The Rational Economic Reason for Income Inequality

Ever notice the price of gasoline or beef or television sets rises when demand increases and/or there is a shortage of supply? Ever notice that prices fall when there is a glut of supply or demand decreases? Of course you have. That's just the way economics works, right?

But when it comes to labor prices, somehow this relationship is not supposed to hold. Over the last thirty years (at least), the demand for high-skill labor -- the sort that requires advanced training and often a college degree -- has been increasing rapidly. The supply of that skilled labor has not increased nearly as fast. At the same time the demand for unskilled labor has been falling as more and more routine functions are done by machines rather than people. Meanwhile the supply of unskilled labor has been steady to increasing (especially due to immigration).  What would you think the consequence of this to be? That's right, wages paid to higher skilled labor would grow faster than those paid to lower skilled labor.

This obvious and efficient* phenomena goes by another name in the political realm: Income Inequality. There is only one way to change the underlying fundamentals (assuming you want to): increase the supply of skilled labor and reduce the supply of unskilled labor. The former can only be accomplished by getting more people into post-high school programs (not necessarily a 4 year college) that equip them with higher value skills. The most likely way to accomplish the latter is to restrict immigration of low-skilled people. This would require the US to adopt an immigration policy that prioritized economic viability over family ties. Sorry, but that means that someone from China you don't know will get a visa rather than your illiterate brother Fernando. 

* Income inequality serves the same economic purpose that any price does. The greater the income gap between skilled an unskilled, the more incentive there is to acquire skills. When there were plenty of semi-skilled jobs that paid you $50,000/year, the incentives were low. When those same skills will only pay you $35,000, the incentives are higher.