Category Archive for: Income Distribution [Return to Main]

Monday, May 15, 2017

The Growing Dispersion of Wages and Productivity in OECD countries

Giuseppe Berlingieri, Patrick Blanchenay, and Chiara Criscuolo at VoxEU:

Great Divergences: The growing dispersion of wages and productivity in OECD countries: Summary Some firms pay well while others don’t; and some are highly productive while many aren’t. This column presents new firm-level data on the increasing dispersion of wages and productivity in both the manufacturing and services sectors in 16 OECD countries. Wage inequalities are growing between firms, even those operating in the same sector – and they are linked to growing differences between high and low productivity firms. Both globalisation and technological progress (notably information and communications technologies) influence these outcomes – as do policies and institutions such as minimum wages, employment protection legislation, unions, and processes of wage-setting.

Tuesday, May 09, 2017

The Link between Family Structure and Wealth Is Weaker Than You Might Think

William Emmons and Lowell Ricketts of the St. Louis Fed:

The Link between Family Structure and Wealth Is Weaker Than You Might Think: ...While there is an overall correlation between, say, two-parent families and higher wealth, research presented at the symposium found that this link actually is inconsistent across racial and ethnic groups and quite weak in a causal sense.

Spurious Connections

In a nutshell, when we focus on family-structure differences within racial or ethnic groups, rather than between groups, there is essentially no relationship at all. Our interpretation is that any correlation between family structure and wealth that exists in aggregate data is largely spurious. That is, it reflects deeply rooted structural, systemic or other unobservable factors that differ across races and ethnicities.

These “deep” causes of differences in both family structure and wealth accumulation could include:

  • The continuing effects of past discrimination
  • Segregation in housing, health care and education
  • Environmental, epigenetic (that is, suppressed expression of true genetic abilities) or cultural factors that differentially affect early-childhood development

We concluded that family-structure differences are a symptom of deeper driving forces, not an important cause per se of wealth differences. One implication is that, even if we could change patterns of marriage and child-bearing among many people, this alone would be unlikely to affect racial and ethnic wealth gaps very much, if at all. ...

Wednesday, April 26, 2017

Minimum Wages and the Distribution of Family Incomes in the United States

Arindrajit Dube at Equitable Growth: 

Minimum wages and the distribution of family incomes in the United States: Introduction The ability of minimum-wage policies in the United States to aid lower-income families depends on how they affect wage gains, potential job losses, and other sources of family income, including public assistance. In contrast to a large body of research on the effects of minimum wages on employment,1 there are relatively fewer studies that empirically estimate the impact of minimum wage policies on family incomes. 
In my new paper, I use individual-level data between 1984 and 2013 from the Current Population Survey by the U.S. Census Bureau to provide a thorough assessment of how U.S. minimum wage policies have affected the distribution of family incomes.2 Similar to existing work, I consider how minimum wages influence the poverty rate. Going beyond most existing research, however, I also calculate the effect of the policies for each income percentile, adjusting for family size. This highlights the types of families that are helped or hurt by wage increases. I also calculate the effect on a broader measure of income that includes tax credits and noncash transfers. I quantify the offset effect of higher wages on the use of transfer programs and the gains net of the offsets by income percentiles, painting a fuller picture of how minimum-wage policies affect the U.S. income distribution and the overall well-being of U.S. families.
Overall, I find robust evidence that higher minimum wages lead to increases in incomes among families at the bottom of the income distribution and that these wages reduce the poverty rate. A 10 percent increase in the minimum wage reduces the nonelderly poverty rate by about 5 percent. At the same time, I find evidence for some substitution of government transfers with earnings, as evidenced by the somewhat smaller income increases after accounting for tax credits such as the Earned Income Tax Credit and noncash transfers such as the Supplemental Nutrition Assistance Program. The overall increase in post-tax income is about 70 percent as large as the increase in pretax income. ...

Thursday, April 13, 2017

Tax Reforms and Top Incomes

Enrico Rubolino and Daniel Waldenström at VoxEU:

Tax reforms and top incomes: The link between tax progressivity and the income distribution is the subject of intense debate. This column presents new evidence from tax reforms during the 1980s and 1990s to examine how reduced progressivity affects top income shares. Reduced progressivity boosted top incomes, particularly for those in the top 0.1% of earners. Income tax changes are a plausible candidate for explaining the recent surge in income inequality. ...
Tax reforms did not increase the size of the cake
Tax progressivity was reduced in the 1980s on the argument that there would be a positive impact on economic activity and efficiency (Auerbach and Slemrod 1997, Gale and Samswick 2014). Therefore it could be that the estimated boost in top shares reflects new resources created in top groups, rather than a redistribution of incomes away from the bottom and middle. We evaluate this hypothesis..., this analysis does not show large real income responses to reductions in progressivity. ...
Taxation and inequality
Our findings suggest that tax progressivity changes influence pre-tax income inequality. Focusing on large, progressivity-reducing tax reforms in the 1980s and 1990s, we show that they had a positive, increasing effect on top income shares in all the countries we studied. ...

Sunday, April 09, 2017

Why People Prefer Unequal Societies

People prefer fair inequality:

Why people prefer unequal societies, by Christina Starmans , Mark Sheskin  & Paul Bloom, Nature Human Behaviour 1, Article number: 0082 (2017): Abstract There is immense concern about economic inequality, both among the scholarly community and in the general public, and many insist that equality is an important social goal. However, when people are asked about the ideal distribution of wealth in their country, they actually prefer unequal societies. We suggest that these two phenomena can be reconciled by noticing that, despite appearances to the contrary, there is no evidence that people are bothered by economic inequality itself. Rather, they are bothered by something that is often confounded with inequality: economic unfairness. Drawing upon laboratory studies, cross-cultural research, and experiments with babies and young children, we argue that humans naturally favour fair distributions, not equal ones, and that when fairness and equality clash, people prefer fair inequality over unfair equality. Both psychological research and decisions by policymakers would benefit from more clearly distinguishing inequality from unfairness. ...

Wednesday, March 29, 2017

Economic Growth in the US: A Tale of Two Countries

Thomas Piketty, Emmanuel Saez, and Gabriel Zucman at VoxEU:

Economic growth in the US: A tale of two countries: The rise of economic inequality is one of the most hotly debated issues today in the US (Furman 2016) and indeed in the world. Yet economists and policymakers alike face important limitations when trying to measure and understand the rise of inequality.

One major problem is the disconnect between macroeconomics and the study of economic inequality. Macroeconomics relies on national accounts data to study the growth of national income, while the study of inequality relies on individual or household income, survey, and tax data. Ideally all three sets of data should be consistent, but they are not. The total flow of income reported by households in survey or tax data adds up to barely 60% of the national income recorded in the national accounts, with this gap increasing over the past several decades.1

This disconnect between the different data sets makes it hard to address important economic and policy questions, such as:

  • What fraction of economic growth accrues to those in the bottom 50%, the middle 40%, and the top 10% of the income distribution?
  • What part of the rise in inequality is due to changes in the share of national income that goes to workers (labor income) and owners (capital income) versus changes in how these labour and capital incomes are distributed among individuals?

A second major issue is that economists and policymakers do not have a comprehensive view of how government programs designed to ameliorate the worst effects of economic inequality actually affect inequality. Americans share almost one-third of the fruits of economic output (via taxes that help pay for an array of social services) through their federal, state, and local governments. These taxes collectively add up to about 30% of national income, and are used to fund transfers and public goods that ultimately benefit all US families. Yet we do not have a clear measure of how the distribution of pre-tax income differs from the distribution of income after taxes are levied and after government spending is taken into account. This makes it hard to assess the extent to which governments make income growth more equal.2

In a recent paper, we attempt to create inequality statistics for the US that overcome the limitations of existing data by creating distributional national accounts (Piketty et al. 2016). We combine tax, survey, and national accounts data to build a new series on the distribution of national income. National income is the broadest measure of income published in the national accounts and is conceptually close to gross domestic product, the broadest measure of economic growth.3 Our distributional national accounts enable us to provide decompositions of growth by income groups consistent with macroeconomic growth.

In our paper, we calculate the distribution of both pre-tax and post-tax income. The post-tax series deducts all taxes and then adds back all transfers and public spending so that both pre-tax and post-tax incomes add up to national income. This allows us to provide the first comprehensive view of how government redistribution in the US affects inequality. Our benchmark series use the adult individual as the unit of observation and split income equally among spouses in married couples. But we also produce series where each spouse is assigned their own labour income, allowing us to study gender inequality and its impact on overall income inequality. In this column, we would like to highlight three striking findings.

Our first finding: A surge in income inequality...

Our second finding: Policies to ameliorate income inequality fall woefully short ...

Our third finding: Comparing income inequality among countries is enlightening ...

Thursday, March 23, 2017

Compensation Benchmarking, Leapfrogs, and the Surge in Executive Pay

A follow-up to "Inequality and the Lake Wobegon Effect":

Compensation Benchmarking, Leapfrogs, and the Surge in Executive Pay, by Thomas A. DiPrete; Gregory M. Eirich; Matthew Pittinsky, American Journal of Sociology: Abstract: Scholars frequently argue whether the sharp rise in chief executive officer (CEO) pay in recent years is "efficient" or is a consequence of "rent extraction" because of the failure of corporate governance in individual firms. This article argues that governance failure must be conceptualized at the market rather than the firm level because excessive pay increases for even relatively few CEOs a year spread to other firms through the cognitively and rhetorically constructed compensation networks of "peer groups," which are used in the benchmarking process to negotiate the compensation of CEOs. Counterfactual simulation based on Standard and Poor's ExecuComp data demonstrates that the effects of CEO "leapfrogging" potentially explain a considerable fraction of the overall upward movement of executive compensation since the early 1990s. [download]

Tuesday, March 21, 2017

The World's Easiest Chart to Make

In case you were wondering (any your probably weren't), from Kevin Drum:

Well, This Was the World's Easiest Chart to Make: CBPP has calculated how much tax money you'll save if Obamacare is repealed. Behold:

Blog_cbpp_tax_savings_obamacare_repeal

You know what really gets me? Even among the millionaires, repeal will only net them about $50,000. That's like finding spare change in the sofa cushions for this crowd. Is clawing back a few nickels and dimes really worth immiserating 20 million people?

Monday, March 20, 2017

Robots and Inequality: A Skeptic's Take

Douglas Campbell:

Robots and Inequality: A Skeptic's Take: Paul Krugman presents "Robot Geometry" based on Ryan Avent's "Productivity Paradox". It's more-or-less the skill-biased technological change hypothesis, repackaged. Technology makes workers more productive, which reduces demand for workers, as their effective supply increases. Workers still need to work, with a bad safety net, so they end up moving to low-productivity sectors with lower wages. Meanwhile, the low wages in these sectors makes it inefficient to invest in new technology.
My question: Are Reagan-Thatcher countries the only ones with robots? My image, perhaps it is wrong, is that plenty of robots operate in Japan and Germany too, and both countries are roughly just as technologically advanced as the US. But Japan and Germany haven't seen the same increase in inequality as the US and other Anglo countries after 1980 (graphs below). What can explain the dramatic differences in inequality across countries? Fairly blunt changes in labor market institutions, that's what. This goes back to Peter Temin's "Treaty of Detroit" paper and the oddly ignored series of papers by Piketty, Saez and coauthors which argues that changes in top marginal tax rates can largely explain the evolution of the Top 1% share of income across countries. (Actually, it goes back further -- people who work in Public Economics had "always" known that pre-tax income is sensitive to tax rates...) They also show that the story of inequality is really a story of incomes at the very top -- changes in other parts of the income distribution are far less dramatic. This evidence also is not suggestive of a story in which inequality is about the returns to skills, or computer usage, or the rise of trade with China. ...

Thursday, March 16, 2017

America’s Two-Track Economy

Peter Dizikes at the MIT News Office:

America’s two-track economy: For many people in America, being middle class isn’t what it used to be.
Consider: In 1971, the U.S. middle class — with household incomes ranging from two-thirds to double the national median — accounted for almost 60 percent of total U.S. earnings. But in 2014, middle-class households earned just about 40 percent of the total national income. And, adjusted for inflation, the incomes of goods-producing workers have been flat since the mid-1970s.
“We have a fractured society,” says MIT economist Peter Temin. “The middle class is vanishing.”
Now Temin, the Elisha Gray II Professor Emeritus of Economics in MIT’s Department of Economics, has written a book exploring the topic. “The Vanishing Middle Class: Prejudice and Power in a Dual Economy,” published this month by MIT Press, examines the plight of middle-income earners and offers some prescriptions for changing our current state of affairs.
The “dual economy” in the book’s title also represents a bracing reflection of America’s class schism. Temin, a leading economic historian, draws the term from the work of Nobel Prize winner W. Arthur Lewis, who in the 1950s applied the model of a dual economy to developing countries. In many of those nations, Lewis contended, there was not a single economy but a two-track economy, with one part containing upwardly-mobile, skilled workers and the other part inhabited by subsistence workers.
Applied to the U.S. today, “The Lewis model actually works,” Temin says. “The economy can grow, but it detaches from the [subsistence] sector. Simple as it is, the Lewis model offers the benefit that a good economic model does, which is to clarify your thinking.”
In Temin’s terms, updated, America now features what he calls the “FTE sector” — people who work in finance, technology, and electronics — and “the low-wage sector.” Workers in the first sector tend to thrive; workers in the second sector usually struggle. Much of the book delves into how the U.S. has developed this way over the last 40 years, and how it might transform itself back into a country with one economy for all.
Headwinds for workers
As Temin sees it, there are multiple reasons for the decline in middle-class earning power. To cite one: The decline of unionization, he contends, has reduced the bargaining power available to middle class workers.
“In the [political and economic] turmoil of the ’70s and ’80s, the unions declined, and the institutions that had been keeping labor going along with rising productivity were destroyed,” Temin says. “It’s partly [due to] new technology, globalization, and public policy — it’s all of these things. What it did was disconnect wages from the growth in productivity.”
Indeed, from about 1945 until 1975, as Temin documents in the book, U.S. productivity gains and the wage gains of goods-producing workers tracked each other closely. But since 1975, productivity has roughly doubled, while those wages have stayed flat.
Where “The Vanishing Middle Class” moves well beyond a discussion of basic economic relations, however, is in Temin’s insistence that readers consider the interaction of racial politics and economics. As he puts it in the book, “Race plays an important part in discussions of politics related to inequality in the United States.”
To take one example: Again starting in the 1970s, incarceration policies led to an increasing proportion of African-Americans being jailed. Today, Temin notes, about one in three African-American men will serve jail time, which he calls “a very striking figure. You can see how that would just destroy the fabric of a community.” After all, those who become imprisoned see a significant reduction in their ability to obtain healthy incomes over their lifetimes.
For that matter, Temin observes, incarceration has expanded so dramatically it has affected the ability of society to pay for prisons, which may be a factor that limits their further growth. At the moment, he notes in the book, the U.S. states pay roughly $50 billion a year for prisons and roughly $75 billion annually to support higher education.
Solutions?
Temin contends in the book that a renewed focus on education is a principal way to distribute opportunities better throughout society.
“The link between the two parts of the modern dual economy is education, which provides a possible path that children of low-wage workers can take to move into the FTE sector,” Temin writes.
That begins with early-childhood education, which Temin calls “critically important” — although, he says, “in order to continue those benefits, [students] have to build on that foundation. That goes all the way up to college.”
And for students in challenging social and economic circumstances, Temin adds, what matters is not just the simple acquisition of knowledge but the classroom experiences that lead to, as he puts it, “Knowing how to think, how to get on with people, how to cooperate. All the social skills and social capital … [are] going to be critically important for kids in this environment.”
In the book Temin bluntly advocates for greater investment in public schools as well as public universities, saying that America’s “educational system was the wonder of the 20th century.” It still works very well, he notes, for kids at good public schools and for those college students who graduate without burdensome debt.
But for others, he notes, “We don’t have a path for the next generation to have what we expect for a middle-class life … [and] not everyone wants to finance it.”
“The Vanishing Middle Class” comes amid increasing scrutiny of class relations in the U.S., but at a time when the public discussion of the topic is still very much evolving. Gerald Jaynes, a professor in the departments of Economics and African American Studies at Yale University, calls Temin’s new book “a significant addition to the existing literature on inequality.”
Temin, for his part, hopes that by the end of “The Vanishing Middle Class,” readers will agree that a society paying for more education will have made a worthy investment.
“The people in this country are the resource we have,” Temin says. “If we maintain the character of our fellow citizens, that is really our national strength.”

It Takes “Alternative Math” to Claim That Redistribution Is Futile

Adam M. Finkel at RegBlog:

It Takes “Alternative Math” to Claim That Redistribution Is Futile: The unequal distribution of costs and benefits across society is one of the hottest topics in the regulatory arena—and one that, regretfully, has sparked fundamentally flawed arguments, threatening to distort and obscure much-needed discussion about redistributive policies. ...
Although all policies have redistributive effects, some ideologies are viscerally, even militantly, opposed to government interventions that benefit the poor, whether by intention or even as a side effect of an otherwise sound policy. ...
In a recent New York Times op-ed, University of Illinois at Chicago Professor Deirdre McCloskey exemplifies this type of argument, in conspicuously misguided fashion. In her column, McCloskey offers a litany of reasons as to why progressive taxation and other policies aimed at redistributing benefits to the poor are ill-advised. At the core of the essay, McCloskey makes the empirical assertion that such policies cannot actually make much of a difference in any event.
Unfortunately, the basic mathematics of McCloskey’s claim are mangled. She may not prefer that we seek progressive tax and regulatory policies, but her claim that these policies do not “uplift the poor very much” is erroneous. That the Times has decided not to correct her error—even in the face of an email exchange in which the author herself acknowledged her mistake—may be an example of how tempting it is to ascribe black-and-white factual issues to the realm of “healthy controversy.” ...
As with many of the toxic myths about regulation—that, for example, it is responsible for destroying countless jobs while failing to create any new ones in the process, or that it relies on gross exaggerations of risk and plays to irrational public fears—we are lost without the ability to distinguish between ideological responses to facts and ideological twisting of facts into nonsense. ...

Monday, February 20, 2017

Let's Think Harder About the Role of Globalization in Wage Stagnation

Brad DeLong:

Let's Think Harder About the Role of Globalization in Wage Stagnation: It's disturbing. As we face the probable abrogation of NAFTA, possible trade wars with China, Germany, and others, and the total cluster** that is the Trump administration's policies (if any) toward NATO and Russia, a number of really smart and really well-intentioned people are, I think, making rhetorical--and in some cases substantive--errors that are degrading the quality of the debate and increasing the chances of bad outcomes. And they are doing it while trying to be forces for good, light, human betterment, truth, justice, and the American way...
So let me do some boundary policing here...
Let me ask people--all of whom are wiser than I am, or if not wiser smarter, or if not smarter more knowledgeable--to think about whether they really hold the positions they set forward, and think about whether they have set them forward in a way most calculated to guard against destructive misinterpretation. Today: Larry Summers...
Larry's big point here--the headline--is 100% correct: Revoking Trade Deals Will Not Help American Middle Classes. Hold tight to that.
Larry's second point is also correct: the big deal in terms of the changing shape of the American workforce--and, quite plausibly, changing life chances, the collapse of upward mobility, and wage stagnation--is technology: rampant improvement in manufacturing technology coupled with limited demand, for while nearly all of us want one few of us want too and only a minuscule proportion of us want three refrigerators. That means that if you are hoping to be relatively high up in the wage distribution by virtue of your position as a hard-to-replace cog on a manufacturing assembly line, you are increasingly out of luck. If you are hoping for high blue-collar wages to lift your own via competition, you are increasingly out of luck.
But then Larry goes, I think, rhetorically awry. His third point should be that inequality has been a political creation: those elected to power in America in the 1980s were elected on the platform that America's biggest problem was that it was, economically, too equal a society. Economic equality was strangling entrepreneurship and enterprise. And so they undertook policies to raise inequality. Those policies were successful. But we are still waiting for the flourishing of entrepreneurship and enterprise. He passes over this, not because he does not know this but because he has other fish to fry. Passing over what should have been his third point is, I think, a major rhetorical mistake: it is never good to pass up an opportunity to remind readers that the rise in inequality since 1980 has been something that those who made the Reagan Revolution hoped to accomplish and are proud of.
Bargaining power has flowed to finance and the executive suite and away from the shop- and assembly-floor. Top tax rates have come way down. It could have been otherwise--this is, primarily, a thing that has happened in English-speaking countries. It has happened much less elsewhere. It could have happened much less here.
And then, I think, Larry goes rhetorically awry again by passing over what ought to have been his fourth point. Over and above the decision to put the government's thumb on the scale assisting in the rise of inequality, wage stagnation and manufacturing decline have been driven by bad macroeconomic policies. The consequences of the Reagan deficits were to cream midwestern manufacturing and destroy worker bargaining power in export and import-competing industries. The switch from government surpluses to deficits under George W. Bush had much the same consequences. The low-pressure economies of Volcker, late Greenspan, and Bernanke wreaked immense damage. The strong-dollar policy was kept long past its proper sell-by date. A rich country like the United States ought to be a net lender to abroad, and ought to have a dollar policy that supports that net lending. Larry passes over this as well.
And so, rather than going technology--willed inequality--bad macro policies--globalization, Larry jumps from technology to globalization. Globalization thus shows up as the second most important factor affecting middle-class wages and inequality rather than the fourth.
It is at this point that I have, I think, a (rare) substantive disagreement with Larry. And I do acknowledge that when I have substantive disagreements with Larry, I am wrong at least as often as I am right.
Larry sees the coming of globalization as bringing with it a sharp reduction in the market power of American blue-collar workers in mass-production industries, and thus as exerting significant downward pressure on middle class wages and upward pressure on inequality. The live question, he thinks, is how large and significant these pressures have been.
I see it differently. Yes, technology, inequality promotion--union busting, so-called "right to work" laws, stagnant minimum wages, etc.--and lousy macro policies working through their effects on the trade sector have creamed the market bargaining power of American blue-collar workers. But globalization? Globalization's big effect has been to enable the construction of intercontinental value chains and to create a much finer global division of labor. It has greatly weakened the bargaining power of unskilled manufacturing workers here in the United States, yes. But has it done the same to semi-skilled and skilled manufacturing workers? If the United States had imposed barriers to the construction of intercontinental value chains would the semi-skilled and skilled manufacturing workers of the U.S. be better off? Or would they face stronger and more effective competition from firms headquartered in Japan and Europe that had created efficient global value chains?
Unskilled manufacturing jobs are not good jobs. Semi-skilled and skilled manufacturing jobs are. I think that odds are at least 50-50 that Larry has gotten the sign of the effects of globalization on bargaining power wrong for those manufacturing jobs that are worth keeping.
Thus I don't think that Larry should concede that "the advent of global supply chains has changed production patterns in the US" in a manner adverse to the interests of blue-collar and middle-class American workers. I think that might be true, but equally probably might be false. I think we need to think harder about this...

Tuesday, February 14, 2017

On inequality in China

Thomas Piketty:

On inequality in China: With Trump and Brexit, the Western-type democratic model is under fire. The Chinese media are having a field day. In column after column, the Global Times (official daily newspaper) condemns the explosive cocktail of nationalism, xenophobia, separatism, TV-reality, vulgarity and ‘money reigns supreme’, the outcome of the so-called free elections and the wonderful political institutions which the West would like to impose on the world. No more lessons!
Recently the Chinese authorities organised an international colloquium on ‘The Role of Political Parties in Global Economic Governance’. The message sent to the colloquium by the Chinese Communist Party (CCP) was perfectly clear. Reliance on solid intermediary institutions such as the CCP (which includes 90 million members, or roughly 10% of the adult population, almost as many as the number of voters in the American or French primaries) enables the organisation of discussions and decision-making and the design of a model for stable, harmonious and duly considered development in which identity conflicts can be overcome.
By so doing, the Chinese regime may well be over-confident. The limits of the model are well known, beginning with the total lack of transparency and the ferocious repression suffered by all those who condemn the opacity of the regime. ...

Thursday, February 02, 2017

Class & Confidence

Chris Dillow:

Class & confidence: On Radio 4’s Media Show yesterday Andrea Catherwood told Sarah Sands, the incoming editor of the Today programme:

The job specification did say that there was a requirement of extensive experience of broadcast journalism and a sound appreciation of studio broadcast techniques. You obviously got over that hurdle (16’23” in).

Many of us, though, wouldn’t even have tried the hurdle. If I’d had Ms Sands otherwise decent CV, I’d have looked at that job spec and ruled myself out as unqualified. Ms Sands, obviously, did not.

In this, she’s following many others. Tristram Hunt has become head of the V&A despite no experience of curating or of running large organizations. David Cameron wanted to become PM because he thought he’d be “rather good” at it – a judgment which now looks dubious. And the last Labour government asked David Freud to review welfare policy even though, by his own admission, he “didn't know anything about welfare at all.”

These people have something in common: they come from families sufficiently rich to afford private schooling*. And they are not isolated instances. ...

One thing that’s going on here is a difference in confidence. Coming from a posh family emboldens many people to think they can do jobs even if they lack requisite qualifications. By contrast, others get the confidence knocked out of them (16’20 in)**. As Toby Morris has brilliantly shown, apparently small differences in upbringing can over the years translate into differences not only in achievement but also in senses of entitlement.

The point is not (just) that people from working-class backgrounds suffer outright discrimination. It’s that they put themselves forward less than others, and so save hirers the bother of discriminating against them. ...

Herein lies an issue. In hiring Ms Sands (and no doubt many others like her) the BBC is conforming to a pattern whereby inequality perpetuates itself. This suggests that the corporation is badly placed to address what is for many of us one of the great issues of our time - the many aspects of class inequality – because it is part of the problem. And it compounds this bias by focusing upon other matters instead – for example by the incessant airtime it gives to the (Dulwich College-educated) Farage***. Bias consists not merely in what is said and reported, but in what is not – in the choice of agenda. In matters of class, the BBC is not impartial. ...

Wednesday, January 25, 2017

Why the Surge in Income Inequality?

Lane Kenworthy in Contemporary Sociology: A Journal of Reviews:

Why the Surge in Income Inequality?: Income inequality is more severe in the United States than in any other affluent longstanding-democratic country, and it has increased sharply in the past generation. ...
What has caused the surge in top-end income inequality? Is it a product of changes in the economy? Or, as Paul Krugman’s The Conscience of a Liberal and Jacob Hacker and Paul Pierson’s Winner-Take-All Politics contend, have the key shifts been in America’s politics and policies? ...
Researchers tend to search for a dominant cause. We want to identify the most important determinant, partly because finding one reduces complexity and partly because it implies a straightforward solution to the problem. Much of the research on the rise of top-end income inequality has proceeded in this vein, with analysts focusing on one or another hypothesized cause and frequently concluding that it is indeed the key contributor. I don’t think any such conclusion is justified. The rise in the top 1 percent’s income share since the late 1970s is a product of multiple developments—growth in product market size, shifts in corporate governance, increases in the market power of some large firms, financialization, soaring stock values, union decline, and reductions in top tax rates—no one or two or even three of which look to have been dominant or decisive.
To some degree it’s pure historical coincidence that these developments occurred around the same time. But they also reinforced and accentuated one another.
Is the origin of these developments mostly economic or mostly political? Are they, in other words, a product of markets or a product of policy? My answer is: both. ...
Just as there is no single dominant cause of the rise in top-end income inequality, there is unlikely to be a silver bullet when it comes to solutions. ...

Sunday, January 22, 2017

Is Global Equality the Enemy of National Equality?

Dani Rodrik:

Is Global Equality the Enemy of National Equality?: The question in the title is perhaps the most important question we confront, and will continue to confront in the years ahead. I discuss my take in this paper.
Many economists tend to be global-egalitarians and believe borders have little significance in evaluations of justice and equity. From this perspective, policies must focus on enhancing income opportunities for the global poor. Political systems, however, are organized around nation states, and create a bias towards domestic-egalitarianism. 
How significant is the tension between these two perspectives? Consider the China "trade shock." Expanding trade with China has aggravated inequality in the United States, while ameliorating global inequality. This is the consequence of the fact that the bulk of global inequality is accounted for by income differences across countries rather than within countries. 
But the China shock is receding and other low-income countries are unlikely to replicate China’s export-oriented industrialization experience. So perhaps the tension is going away?
Not so fast. The tension is even greater somewhere else: Relaxing restrictions on cross-border labor mobility would have an even stronger positive effect on global inequality, at the cost of adverse effects at the lower end of labor markets in rich economies. On the other hand, international labor mobility has some advantages compared to further liberalizing international trade in goods.
I discuss these issues and more here.

Wednesday, January 11, 2017

The Earnings Gap between Black and White Men

John Laidler at the NBER Digest:

The Earnings Gap between Black and White Men: Since the end of slavery a century and a half ago, differences between the earnings of black and white Americans have been a reality of the U.S. labor market. Among working men, this gap narrowed sharply between 1940 and 1970 and has remained largely stable ever since. In Divergent Paths: Structural Change, Economic Rank, and the Evolution of Black-White Earnings Differences, 1940-2014, (NBER Working Paper No. 22797), Patrick Bayer and Kerwin Kofi Charles point out that focusing only on those who are employed fails to account for the growing numbers of men who are not working for a number of reasons. This group includes those who are unemployed, disabled, or no longer searching for work, as well as the rising number of individuals who are incarcerated.
Among working men, "the median earnings gap between blacks and white fell by almost 60 percent from 1940 to 1980 (with large decreases in the 1940s and 1960s) but has been essentially flat ever since, remaining in the 35-40 percent range in every sample from 1980-2014," the researchers report. But when they consider the entire population of men, they find that the earnings gap has actually widened substantially in recent decades. In 2010, the gap in the population as a whole was comparable to that in 1950.

Their analysis, which focuses on the black-white earnings differences among prime-aged men from 1940 through the Great Recession, "points to the incredible lack of progress and, in many cases, regress in closing the gaps in labor market outcomes for black and white men."

The findings are most striking among median- and low-income blacks, whose position relative to median-income whites changed little in the seven-decade study period. In 1940, the earnings of a median-income black earner fell at the 24th percentile of the earnings distribution for whites. At the time of the Great Recession, the comparable black earners' earnings fall at the 27th percentile of the earnings distribution for whites—only a slight improvement in rank over the entire 75-year study period.

In contrast, a black earner at the 90th percentile of the distribution for African Americans saw progress relative to the earnings of whites. In 1940, the earnings of the 90th percentile black were comparable to those of the median white, but by the late 2000s, this earnings level had risen to the 75th percentile in the white earnings distribution.

The racial earnings gap around the median narrowed from 1940-70, due largely to broad economic forces which reduced the income disparities among all workers. But since then, the relative gains made by low-skilled blacks through improved education have been countered by the growing overall connection between education and economic rank, the researchers find. "Racial convergence in educational attainment would have led to strong positional gains for black men at the median and below, except that these men faced strong structural headwinds from the simultaneously rising returns to education, both in terms of wages and in the probability of employment," the researchers find.

By contrast, high-skilled black men have moved closer to their white counterparts in income, which the researchers suggest has been due to more-equal access to quality higher education and high-skilled occupations.

"While the entire economy has experienced a marked increase in earnings inequality, this increase has been even more dramatic for black men," the researchers find, "with those at the top continuing to make clear gains within the earnings distribution, and those at the bottom being especially harmed by the era of mass incarceration and the failing job market for men with low skills." The impact of rising incarceration is particularly striking: The incarceration rate tripled for black men between 1980 and 2010, from 2.6 percent to 8.3 percent of the population. The rate quintupled for white men, but remained much lower, at 1.5 percent of the population.

The researchers conclude that education "has played a subtle but extremely important role in the evolution of the racial earnings gap," both fueling and stalling progress.

Sunday, January 08, 2017

Monopsony Takes Center Stage

Marshall Steinbaum at ProMarket:

Monopsony Takes Center Stage: In October, the Council of Economic Advisors released a report about monopsony in the labor market. That alone was rather astonishing—employer power and its consequences for labor market outcomes has been a distinctly minority concern in the economics profession for quite a while, notwithstanding mounting evidence of its importance coming from a number of subfields.
For that agenda to gain a hearing at the apex of economic policy-making is evidence of the shifting ground in matters of public economic debate. It is also reminiscent of the last time inequality was so high: then, as now, it sparked a sea change in the economics profession, including both the mainstreaming of labor exploitation as a subject of economic research and the founding of the American Economic Association. ...

Thursday, January 05, 2017

Market Failure and Income Distribution

John Quiggin:

Market Failure and Income Distribution: Notes for Economics in Two Lessons: For quite a while now, I’ve been working through my book-in-progress...

Thinking about the standard market failures (monopoly, externality and so on), I’ve come to the conclusion that I need to say more about the interaction between market failure and income distribution. I’ve already looked at the opportunity costs involved in income redistribution and predistribution, but different kinds of questions are coming up in relation to issues like monopoly, privatisation and for-profit provision of public services.

The discussion here and at my blog has been very helpful in stimulating my thoughts, but I need to do a lot more clarification. Some preliminary thoughts are over the fold: comments and criticism much appreciated...

Tuesday, December 13, 2016

Should Some Countries Cease to Exist?

Branko Milanovic:

Should some countries cease to exist?: Working on global inequality makes you ask questions you would never ask otherwise simply because they would not occur to you. ...
Take the convergence economics. In growth theory, convergence indicates the regularity that poorer countries tend to grow faster than richer countries because they can use all the knowledge and innovations that the richer have already produced..., there is some evidence for conditional convergence in empirical studies and it is, for obvious reasons, considered a good thing.
Now, when you look more closely you realize that convergence is studied in terms of countries but in reality it deals with the convergence in living standards between individuals. We express it in terms of a poorer country catching up with the richer because we are used to doing our economics in terms of nation-states and implicitly assume that there is no movement of people between countries. But in reality convergence is nothing else but the diminution of income inequality between all individuals in the world.
So, how best to achieve such a decrease in inequality between people? Economic theory, common sense and simulation exercises clearly show that it can be best done by allowing free movement of people. Such a policy would increase global income (as any free movement of factors of production in principle should), reduce global poverty and global inequality. It is immaterial, from a global perspective, that it might slower between-country convergence (as some recent results for EU indicate) because countries are, as we have just seen, not the relevant entities in global economics: the relevant entities are individuals and their welfare levels. ... To see this point, think in the familiar terms of the nation-state: no one in his or her right mind would argue that people from the Appalachian in the US should not be allowed to move to California because the average income in the Appalachia might go down. In fact, both the average income in California and in Appalachia might go down, and both inequalities in the Appalachia and California might go up, and yet the overall US income would rise and US inequality would be less.
The argument is identical for the world as a whole ... The objections to migration, namely that it might reduce the average income in recipient countries, raised by Paul Collier in his book “Exodus” are immaterial because the real subject of our analysis is not the nation-state but the individual.
Thus far the argument seems to me entirely incontestable. But then things get a bit messier. Pushing this logic further, and using the results of the Gallup poll that show the percentage of people who desire to move out of their countries, we find that in the case of unimpeded global migration some countries could lose up to 90 percent of their populations. They may cease to exist: everybody but a few thousand people might move out. Even the few who might at first remain, could soon find their lives there intolerable, not least because providing public goods for a very small population may be exceedingly expensive.
So, what?—it could be asked. If Chad, Liberia and Mauritania cease to exist because everybody wants to move to Italy and France, why should one be concerned: people have freely chosen to be better off in Italy and France, and that’s all there is to that. But then, it could be asked, would not disappearance of countries also mean disappearance of distinct cultures, languages and religions? Yes, but if people do not care about these cultures, languages and religions, why should they be maintained?
Destroying the variety of human traditions is not costless, and I can see that one might believe that maintaining variety of languages and cultures is not less important that maintaining variety of the flora and fauna in the world, but I wonder who needs to bear the cost of that. Should people in Mali be forced to live in Mali because somebody in London thinks that some variety of human existence would be lost if they all came to England? I am not wholly insensitive to this argument, but I think that it would be more honest to say openly that the cost of maintaining this “worldwide heritage” is borne not by those who defend it in theory but by those in Mali who are not allowed to move out.
There is a clear trade-off between the maintenance of diversity of cultural traditions and freedom of individuals to do as they please. I would be happier if the trade-off did not exist, but it does. And if I have to choose between the two, I would choose human freedom even if it means loss of tradition. After all, are traditions that no one cares about worth preserving? The world has lost Macromanni, Quadi, Sarmatians, Visigoths, Alans, Vandals, Avars and thousands others. They have disappeared together with their languages, cultures and traditions. Do we really miss them today?

Sunday, December 11, 2016

The In-Betweeners

Frances Coppola (the full post is much longer):

The in-betweeners: How effective is monetary policy?

Highly effective, according to the Governor of the Bank of England. In a speech earlier this week, Mark Carney robustly defended the Bank of England's record...

Well, lots of us might agree that monetary policy did help to offset the damaging effects of bank and household deleveraging in the aftermath of the worst financial crisis since the 1930s. ...

But the most persistent criticism of monetary policy is that it has, in the words of HSBC's Stephen King, "unfortunate distributional effects". It benefits the holders of financial assets - primarily the rich - at the expense of those dependent on interest income, who are believed to be much poorer, though not necessarily the poorest.

Carney is having none of it. He rejected the distributional criticism of monetary policy... He points to these two charts as evidence that the poor have done better than the rich from monetary policy...

It is all very well crowing that the poorest have been supported. They have, to some extent, though perhaps not quite as much as you claim. But it is painfully evident that the "in-betweeners" have had much less support. Relative to the rich, they have lost out both in wealth and in income. And relative to the poor, they have lost out too: they no longer qualify for many benefits and other public support, and they are seeing public money going to people not much poorer than them while they are left to struggle on their own. These are people who see themselves as having done everything right: they have worked hard, saved and paid into the system. Now, they think the system has abandoned them. And with reason.

To be fair, it is not the Bank of England that has abandoned them, though some of them blame you for their woes: "in-betweener" pensioners are those who have been hardest hit by very low interest rates. The real failures lie on the fiscal side, and are of very long standing.

The promise of "cradle to grave" support upon which the British welfare state was founded has been systematically dismantled. Now, only the poorest are supported. The neglected in-betweeners are on their own. And their anger is shaking our political establishment to its foundations.

Thursday, December 08, 2016

The American Dream, Quantified at Last

David Leonhardt:

The American Dream, Quantified at Last: ...Chetty, a Stanford professor, and his colleagues .... constructed a data set that shows the percentage of American children who earn more money — and less money — than their parents earned at the same age.
The index is deeply alarming. It’s a portrait of an economy that disappoints a huge number of people who have heard that they live in a country where life gets better, only to experience something quite different. ...
It begins with children who were born in 1940... The researchers went into the project assuming that most of these children had earned more than their parents — but were surprised to learn that nearly all of them had... About 92 percent of 1940 babies had higher pretax household earnings at age 30 than their parents had at the same age. (The results were similar at older ages and for post-tax earnings.)
The few 1940 children who earned less than their parents were also, for the most part, doing just fine. They were generally earning less because they had grown up rich...
For children born in 1950, the likelihood of achieving the American Dream had begun to fall but remained very high. ...
For babies born in 1980 — today’s 36-year-olds — the index of the American dream has fallen to 50 percent: Only half of them make as much money as their parents did. In the industrial Midwestern states that effectively elected Donald Trump, the share was once higher than the national average. Now, it is a few percentage points lower. There, going backward is the norm. ...

It goes on to discuss how the trend might be reversed.

Tuesday, December 06, 2016

Economic Growth in the United States: A Tale of Two Countries

Thomas Piketty, Emmanuel Saez, Gabriel Zucman:

Economic growth in the United States: A tale of two countries, by Thomas Piketty, Emmanuel Saez, Gabriel Zucman, Equitable Growth: Overview The rise of economic inequality is one of the most hotly debated issues today in the United States and indeed in the world. Yet economists and policymakers alike face important limitations when trying to measure and understand the rise of inequality.

One major problem is the disconnect between macroeconomics and the study of economic inequality. Macroeconomics relies on national accounts data to study the growth of national income while the study of inequality relies on individual or household income, survey and tax data. Ideally all three sets of data should be consistent, but they are not. The total flow of income reported by households in survey or tax data adds up to barely 60 percent of the national income recorded in the national accounts, with this gap increasing over the past several decades.1

This disconnect between the different data sets makes it hard to address important economic and policy questions...

A second major issue is that economists and policymakers do not have a comprehensive view of how government programs designed to ameliorate the worst effects of economic inequality actually affect inequality. Americans share almost one-third of the fruits of economic output (via taxes that help pay for an array of social services) through their federal, state, and local governments. ... Yet we do not have a clear measure of how the distribution of pre-tax income differs from the distribution of income after taxes are levied and after government spending is taken into account. This makes it hard to assess the extent to which governments make income growth more equal.2

In a recent paper, the three authors of this issue brief attempt to create inequality statistics for the United States that overcome the limitations of existing data by creating distributional national accounts.3 We combine tax, survey, and national accounts data to build a new series on the distribution of national income. ... Our distributional national accounts enable us to provide decompositions of growth by income groups consistent with macroeconomic growth.

In our paper, we calculate the distribution of both pre-tax and post-tax income. The post-tax series deducts all taxes and then adds back all transfers and public spending so that both pre-tax and post-tax incomes add up to national income. This allows us to provide the first comprehensive view of how government redistribution in the United States affects inequality. Our benchmark series use the adult individual as the unit of observation and split income equally among spouses in married couples. But we also produce series where each spouse is assigned their own labor income, allowing us to study gender inequality and its impact on overall income inequality. In this short summary, we would like to highlight three striking findings.

Our first finding—a surge in income inequality

First, our data show that the bottom half of the income distribution in the United States has been completely shut off from economic growth since the 1970s. ...

It’s a tale of two countries. For the 117 million U.S. adults in the bottom half of the income distribution, growth has been non-existent for a generation while at the top of the ladder it has been extraordinarily strong. And this stagnation of national income accruing at the bottom is not due to population aging. ...

Our second finding—policies to ameliorate income inequality fall woefully short

Our second main finding is that government redistribution has offset only a small fraction of the increase in pre-tax inequality. ...

Our third finding—comparing income inequality among countries is enlightening

Third, an advantage of our new series is that it allows us to directly compare income across countries. Our long-term goal is to create distributional national accounts for as many countries as possible; all the results will be made available online on the World Wealth and Income Database. One example of the value of these efforts is to compare the average bottom 50 percent pre-tax incomes in the United States and France.8 In sharp contrast with the United States, in France the bottom 50 percent of real (inflation-adjusted) pre-tax incomes grew by 32 percent from 1980 to 2014, at approximately the same rate as national income per adult. While the bottom 50 percent of  incomes were 11 percent lower in France than in the United States in 1980, they are now 16 percent higher. (See Figure 3.) ... Since the welfare state is more generous in France, the gap between the bottom 50 percent of income earners in France and the United States would be even greater after taxes and transfers.

The diverging trends in the distribution of pre-tax income across France and the United States—two advanced economies subject to the same forces of technological progress and globalization—show that working-class incomes are not bound to stagnate in Western countries. In the United States, the stagnation of bottom 50 percent of incomes and the upsurge in the top 1 percent coincided with drastically reduced progressive taxation, widespread deregulation of industries and services, particularly the financial services industry, weakened unions, and an eroding minimum wage.

Conclusion

Given the generation-long stagnation of the pre-tax incomes among the bottom 50 percent of wage earners in the United States, we feel that the policy discussion at the federal, state, and local levels should focus on how to equalize the distribution of human capital, financial capital, and bargaining power rather than merely the redistribution of national income after taxes. Policies that could raise the pre-tax incomes of the bottom 50 percent of income earners could include:

  • Improved education and access to skills, which may require major changes in the system of education finance and admission
  • Reforms of labor market institutions to boost workers’ bargaining power and including a higher minimum wage
  • Corporate governance reforms and worker co-determination of the distribution of profits
  • Steeply progressive taxation that affects the determination of pay and salaries and the pre-tax distribution of income, particularly at the top end

The different levels of government in the United States today obviously have the power to make income distribution more unequal, but they also have the power to make economic growth in America more equitable again. Potentially pro-growth economic policies should always be discussed alongside their consequences for the distribution of national income and concrete ways to mitigate their unequalizing effects. We hope that the distributional national accounts we present today can prove to be useful for such policy evaluations. ...

Why Not Centrism?

Chris Dillow:

Why not centrism?: Some people want to revive centrism. Tony Blair wants to “build a new policy agenda for the centre ground”. And the Lib Dems’ victory in Richmond Park is being seen as a warning to the Tories that it must “keep the votes of the middle ground.”
This poses the question: does the idea of political centre ground even make sense? It does, if you think of political opinion being distributed like a bell curve with a few extremists at either end and lots of moderates in the middle. But this doesn’t seem to apply today, and not just because political opinion has always been multi-dimensional. What we have now is a split between Leavers and Remainers, and the ideas correlated with those positions such as openness versus authoritarianism. Where does the “centre ground” fit into this? ...
This, I think, is the essence of centrism. It accepts that globalization and free markets (within limits) bring potential benefits, but that these benefits must be spread more evenly via the tax and welfare system. This stands in contrast to nativism and some forms of leftism which oppose globalization and favour market intervention. It also contrasts to libertarianism and Thatcherism which emphasize freeish markets whilst underplaying redistribution. It’s also what New Labour stood for. ...
I have a ... beef. It’s that this form of centrism offers too etiolated a vision of equality. Inequality isn’t simply a matter of pay packets but of power too. Centrism fails to tackle the latter. This is a big failing... For me, therefore, a centrism which ignores inequalities of power must be inadequate.
Herein, though, lies the sadness: even this form of centrism would be a big  improvement upon a lot of today’s politics.

Friday, December 02, 2016

Minimum Wage Increases and Earnings in Low-Wage Jobs

Brad DeLong:

I think I have to change my mind: Back when Card and Krueger first suggested that there was substantial effective monopsony power in the low-wage labor market and thus that there would be no disemployment effect from (modest) increases in the minimum wage to make it binding, I said: "Clever, but nahhh." The reason for their findings, I thought, was that labor demand is just inelastic in the short and perhaps the medium run--but maybe not in the long run.
I confess that I think I have to change my mind. Economists do not fail to find disemployment effects from (modest) increases in the minimum wage that make it binding because labor demand is inelastic and statistical power is insufficient. Employers actually do have substantial monopsony power in the low-wage labor market--even though they shouldn't. And the minimum wage is best thought of as an anti-monopsony rate-regulation policy that raises low-wage employment, raises average low-wage earnings, and brings the market closer to its competitive equilibrium:
Sandra Black, Jason Furman, Laura Giuliano and Wilson Powell: Minimum Wage Increases and Earnings in Low-Wage Jobs ...

Wednesday, November 30, 2016

One Tax Policy Americans Yugely Favor

Gerald E. Scorse:

One tax policy Americans yugely favor, The Hill: Nobody likes taxes, but roughly nine out of 10 Americans want income from investments to be taxed at least as much as other income. Republican leaders, tone-deaf,... close their eyes to a reform enacted under President Ronald Reagan: equal taxes on capital gains, dividends, and ordinary income such as wages. It’s one policy the country would love to have back, yugely. ...
The landslide national preference for at least equal taxes on investments—for tax fairness, not tax breaks—meshes perfectly with the populist belief that the system is rigged in favor of the rich. ... According to an analysis by the non-partisan Tax Policy Center, the top 1 percent of Americans receives over 62 percent of the benefits from lower rates on capital gains, dividends and related tax preferences; for the top 10 percent, the total benefit share is just short of 80 percent.
That’s more than alright with Republicans, whose tax plans will likely drive those percentages even higher—in exactly the opposite direction of the reform ushered in a generation ago by President Reagan. He took Main Street’s side on taxing Wall Street gains, but the GOP likes to pretend it never happened. ...
Donald Trump rode the populist tide all the way to the White House. Let’s see if President Trump listens to the populist yearning—the yuge populist yearning—for equal taxes on income from wealth and income from work.

Sunday, November 27, 2016

Should We Worry About the Top 1%, or Praise Them?

Miles Corak:

...Earnings mobility for children from the very broad middle—parents whose income ranges from the bottom 10 percent all the way to the cusp of the top 10 percent—is not tied strongly to family income. These children tend to move up or down the income distribution without regard to their starting point in life. This may be one element of insecurity among the middle class: in spite of their best efforts, their children may be as likely to lose ground and fall in the income distribution as they are to rise.
The situation is very different for children raised by top-earning parents...

Much more here.

Wednesday, November 16, 2016

We Must Rethink Globalization, or Trumpism will Prevail

Thomas Piketty:

We must rethink globalization, or Trumpism will prevail: Let it be said at once: Trump’s victory is primarily due to the explosion in economic and geographic inequality in the United States over several decades and the inability of successive governments to deal with this. ...
The tragedy is that Trump’s program will only strengthen the trend towards inequality. ..
The main lesson for Europe and the world is clear: as a matter of urgency, globalization must be fundamentally re-oriented. The main challenges of our times are the rise in inequality and global warming. We must therefore implement international treaties enabling us to respond to these challenges and to promote a model for fair and sustainable development. ...
There should be no more signing of international agreements that reduce customs duties and other commercial barriers without including quantified and binding measures to combat fiscal and climate dumping in those same treaties. For example, there could be common minimum rates of corporation tax and targets for carbon emissions which can be verified and sanctioned. It is no longer possible to negotiate trade treaties for free trade with nothing in exchange. ... 
It is time to change the political discourse on globalization: trade is a good thing, but fair and sustainable development also demands public services, infrastructure, health and education systems. In turn, these themselves demand fair taxation systems. If we fail to deliver these, Trumpism will prevail.

I recently made a similar argument:

...Those of us in the economics profession have a choice to make. 

We can hold onto old ideas, inflated promises about the benefits of globalization and international trade for example, while charlatans such as Donald Trump take advantage of the fears people have to divide us through racism and xenophobia that miscasts the blame for our economic woes. Or we can recognize that change and new ways of thinking are needed and lead the way to policies that move us toward a more equitable economic system.

Tuesday, November 01, 2016

How Waning Competition Deepens Labor’s Plight

Eduardo Porter:

How Waning Competition Deepens Labor’s Plight: ...collectively, mergers ... are reconfiguring the American economy in ways that seem to be tilting the scales toward the interests of ever-larger corporations, to the broad detriment of labor. ...
Three years ago, the Nobel laureate economist Joseph Stiglitz proposed that increasing profits from companies managing to avoid normal competitive forces — what economists refer to as “rents” — appeared to be an important factor in the rising share of the nation’s income flowing toward corporate profits and top executive pay in recent years. He surmised that weak labor unions ... did not have the clout to protect the workers’ share.
Since then, several other studies have presented various channels through which a lack of competition between employers could keep wages down. ...
Waning competition in employment can muck up the economy in more ways than one. It slows wage growth, of course. Lacking outside options, workers are much less likely to leave a job. But economic output and employment will suffer, too, because fewer workers will be willing to work for the lower wage. ...
Policy makers can push back against employers’ market power. Strengthening labor unions... Raising the minimum wage... But it seems there is an opportunity to rethink the nation’s approach to antitrust law, too. It shouldn’t be seen exclusively as a tool to protect consumers from sticker shock.
In a speech in September, Renata Hesse, the Justice Department’s acting assistant attorney general for antitrust, argued forcefully that “the antitrust laws were intended to benefit participants in the American economy broadly — not just in their capacity as consumers of goods and services.”
Antitrust enforcement efforts, Ms. Hesse said, “also benefit workers, whose wages won’t be driven down by dominant employers with the power to dictate terms of employment.” ...

Wednesday, October 19, 2016

Are Americans Better Off Than They Were a Decade or Two Ago?

Ben Bernanke and Peter Olson:

Are Americans better off than they were a decade or two ago?: Economically speaking, are we better off than we were ten years ago? Twenty years ago? When asked such questions, Americans seem undecided, almost schizophrenic, with large majorities saying the country is heading “in the wrong direction,” even as they tell pollsters that they are optimistic about their personal financial situations and the medium-term economic outlook.
In their thirst for evidence on this issue, commentators seized on the recent report by the Bureau of the Census, which found that real median household income rose by 5.2 percent in 2015, as showing that “the middle class has finally gotten a raise.” Unfortunately, that conclusion puts too much weight on a useful, but flawed and incomplete, statistic. Among the more significant problems with the Census’s measure are that: 1) it excludes taxes, transfers, and non-monetary compensation like employer-provided health insurance; and 2) it is based on surveys rather than more-complete tax and administrative data, with the result that it has been surprisingly inconsistent with the official national income numbers in recent years. Even if precisely measured, data on income exclude important determinants of economic well-being, such as the hours of work needed to earn that income.
While thinking about the question, we came across a recently published article by Charles Jones and Peter Klenow, which proposes an interesting new measure of economic welfare. While by no means perfect, it is considerably more comprehensive than median income, taking into account not only growth in per capita consumption but also changes in working time, life expectancy, and inequality. Moreover, as the authors demonstrate, it can be used to assess economic performance both across countries and over time. In this post we’ll report some of their results, and extend part of their analysis (which ends before the Great Recession) through 2015.[1]
The bottom line: According to this metric, Americans enjoy a high level of economic welfare relative to most other countries, and the level of Americans’ well-being has continued to improve over the past few decades despite the severe disruptions of the last one. However, the rate of improvement has slowed noticeably in recent years, consistent with the growing sense of dissatisfaction evident in polls and politics. ...

Monday, October 17, 2016

How Clones Can Experience Unequal Economic Outcomes

Tim Taylor:

How Clones Can Experience Unequal Economic Outcomes: A certain amount of economic inequality is just luck. At the extreme, some people win the lottery, and others don't. But there is also the potential for more subtle kinds of luck, like two equally talented entrepreneurs, where one business happens to take off while the other doesn't. Or two equally talented workers who go to work for similar-looking companies, but one company takes off while the other craters. Richard Freeman discusses the research literature on why this final example might be significant enough to play a role in overall economic inequality in the US in his essay, "A Tale of Two Clones: A New Perspective on Inequality," just published by the Third Way think tank. Freeman sets the stage like this (footnotes omitted):
"[C]onsider two indistinguishable workers, you and your clone. By definition, you/clone have the same gender, ethnicity, years of schooling, family background, skills, etc. In 2006 you/clone graduated with identical academic records from the same university and obtained identical job offers from Facebook and MySpace. Not knowing any more about the future than the analysts who valued Facebook and MySpace roughly equally in the mid-2000s, you/clone flipped coins to decide which offer to accept: heads – Facebook; tails – MySpace. Clone’s coin came up heads. Yours came up tails. Ten years later, Clone is in the catbird’s seat in the job market — high pay, stock options, a secure future. You struggle. Back to university? Send job search letters to close friends? Ask distant acquaintances to help? The you/clone thought experiment may seem extreme, but recent research that I have conducted with colleagues finds that the earnings of workers with near-clone similarity in attributes diverged so much by the place they worked that rising inequality in pay among employers has become the major factor in the trend rise in inequality. ... The labor market has been dominated by economic forces that pull the wages of firms further apart from each other, motivating our analysis of the role of employers in increasing inequality." 
In other words, a lot of inequality is about where you work. The rise in equality is linked to differences across what firms are paying employees who appear to be similarly qualified. As Freeman acknowledges, this argument that this is a quantitatively important cause of rising inequality isn't ironclad at this point, but it's highly suggested in several ways of looking at the data: Freeman  writes:
"This implies that 86% ... of the trend increase in inequality [from 1977-2009] occurs among people with measurably the same skills, whereas just 14% of the trend increase comes from changes in earnings among workers with different skills. The big surprise in the exhibit is that the inequality of average earnings among establishments increased by the same 0.147 points [measuring variance of natural log of earnings, a standard measure of inequality of earnings] as did inequality among workers with the same characteristics. This suggests that all of the increase in inequality among similar workers comes from the increase in earnings at their workplaces." 
Or here is a figure suggesting a linkage from firm earnings to individual inequality of earnings. The blue line shows the change in individual earnings along the income distribution from 1992-2007. As one would expect, given the rise in inequality, those in the bottom percentiles of the income distribution do worse, while those in the top percentiles of the income distribution do better. But now, notice that the blue line for individual earnings almost matches the orange line for firm earnings. That is, there has also been widening inequality in firm earnings, with those at the bottom of the earnings distribution also seeing a decline from 1992-2007 and those at the top seeing an increase. Freeman also offers evidence that those who stayed at firms have seen their earnings change with the fortunes of the firm--thus contributing to overall inequality. As he writes; "In sum, changes in the distribution of earnings among establishments affect the change in earnings along the entire earnings distribution and the increased advantage of top earners compared to other workers."
What makes it possible for successful firms to pay workers more? The answer must be rooted in higher productivity for those firms. Indeed, productivity seems to be diverging across firms, too.
Indeed, as Freeman emphasizes, this figure shows that the equality of revenue per worker--a rough measure of productivity at the firm level--is diverging faster than inequality of wages across firms. Moreover, Freeman argues that a similar pattern of productivity divergence across firms is happening within each sector of the economy.
 Freeman's evidence is consistent with some other studies. For example, last year I pointed to an OECD report on The Future of Productivity, which argued that while cutting-edge frontier firms continue to see strong increases in productivity, the reason for slower overall rates of productivity is that other firms aren't keeping up.
Thinking about inequality between similar workers may alter how one thinks about public policies related to underlying determinants of inequality. For example, it may be important to think about how productivity gains diffuse across industries and how that process may have changed. I suspect there is also some element of geographical separation here, where firms in certain areas are seeing faster productivity and wage increases, and so thinking about mobility of people and firms across geographic areas may be important, too.

Tuesday, October 04, 2016

Does the One Percent Deserve What it Gets?

Nancy Folbre:

Does the one percent deserve what it gets?: The rich are not like you and me. They contribute far more to society than everybody else, so argues Harvard University economist Gregory Mankiw in his essay “Defending the One Percent.” Mankiw’s praise for talented superstars such as Steven Jobs, J.K. Rowling, and Steven Spielberg quickly blooms into a more general argument that competitive labor markets pay workers what they deserve. This is music to the ears of high earners, and it sings to a very human desire to believe that the world is fair.
But this argument is based on neoclassical economic theories that define the domain of human choice in narrow terms, minimizing the effects of bad luck, bad markets, and bad inequalities that often predetermine market outcomes. Mankiw’s argument leaves room for corporate bad behavior defined in narrow terms as “gaming the system.” But what he most deplores is government meddling with the system.
Most economists do not explicitly endorse such views. But years of schooling in neoclassical economic theories predispose them to the view that perfectly competitive markets yield equitable as well as efficient outcomes. As a result, they often assess “rent seeking,” or efforts to get rich at someone else’s expense, by comparison with hypothetical market outcomes.
Rent seeking becomes just another name for interference with the magic meritocracy of the marketplace. From this perspective, efforts to increase the minimum wage can be considered just as unfair as efforts to challenge compensation practices for corporate chief executives and other well-heeled top managers.
Like neoclassical economic theory in general, this approach is too narrow. Competitive markets comprise a relatively small part of an economy dominated by large multinational corporations—marketplaces and firms that are embedded in a global environment of unpriced goods and services.
Efforts to get rich at someone else’s expense, which fall under the academic rubric of distributional conflict, are multidimensional. Forms of collective bargaining power based on citizenship, class, race and ethnicity, and gender, as well as other aspects of group identity, influence the resources that individuals bring to the labor market. They also influence the power that individuals possess to modify labor market outcomes.
Some of us contribute more than members of the top one percent to the economy, and some of us contribute less. None of us gets exactly what we deserve. One difference between the rich and us is that they have more money. They also enjoy—both as cause and effect—a lot more power.

Link to paper.

Thursday, September 29, 2016

The Decline of the Middle Class is Causing Economic Damage

Larry Summers:

The decline of the middle class is causing even more economic damage than we realized: I have just come across an International Monetary Fund working paper on income polarization in the United States that makes an important contribution to the secular stagnation debate. The authors ... find that polarization has reduced consumer spending by more than 3 percent or about $400 billion annually. If these findings stand up to scrutiny, they deserve to have a policy impact.
This level of reduction in spending is huge. For example, it exceeds by a significant margin the impact in any year of the Obama stimulus program. Alone it would be enough to account for a significant reduction in neutral real interest rates. If consumers were spending 3 percent more, there would be scope to maintain full employment at interest rates much closer to normal. And there would be much less of a problem of monetary policy’s inability to respond to the next recession.
What is the policy implication? Principally, it is the macroeconomic importance of supporting middle class incomes. This can be done in a range of ways from promoting workers right to collectively bargain to raising spending on infrastructure to making the tax system more progressive. ...

Thursday, September 22, 2016

Estate Tax a Key Tool for Fighting US Inequality

Caroline Freund at PIIE:

Estate Tax a Key Tool for Fighting US Inequality: This year marks the 100th anniversary of the US estate tax, which affects only the ultra-wealthy. Given the rising focus on American income inequality, the tax should be on solid ground. Not so.
Republican presidential candidate Donald Trump has vowed to eliminate the estate tax, while Democrat candidate Hillary Clinton wants to revive it ...
There are good reasons to support this tax:
As I have pointed out previously, there is no productive activity in inheriting a large sum of money, so it does little to distort the economy.
Estate taxes also raise revenue and redistribute wealth. ...
Historically such taxes have worked well in the United States. ...
The future of the estate tax will depend heavily on the upcoming presidential election. Donald Trump would like to see it gone. This is not unthinkable, since in a largely symbolic vote last year the House of Representatives voted to abolish it. ...
Hillary Clinton proposes higher estate tax brackets as wealth increases, reaching 65 percent for a billionaire couple. My guess is that if people really understood the incidence of the tax, 99.8 percent of the population would support her proposal.

Saturday, September 17, 2016

The Downside of Upward Mobility

Branko Milanovic:

The downside of upward mobility: ...If we ... really wanted to support upward mobility or give equal chances to all there are many political measures we could enact. ...Ganesh shows how totally politically unfeasible they are: confiscatory inheritance taxes, smaller class sizes in poorer neighborhood funded from the taxes from the rich, end of tax-exempt status for the richest universities, moral suasion that rich universities annually transfer 1% of their wealth to poorer state schools, criminalization of nepotism etc. None of these proposals will have the remotest chance of being accepted by those who currently wield political and economic power. ...

If upward mobility is about the relative positions in a society, then upward mobility for some implies downward mobility for the others. But if those currently at the top have a stronghold on the top places in society, there will no upward mobility however much we clamor for it. This positional (or relative) approach to mobility is a fairly accurate description of reality in societies that are growing slowly. In societies that develop quickly even if a lot of mobility is about positional advantages (and they are by definition fixed) it can be compensated by creating enough new social layers, new jobs and by making people richer. Thus the upwardly mobile have some room to move up which does not require an equal number of people to move down.

In more stagnant societies, mobility becomes a zero-sum game. To effect real social mobility in such societies, you need revolutions that, while equalizing chances or rather improving dramatically the chances of those on the bottom, do so at the cost of those on the top. In addition, they destroy many other things including lives, not only of those on the top but also of those on the bottom. ...

It is then not surprising that, short of such massive upheavals that shake the societies to their very core, countries tend to display relatively little positional mobility. ...

I think that we are led to a very somber conclusion here. In societies with slow growth, upward mobility is limited by the lack of opportunities and the solid grip that those who are on the top keep over the chances of their children to remain on the top. It is either self-delusion or hypocrisy to believe that societies with such unevenness of chances will come close to resembling “meritocracies”. But it is also the case that true upward mobility comes with an enormous price tag of lives lost and wealth destroyed.

Thursday, September 15, 2016

Do U.S. Economists Ignore Inequality?

Arjun Jayadev at INET:  

Do U.S. Economists Ignore Inequality?: A thought-provoking report in The Atlantic seeks to explore an apparent paradox in the practice of economics in the United States: Despite the high levels of inequality that many view as a drag on the performance of the U.S. economy — and also the increasingly volatile political effects of that inequality — the report argues that American economists have not been at the forefront of studying the distribution of wealth and income. Most of the cutting edge work has been often led by researchers from different national and cultural backgrounds.
While it’s encouraging to note that many of those cited in the piece as exemplary path-breakers in the field, such Gabriel Zucman, Steven Fazzari, and James K. Galbraith, have been supported by the Institute for New Economic Thinking, it may be overstating the case to say that American economists have not been cognizant of inequality — the widening of the wealth and income gap over the past 30 years has hardly gone unnoticed. Still, it is probably true to suggest that most explanations offered for the phenomenon have cited some combination of differential investments in human capital and/or technological changes as being primary drivers. There have always, of course, been dissenters from this approach, but analyses that identified macroeconomic factors such as weak labor markets or political factors such as the rise of a financial class remained minority views.
What is notable about some of the new research commended by the Atlantic for more boldly tackling the more politically challenging aspects of inequality is that this work has given more central causal weight to macroeconomic policy and factors such as the declining bargaining power of labor vs. capital.
For many years, to cite one example, labor shares and their decline were either treated as an artifact of the way data is collected, or as marginal to economic analysis. In the recent past however, a spate of influential papers have returned to the question of the capital-labor relations and shares of output going to each. Other influential papers have implicated the enormous growth of the financial sector as important features in the landscape of U.S. inequality. The centrality of the balance of political power in shaping income distribution was certainly a feature of U.S. academic economics until the 1980s, and work in this tradition has continued at the margins. But the new research being hailed by the Atlantic is restoring the centrality of such concerns. Economics, and the society it purports to serve, can only benefit from that development.

Monday, September 12, 2016

Labor Compensation and Labor Productivity

Just a quick reminder:

More here: Labor Compensation and Labor Productivity: Recent Recoveries and the Long-Term Trend, B. Ravikumar and Lin Shao, St. Louis Fed

Thursday, September 08, 2016

Drivers of inequality: Trade Shocks Versus Top Marginal Tax Rates

Douglas Campbell and Lester Lusher at VoxEU:

Drivers of inequality: Trade shocks versus top marginal tax rates: Growing wealth inequality has been one of the most pressing political issues since the Great Recession. However, there is a relative lack of consensus on the significant drivers of this trend. This column investigates the contribution of globalization, via international trade, to US wealth inequality. Although trade is found to have had important effects on certain parts of the US labor market in the early 2000s, the growth in US inequality since 1980 can be traced back to Reagan-era tax cuts. ...

Tuesday, August 30, 2016

Rising Wage Inequality Continues

Elise Gould at the EPI:

Rising wage inequality continues to be a defining feature of the U.S. labor market: It’s well documented and widely understood that wage inequality has grown dramatically over the last four decades as productivity and compensation growth have become delinked. Despite an expanding and increasingly productive economy, wages have stagnated for the vast majority. Looking at the most recent data—through the first half of 2016—we see that wage inequality has continued to grow, with top earners faring far better than those in the middle or bottom of the wage scale. First, the data paints a striking picture of growing wage inequality since the last business cycle peak in 2007. Second, average wage growth overall is slow, and any significant real wage growth continues to be driven by low (and below target) inflation—not meaningful acceleration in nominal wage growth. Last, strong payroll employment growth the last couple of months suggests positive future trends for not only wage growth, but also declining unemployment and rising labor force participation. ...

Friday, August 26, 2016

Today’s Inequality Could Easily Become Tomorrow’s Catastrophe

Robert Shiller:

Today’s Inequality Could Easily Become Tomorrow’s Catastrophe: Economic inequality is already a concern, but it could become a nightmare in the decades ahead, and I fear that we are not well equipped to deal with it. ...
One way to judge the likely outcome is to look at what has happened in the past. ...Kenneth Scheve ... and David Stasavage ... looked at 20 countries over two centuries to see how societies have responded to the less fortunate. Their primary finding may seem disheartening: Taxes on the rich generally have not gone up when inequality and economic hardship has increased. ...
Professor Scheve and Professor Stasavage found that democratic countries have not consistently embraced more redistributive tax policies, and most people do not vote strictly in their narrow self-interest. ...
This is consistent with my own survey results, which focused on inheritance taxes. ... Taxing around a third of wealth, more or less, seemed fair to people. And perhaps it is reasonable, in the abstract, yet what will we do in the future if this degree of taxation won’t produce enough revenue to meaningfully help the very poor as well as the sagging middle class? ...
Angus Deaton..., commenting on what he called the “grotesque expansions in inequality of the past 30 years,” gave a pessimistic prediction: “Those who are doing well will organize to protect what they have, including in ways that benefit them at the expense of the majority. ” And Robert M. Solow ... said, “We are not good at large-scale redistribution of income.” ...
No one seems to have an effective plan to deal with the possibility of much more severe inequality, should it develop. ...
Despite past failures, we should not lose hope in our ability to improve the world. ...

Tuesday, August 09, 2016

Bosses Pay: The Right's Problem

Chris Dillow:

Bosses pay: the right's problem: The High Pay Centre said yesterday that FTSE 100 CEOs’ pay rose 10% last year to an average of almost £5.5m. It’s obvious that the left should find this a problem. I want to suggest that it should also be a problem for the right too, for four reasons.
First, high CEO pay is due in at least part to a market failure. ...
Secondly, rising CEO pay, especially when accompanied by a degradation of “middle-class” jobs means we’re shifting from a bourgeois society to a “winner-take-all” one. This has potentially nasty cultural effects. ...
Thirdly, it’s possible – I put it no stronger than that – that high CEO pay is bad for overall productivity. ...
Finally, there’s a danger that rising inequality will produce a nasty backlash. ... Political instability is no friend of business or free markets. ...
My point here is a simple one. There are good reasons why Theresa May has spoken of the “irrational, unhealthy and growing gap” between bosses’ and workers’ pay. It’s because such a gap threatens the values and interests of many conservatives.
Many Marxists are relaxed about this; it just confirms our view that capitalism is a device through which the rich exploit others. Should rightists really also be relaxed? I mean, they can’t all be just hypocritical shills of the rich, can they?

(There is an explanation of each point in the full post.)

Monday, August 01, 2016

What is Inclusive Growth?

Tim Taylor:

What is Inclusive Growth?: "Inclusive growth" is an unquestionably astute rhetorical formulation. Those who use it can support both economic growth and helping the poor in a two-word phrase. But where did the term come from? Does the term have different content from seemingly similar terms like "broad-based growth" or "pro-poor growth"? Or do all these terms mean pretty much the same thing? Most of all, is "inclusive growth" a specific set of policies or just a desirable outcome?

Rafael Ranieri and Raquel Almeida Ramos explore the history of the "inclusive growth" terminology in "Inclusive Growth: Building up a Concept," published in May 2013 by the International Centre for Inclusive Growth (Working Paper #104). A little earlier,  Elena Ianchovichina and Susanna Lundstrom produced a note on "What is inclusive growth?" for the World Bank in a note published on February 10, 2009.

Apparently, the term "inclusive growth" originated in an essay "What is Pro-poor Growth?" by  Nanak Kakwani and Ernesto M. Pernia, which appeared in the Asian Development Review in 2000. They use the term "inclusive" growth only once, and in a way which makes it synonymous with "pro-poor growth." They write: "Broadly, pro-poor growth can be defined as one that enables the poor to actively participate in and significantly benefit from economic activity. It is a major departure from the trickle-down development concept. It is inclusive economic growth."

The reasons why "inclusive growth" or "pro-poor growth" seemed like a new thing back about two decades ago was rooted in how people used to talk about development economics . A common framework at that time was the notion that low-income countries were trapped in poverty, and needed big boost of investment capital to jolt themselves forward into a process of industrialization. The "Kuznets curve" held that a process of economic development first brings a period of greater inequality, as new industries take hold, which would then followed by a period of greater equality as prosperity spreads or diffuses through an economy.

All of these frameworks have been challenged in various ways. It's not clear that low-income countries are in a poverty "trap"--it's just that they have slow growth, which isn't necessarily the same thing. It wasn't clear that industrialization would necessarily diffuse through an economy: for example, Latin American countries had a reasonable degree of growth from the 1960s on, but with persistent and high levels of inequality. By the 1970s, arguments were emerging that poverty itself held back economic development, so rather than seeking development first and hoping it would reduce poverty eventually, a direct approach to improving the nutrition, health, education, and income-earning prospects of the poor could bring development. The greatest economic development success stories from the the 1960s through the 1980s, the East Asian "growth miracle" that saw the take-off of economies like South Korea, Thailand, and Taiwan didn't involve a large rise in inequality, nor did the earlier take-off of Japan's economy. As Ranieri and Ramos note:

Another core reason for the shift of development thinking towards a constructive, or at least not pernicious, relationship between growth and equity was the phenomenal developmental performance of the so-called Asian tigers: Hong Kong, Singapore, South Korea and Taiwan. The East Asian developmental experience, which unfolded over the course of a larger time span but received most attention from the 1970s into the 1980s and early 1990s, decisively challenged the existence of an inescapable trade-off between growth and equity. Combining rapid growth in per capita income with relatively stable and low inequality,  it suggested that “there might be policy measures to foster the benign combination of high growth and rapid poverty reduction” ...

But as the goal of inclusive growth became common, a number of detailed questions emerged. For example, did inclusive growth mean an improvement in the level of standard of living for the poor, or did it mean that the standard of living for the poor needed to be faster than the average for the middle and upper income groups? To what extent did the word "inclusive" apply to the broader middle-class as well as the poor? Does inclusive growth refer to income that includes government transfers, or only to income earned in the market? Does inclusive growth include only private income, or does it also refer to improved provision of government services like education, health services, sanitation and water, or reliable electricity? Should the "inclusiveness" of growth be understood at least partially in terms of institutions for democratic representation and governance?

These different concepts of inclusive growth have different policy implications. While it's easy to feel an attraction to the concept of inclusive growth, it's not clear that it offers a growth formula that works. After all, for many low-income countries around the world, it hasn't seemed that their choice was between "inclusive growth" or "noninclusive growth," but rather they were just struggling to have meaningful growth of any kind.

There's no question that the conceptual problems with "inclusive growth" are severe. Rememver, the Ramieri and Ramos working paper is written for what is called the International Policy Center for Inclusive Growth (which in turn seems to be a joint venture between the UN Development Programme and the Brazilian government), and the writers nonetheless conclude:

"[G]overnments and multilateral development institutions speak of inclusive growth and devise and label objectives, strategies and policies accordingly. But there is no clarity about what is actually meant by inclusive growth; definitions vary and tend to be vague. In general, what seems to be implied is that inclusive growth involves improving the lot of underprivileged people in particular and overall making opportunities more plentiful while lessening barriers to the attainment of better living conditions. But exactly what these entail and whether and how they are interconnected is not made clear. As the meaning of inclusiveness determines policy objectives, while it remains unclear, so do the objectives to be sought in designing policies aimed at promoting inclusive growth."

But despite the conceptual confusion, it seems to me that the terminology of "inclusive growth" does capture some important themes. The great problem of economic development is we cannot yet enunciate any compact list of government policies that reliably leads to a growth miracle. Indeed, given the many different circumstances of nations and economies, it may be that no single list exists, and that instead each country must diagnose which economic or institutional constraints are holding it back. Or it may even be that such diagnosis is too faulty to be reliable, and the best a a country can do is to work on basics like education, health, physical infrastructure, rule of law, and hope for best.

But when thinking about either the inputs to the development process or the outputs of the process, the inclusive growth concept can offer a useful reminder.  When thinking about policies to encourage development, it's a reminder that steps which help lower-income people in a direct way are worthwhile, not only because they might help to bring about economic growth but because benefiting those with lower incomes is beneficial in itself. In the general category of policies to help people in a direct way, I would include not just vaccinations and schooling and nutrition, but also policies that help people overcome the hurdles to starting a small business, or that allow people to monitor how public officials are spending money. When judging the results of development efforts, it's a useful reminder to look beyond the images of a huge and flash project like a dam, highway, factory, or mine, and consider the extent to which the project improved the day-to-day lives of lower-income people--whether through jobs and wages or through more affordable goods and services.

To steal a phrase from Ranieri and Ramos, the inclusive growth agenda is to search for a "constructive interaction of declining poverty and inequality and economic growth." That may be an insufficient agenda for economic development, in and of itself, but keep the potential for such constructive interactions in mind is surely worthwhile.

Friday, July 22, 2016

In Defense of Equality (without Welfare Economics)

Branko Milanovic:

In defense of equality (without welfare economics): When I taught recently at the Summer School at Groningen University, I began my lecture on the measurement of inequality by distinguishing between the Italian and English schools as they were defined in 1921 by Corrado Gini...
I put myself squarely in the camp of the “Italians”. Measurement of income inequality is like measurement of any natural or social phenomenon. We measure inequality as we measure temperature or height of people. The English (or welfarist) school believes that the measure of income inequality is only a proxy for a measure of a more fundamental phenomenon: inequality in welfare. The ultimate variable, according to them, that we want  to estimate is welfare (or even happiness) and it is distributed. Income provides only an empirically feasible short-cut to it.
I would have been sympathetic to that approach if I knew how individual utility can be measured. There is, I believe, no way to compare utilities of different persons. ... The only way for the “welfaristas” to solve this conundrum is to assume that all individuals  have the same utility function. This is such an unrealistically bold assumption that I think nobody would really care to defend it...
Now, the welfarst approach continues to be associated with pro-equality policies. Why? Because if all people have the same utility function, then the optimal distribution of income is such that everybody has the same income. ...
My students then asked how I can justify concern with inequality if I reject the welfarist view which is the main ideological vehicle through which equality of outcomes is being justified. (A non-utilitarian, contractarian alternative is provided by Rawls. Yet another alternative, based on equal capabilities—a close cousin to equality of opportunity (of which more below) is provided by Amartya Sen.)
My answer was that I justify concern with income inequality on three grounds.
The first ground is instrumental: the effect on economic growth. ...
The second is political effect. In societies where economic and political  spheres are not separated by the Chinese wall (and all existing societies are such), inequality in economic power seeps and ultimately invades and conquers the political sphere. ...
The third ground is philosophical. As Rawls has argued, every departure from unequal distribution of resources has to be defended by an appeal to a higher principle. Because we are all equal individuals (whether as declared by the Universal Charter of Human Rights or by God), we should all have an approximately equal opportunity to develop our skills and to lead a “good (and pleasant) life”. Because inequality of income almost directly translates into inequality of opportunities, it also directly negates that fundamental equality of all humans.  ...
I have to say here that in addition inequality of opportunity affects negatively economic growth...
My argument, if I need to reiterate it, is: you can reject welfarism, hold that inter-personal comparison of utility is impossible, and still feel very strongly that economic outcomes should be made more equal—that inequality should be limited so that it does not strongly affect opportunities, so that it does not slow growth and so that it does not undermine democracy. Isn’t that enough?

Thursday, July 14, 2016

It is More Difficult for Workers to Move Up the Income Ladder

Austin Clemens at Equitable Growth:

New analysis shows it is more difficult for workers to move up the income ladder: Against a rising chorus of concern about increasing income inequality, some economists are pushing back, suggesting that it is not income inequality we should be concerned with but rather income mobility. Income mobility describes the ability of individuals to move up and down the income ladder over some period of time. As long as mobility is healthy, they argue, society can remain egalitarian in the face of inequality, because the poor can move up and the rich down. ...
Equitable Growth grantees Michael D. Carr and Emily E. Wiemers at the University of Massachusetts-Boston used a new dataset to revisit the measurement of earnings mobility, the part of income that comes from work. Their results suggest that lifetime earnings mobility has declined in recent years. ...

Friday, July 01, 2016

U.S. Top One Percent of Income Earners Hit New High in 2015

Emmanuel Saez:

U.S. top one percent of income earners hit new high in 2015 amid strong economic growth: The top 1 percent income earners in the United States hit a new high last year, according to the latest data from the U.S. Internal Revenue Service. ... The latest IRS data show that incomes for the bottom 99 percent of families grew by 3.9 percent over 2014 levels, the best annual growth rate since 1998, but incomes for those families in the top 1 percent of earners grew even faster, by 7.7 percent, over the same period. ...
After a large decline of 11.6 percent from 2007 to 2009, real incomes of the bottom 99 percent of families registered a negligible 1.1 percent gain from 2009 to 2013, and then grew by 6.0 percent from 2013 to 2015. Hence, a full recovery in income growth for the bottom 99 percent remains elusive. Six years after the end of the Great Recession, those families have recovered only about sixty percent of their income losses due to that severe economic downturn.
In contrast, families at or near the top of the income ladder continued to power ahead. ... The share of income going to the top 10 percent of income earners—those making on average about $300,000 a year—increased to 50.5 percent in 2015 from 50.0 percent in 2014, the highest ever except for 2012. The share of income going to the top 1 percent of families—those earning on average about $1.4 million a year—increased to 22.0 percent in 2015 from 21.4 percent in 2014.
Income inequality in the United States persists at extremely high levels, particularly at the very top of the income ladder. ... This ... is unfortunately on par with a long-term widening of inequality since 1980, when the top 1 percent of families began to capture a disproportionate share of economic growth. ...
Policymakers ... need to grasp whether past efforts to raise taxes on the wealthy—in particular the higher tax rates for top U.S. income earners enacted in 2013 as part of the 2013 federal budget deal struck by Congress and the Obama Administration—are effective at slowing income inequality.
The latest data from the IRS suggests the 2013 reforms proved to be fleeting in terms of reducing income inequality. There was a dip in pre-tax income earned by the top one percent in 2013, yet by 2015 top incomes are once again on the rise—following a pattern of growing income inequality stretching back to the 1970s.

Tuesday, June 28, 2016

Productivity, Inequality, and Economic Rents

Jason Furman at ProMarket:

Productivity, Inequality, and Economic Rents: Productivity growth—a necessary (though not sufficient) condition for rising incomes in the long run—has slowed since 1973... At the same time, inequality in the United States is higher and, in recent decades, has risen faster than in other major advanced economies. ...
These dual trends ... have many distinct sources, but insofar as they have some causes in common, there is the potential to address these causes in ways that simultaneously improve efficiency and equity. To this end, the evidence that a rise in rents is contributing to both phenomena is important. ...
The good news is that to the degree that the “rents” interpretation is correct, it suggests that it is possible to reduce inequality and promote productivity growth without hurting efficiency by changing how rents are divided—or even that it is possible to do both while increasing efficiency by acting to reduce rents in the economy. Policies that raise the minimum wage and provide greater support for collective bargaining can help level the playing field for workers in negotiations with employers, in turn changing the way that rents are divided. Measures that would rationalize licensing requirements for employment, reduce zoning and other land-use restrictions, appropriately balance intellectual property regimes, and change the incentives that have led to the expansion of the financial sector as a share of the economy would all help curb excessive rents.
Additional measures that would reduce the scope and unequal distribution of economic rents include the promotion of competition through rulemaking and regulations, as well as the elimination of regulatory barriers to competition. ...
The bad news, however, is that rents have beneficiaries and these beneficiaries fight hard to keep and expand their rents. As a result, political reforms and other steps aimed at curbing the influence of regulatory lobbying are important for reducing the ability of people and corporations to seek rents successfully. Such actions would help ensure that economic growth in the decades ahead is robust, sustainable, and widely shared.

Sunday, June 26, 2016

Property Rights, the Income Distribution, and China

Roger Farmer:

Property Rights, the Income Distribution and China: ...why has the distribution of income, in the United States and Europe, tilted towards capital and away from labor over the past few decades? There is growing evidence that this redistribution is connected with the opening of trade with China. Globalization has lifted a billion Chinese workers out of poverty and it has led to huge income gains for Americans and Europeans at the top of the income and wealth distributions. These gains have not been shared with middle class and working class people in the US and Europe. ...

It is ... possible to conceive of alternative forms of democracy that would provide greater rights to workers. Workers councils, for example, have proved to be relatively successful in Germany. 

The concept of private property is contingent on rights that are defined and enforced by national governments. Those rights are constantly evolving. When the US founding fathers signed the Declaration of Independence, it was still possible to buy and sell human beings. The idea that a national government would enforce the property rights of a slave owner is, to today's sensibilities, abhorrent. It is entirely possible that a system of property rights that allows a factory owner to close down a large manufacturing plant without consulting the workers whose livelihoods depend on its continued operation, will, in another two hundred years, appear to be equally abhorrent.

[This is part of a discussion of whether intervention in financial markets necessarily leads to an upward redistribution of income.]

Tuesday, June 21, 2016

The Growing Size and Incomes of the Upper Middle Class

New report from Stephen Rose at the Urban Institute:

The Growing Size and Incomes of the Upper Middle Class: ... I found that the upper middle class has grown substantially, from 12.9 percent of the population in 1979 to 29.4 percent in 2014. Further, with the exception of the bottom 6 per cent, real growth occurred throughout the income ladder. However, that growth was unevenly distributed in that people with higher incomes had faster growth than those with lower incomes. Consequently, these findings expand the discussion of rising inequality to focus on more than just the top 1 percent. Indeed, a massive shift has occurred in the center of gravity of the economy. In 1979, the middle class controlled a bit more than 46 percent of all income s, and the upper middle class and rich controlled 30 percent. In contrast, in 2014 the rich and upper middle class controlled 63 percent of all incomes ( 52 percent for the upper middle class and 11 percent for the rich); the middle class share had shrunk to 26 percent; and the shares of the lower middle class, poor, and near - poor had declined by half.

Sunday, June 19, 2016

Competition Policy and Inclusive Growth

At VoxEU:

Competition policy and inclusive growth, by Fabienne Ilzkovitz and Adriaan Dierx: Firms with greater market power can behave monopolistically, and recent research suggests that declining market competitiveness is driving income inequality. While competition authorities already measure the overall impact of their interventions by using customer savings, these measurements do not account for indirect effects of intervention. This column introduces a DSGE model to model competition policy interventions as a negative mark-up shock. Competition policy has a significant and positive impact on growth and jobs, and impacts richer and poorer households differently. Interventions have important redistributive effects that benefit the poorest in society.

Thursday, June 16, 2016

What’s the Right Minimum Wage? Reframing the Debate

At Equitable Growth:

 What’s the right minimum wage? Reframing the debate from ‘no job loss’ to a ‘minimum living wage,’ Working Paper 2016-06, by David Howell, Kea Fiedler, and Stephanie Luce: Abstract The American debate over the proper level of the statutory minimum wage has always reflected the tension between the twin goals of ensuring decent living-wage jobs with maximum job opportunity. The moral and efficiency arguments for a wage floor that can keep a worker above mere subsistence have a long history, dating back at least to Adam Smith. The U.S. federal minimum wage was established by the 1938 Fair Labor Standards Act to ensure a “minimum standard of living necessary for health, efficiency, and general well being of workers” and to do so “without substantially curtailing employment.” In recent years, the best evidence has shown that moderate increases from very low wage floors have no discernible effects on employment, which has strengthened the case for substantial increases in the minimum wage.
But the very strength of this new evidence—research designs that effectively identify employment effects at the level of individual establishments—has contributed to the adoption of a narrow No-Job-Loss (NJL) criterion: that the “right” wage floor is the one that previous research has demonstrated will pose little or no risk of future job loss, anywhere. The economist’s Pareto Criterion—a good policy is one that does no immediate harm to anyone—has replaced the earlier much broader concern with aggregate employment effects, and more generally, with overall net benefits to working families. The explicit moral and efficiency framing of the case for a living wage by earlier generations of economists, advocates, and policy makers has taken a back seat to statistical jousting over which wage floor will pose no risk of job loss (or harm) to anyone.
We think the debate over the proper level of the statutory minimum wage should be reframed from a NJL to a Minimum Living Wage (MLW) standard: the lowest wage a fulltime worker needs for a minimally decent standard of living. This paper illustrates and critiques the recent NJL framing, as well as the usefulness of one metric that has been heavily relied upon for identifying the NJL threshold—the ratio of the wage floor to the average wage (the Kaitz index). We argue that the proper framing of the debate is not over the statistical risk of the loss of some poverty-wage, high-turnover jobs, but rather over the wage floor that establishes a minimally decent standard of living from full-time work for all workers, along with complementary policies that would ensure that any costs of job loss would be more than fully remedied.