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How Mexico Proved Mainstream Economics Wrong

American analysts have long viewed inequality as a byproduct of technological causes. But Claudia Sheinbaum’s Morena Party has boosted workers’ income without any technological tradeoffs.

Mexican President Claudia Sheinbaum, delivering her first state of the union speech last year.

In the 1990s, economists suddenly looked around and noticed that US income inequality had taken a sharp turn for the worse during the previous decade. After some fretful speculation, they hit upon an explanation: Technological change was responsible, and since technology occupies the status of demigod in neoclassical economic theory, it stood to reason that nothing much could be done about it. Too bad somebody forgot to tell the leftist Morena party in Mexico this gloomy news: It has implemented a massive improvement in income distribution of just the kind that mainstream economists claim is impossible.

To get at the reasoning behind America’s fatalist embrace of an economy producing less for the country’s workers, it’s necessary to revisit how the country’s economics profession processed the shock of the 1980s upturn in inequality. University of Michigan economist George Johnson published a useful article in 1997 surveying a decade of economists’ work on the subject. The supply of more-skilled workers (with some college or four-year degrees) had surged from 21 percent of the labor force in 1970 to 45 percent in 1993. This meant, other things being equal, that according to the iron logic of supply and demand employers ought to have been paying them less of a premium, thereby reducing income inequality. So why were they earning more of a premium, and worsening it? Studies had reached “virtually unanimous agreement,” Johnson wrote, “that during the 1980s relative demand increased for workers at the high end of the skill distribution and thus caused their relative wages to rise.”

Economists looked around for culprits that might inflate demand for high-skilled workers fast enough to account for their heightened earnings. Reaching into their tool kit, they found two main suspects: increased trade and technological change. As manufacturers outsourced goods production to low-wage countries, well-paid factory workers were laid off and reduced to taking low-paid service jobs. You’d rather make autos for GM than sell Chinese imports at Walmart. At the other end of the salary scale, industries such as finance seeking higher-skilled workers had swelled.

But there was a problem with this narrative: You can plausibly measure how such industrial shifts worsened income inequality, and they didn’t cut deep enough to explain the 1980s surge.

So the main culprit had to be the steamroller of “skill-biased” technological change: production methods demanding more skilled workers. A factory increasing automation of the production line requires fewer workers and more engineers to fix everything that goes wrong. At least Johnson honestly faced the implications of his argument: “Public policies to ‘do something’ about earnings inequality”—his scare quotes—such as significantly raising the minimum wage, restricting imports, or retraining workers “either present potentially undesirable side effects or may work only very slowly or not at all.” One could always recommend more education, but the structural shifts spiking demand for high-skilled labor were so far-reaching that this wouldn’t happen at a great enough scale to counteract them.

This argument presents countless problems. How did economists know that most of the demand shift was due to skill-biased technological change? They had no way to measure it directly. In reality, they were simply offering a loose hypothesis to try to account for what’s known as a statistical “residual”——the growth in inequality that wasn’t attributable to the baseline changes in the economy’s industrial structure. In other words, economists were straining to explain everything they couldn’t measure. One skeptical economist called the residual “the measure of our ignorance.”

You could just as well label the main driver of inequality in the ’80s “politics” instead of “technology.” When economists talk about demand, they don’t mean the number of items customers want to buy. They........

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