Skill-Biased Inequality, Market Luck, and Redistributive Preferences

Authors – Jeffrey Yusof, Simona Sartor.

Abstract :

The rewards for different skills and the resulting skill-biased inequality are often determined by exogenous market mechanisms over which individuals cannot exert control. We refer to this driver of income inequality as market luck. Figurative examples of market luck are profound macroeconomic developments such as globalization, skill-biased technological change, and automation that have caused substantial shifts in the valuation of different skills in the labor market. From the perspective of economic efficiency, skill-biased inequality might appear justified as higher rewards reflect higher productivity. However, according to the principles of meritocracy, inequalities are only justified if they are due to differences in individual effort and performance but not due to factors outside of individuals’ control. Skill-biased inequality, therefore, introduces a trade-off in distributive fairness.

In this paper, we design a parsimonious experiment to study this trade-off in fairness views and improve the understanding of individuals’ preferences for redistribution by asking the following research question: Are inequalities arising from market luck perceived as fair? In our experiment, we design a setting where skill-biased inequality between workers arises because exogenous shocks to market demand make certain skills more valuable. For that, we are the first to explicitly model the demand and supply side of a market in a study of redistributive preferences. As our primary outcome, we measure the redistributive behavior of separately recruited third-party spectators, who can decide how much income they want to redistribute between two workers who earned unequal incomes.

Our results show that individuals tend to accept inequalities between workers that arise from market forces, even if there are no discernible differences in effort, and the source of inequality is entirely beyond a worker’s control. Our experimental measure of inequality acceptance within a market setting is a strong predictor of support for redistributive policies. Furthermore, the results of a complementary survey experiment confirm that our findings extend to real-life scenarios. In conclusion, our paper suggests that the conventional dichotomy of effort versus luck inadequately accounts for redistributive preferences in contexts where markets generate and perpetuate inequality.