally pessimistic. Only my wife thought I should try to keep the business going.

Another point that Schramm makes is that in a dynamic economy, safety requires taking risk. Counting on a large employer to maintain your standard of living is ultimately an unsafe approach. At one point or another, most people are going to have to make career changes. One career possibility is starting your own business. Help from a spouse can be crucial. Some couples benefit by starting a business together. In other cases, the fact that one spouse continues earning a living enables the other spouse to launch a business that takes time to achieve profitability.

Extended families are often a source of financing for new businesses. Among entrepreneurs, the question of where you got your funding is often answered with The Three F's--"friends, family, and fools."

New businesses often fail, but many families are strong enough financially to survive such a failure. They simply pick themselves up and move on. Still, we can expect inequality to rise as more people become involved in start-up enterprises, due to differential degrees of success.

Divorce and Single Moms

Someone who gets married and stays married has a major financial advantage over someone who never marries or gets divorced. This is especially true for women with children, but the differences for men are also significant.

In a sense, increased divorce and single motherhood probably reflect the fact that we are wealthier than we were 50 years go. In the past, it was not possible for a single or divorced mother to support a child at all.

Today, divorced and single mothers ordinarily can afford to keep their children. However, although they are not completely destitute, their incomes tend to fall far below the affluent average.

Any comparison of the distribution of family incomes today with that of 1950 or earlier is a comparison of apples and oranges. A collection of intact families is bound to have a more homogeneous distribution of income than an aggregation that includes intact families, divorced families, and single mothers.

What Can Government Do?

In an age where people seem inclined to worship government, the tendency is to blame government for the rise in income disparities. Surely, the all-powerful deity in Washington can ameliorate this phenomenon.

I do not think that government is going to step in to stop people from engaging in assortive mating. As long as people are allowed to choose their own spouses freely, that source of rising inequality is going to remain with us.

I also do not think that government is going to do much about divorce and single motherhood. These phenomena arise out of individual choices. In terms of economic policy, government faces a trade-off: providing assistance to non-traditional families can help those families raise their living standards; however, such assistance serves to encourage more non-traditional families. The net effect might be to increase poverty, a concern led to the 1996 welfare reform.

Finally, I do not think that government can do much about the economic shift away from large, stable corporations. Trying to preserve and protect large, dying industries is a very expensive and perhaps ultimately futile proposition. At the other end of the scale, government involvement in entrepreneurship is not helpful. The Small Business Administration is basically a pork barrel.

When they look at the trends toward innovation, technological change and entrepreneurship, many people instinctively plea for government to "do more" for education. However, as the next essay will explain, when it comes to education it may be better for government to do less.


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