Category Archive for: Income Distribution [Return to Main]

Saturday, October 03, 2015

'How Poverty Affects Children’s Brains'

We need to do more to "inoculate young children’s pliable brains against the ravages of poverty":

How poverty affects children’s brains, Washington Post: ... In a study published this year in Nature Neuroscience, several co-authors and I found that family income is significantly correlated with children’s brain size — specifically, the surface area of the cerebral cortex, which ... does most of the cognitive heavy lifting. Further, we found that increases in income were associated with the greatest increases in brain surface area among the poorest children. ...
Some feared the study would be used to reinforce the notion that people remain in poverty because they are less capable than those with higher incomes. As neuroscientists, we interpret the results very differently. We know that the brain is most malleable in the early years of life...
Our [new] clinical trial is designed to provide strong evidence regarding whether and how poverty reduction promotes cognitive and brain development. This study, however, will take at least five years to complete — far too long for young children living in poverty today. We should not wait until then to push for policies that can help inoculate young children’s pliable brains against the ravages of poverty. ...

Friday, October 02, 2015

''You Just Don’t See the Positive Side'' of High Managerial Compensation

From an interview with Thomas Piketty during a trip to South Africa:

...I think in all cases there is always a lot to learn from these historical experiences and probably the one … lesson is we don’t want, we don’t need 19th-century inequality to grow in the 21st century. We find the role of inequality may be justified by incentive and growth considerations, but certainly no extreme and sometimes obscene level of inequality of pay that we’ve seen in recent days, with top managerial compensation going to millions of dollars. You just don’t see the positive side of this in the performance, in the job creation. ... The idea that you need to pay top managers 100, 200 times the minimum wage to get them to work and otherwise they will just not do the work. That ideology is not consistent at all with the historical data that we have, which shows that you can develop with reasonable, not extreme inequality levels. ...

The comments on the interview, at least when I read them, were not supportive.

Thursday, October 01, 2015

Market Power, Labor's Share of Income, and Measured Productivity

For a long time, I have been making the argument that part of the reason for the inequality problem is distortions in the distribution of income driven by market imperfections such as monopoly power that allows prices to exceed marginal costs. What I didn't realize is that this can also affect measurements of productivity growth:

The relationship between U.S. productivity growth and the decline in the labor share of national income, by Nick Bunker: One of the ongoing debates about the state of the U.S. economy is the extent to which the profits from productivity gains are increasingly going to the owners of capital instead of wage earners. These researchers are debating the extent to which the labor share of income, once considered a constant by economists, is on the decline.
But what if the decline of national income going to labor actually affects the measured rate of U.S. productivity growth? In a blog post published last week, University of Houston economist Dietz Vollrath sketches out a model showing just that scenario. ...
Vollrath argues that businesses with more market power are able to charge higher markups on their goods and services, meaning their pricing is higher than the cost of producing an additional goods or services compared to pricing in a perfectly competitive market. So in this situation where markups are high, goods and services are being produced less efficiently, with the increased profits going to the owners of capital.
Vollrath argues that this is how measured productivity growth is affected by the decline of the labor share of income. Market power is important for thinking about measured productivity growth because, as Vollrath says, it “dictates how efficiently we use our inputs.” ... Impeding the most efficient use of capital and labor via marked-up prices will reduce measured productivity. ... Perhaps this could explain some of the reason why measured productivity growth looks so meager in the seeming age of innovation...
But Vollrath’s story isn’t a complete explanation of the fall in measured productivity, as he acknowledges...
But Vollrath’s market power explanation for falling productivity growth, alongside the falling share of national income going to wage earners, is supported by some evidence.  Work by Massachusetts Institute of Technology graduate student Matt Rognlie, for example, found evidence of higher markups.
Whether and how the decline of the labor share of income affects productivity growth is obviously a topic far too large for a couple of blog posts. But Vollrath’s model is especially interesting for connecting two important trends in recent years: the slowdown in productivity growth and the declining labor share. It’s worth, at the very least, a bit more investigation.

Wednesday, September 30, 2015

'Jeb Goes Galt'

Paul Krugman:

Jeb Goes Galt: This is amazing:

“I think the left wants slow growth because that means people are more dependent upon government,” Bush told Fox Business’ Maria Bartiromo.

Remember, this is the establishment candidate for the GOP nomination — and he thinks he’s living in Atlas Shrugged.

Back when Romney made his "47 percent" remark, Rich Lowry of the National Review Online responded:

...The contention is that if people aren’t paying federal income taxes, they are essentially freeloaders who will vote themselves more government benefits knowing that they don’t have to pay for them. As NR’s Ramesh Ponnuru has pointed out, there’s no evidence for this dynamic. ...
Fear of the creation of a class of “takers” can slide into disdain for people who are too poor — or have too many kids or are too old — to pay their damn taxes. For a whiff of how politically unattractive this point of view can be, just look at the Romney fundraising video.

Bush didn't learn a thing from Romney' venture down this road. "There's no evidence" for the charge itself, it's a political loser except with a certain population that would vote Republican in any case, and it falsely asserts that Democrats are opposed to policies that spur economic growth (hence our repeated calls for things like infrastructure to provide jobs, get the economy ready for a highly competitive international economy, and avoid the potential for secular stagnation?).

What we are opposed to, or what I am opposed to -- guess I should speak for myself -- is growth where all the benefits are captured by those at the top. Imperfections in economic institutions along with changes in the rules of the game pushed forward by those with political influence have caused those at the top to be rewarded in excess of their contribution to economic output, while those at the bottom have gotten less than their contribution. It's not "taking" to increase taxes at the top and return income to those who actually earned it, to the real makers who toil each day at jobs they'd rather not do to support their families. It's a daily struggle for many, a struggle that would be eased if they simply earned an amount equivalent to their contributions. That's why it's so "politically unattractive", people explicitly or implicitly understand they have been, for lack of a better word, screwed by the system. The blame is sometimes misplaced, but that doesn't change the nature of the problem. They don't want "free stuff," they want what they deserve, and there is nothing whatsoever wrong with that.

The other thing I'm opposed to is tax cuts for those at the top that make this problem even worse without delivering any corresponding benefits. These tax cuts redistribute income upward and cause the income received by workers to fall even further below their contribution, and there's no corresponding benefit to economic growth (or if there is, it's very, very small). We keep hearing that putting money in the hands of the "makers' at the top will produce magical growth, but the reality is that these are the true takers, the ones who are receiving far more from the economy than they contribute, while those who actually work their butts off each day to make the things we all need and enjoy struggle to pay their bills.

'On the Ethics of Redistribution'

Curious to hear what people think of this:

On the Ethics of Redistribution, by V. V. Chari and Christopher Phelan, The Region, FRB Minneapolis: When evaluating economic inequality, economists frequently employ the ethical principle referred to as behind-the-veil-of-ignorance. Originated by Nobel Laureate John Harsanyi and philosopher John Rawls, this criterion imagines the social contract that would be developed by a society of risk-averse people who don’t yet know where each of them will end up in that society’s distribution of income.1 ...
From behind the veil of ignorance, no individual could know into which country (or economic class) he or she will be born. Behind-the-veil, risk-averse people would therefore want to ensure that people born in rich countries do not adopt policies that hurt people born in poor countries. Nevertheless, analysts almost invariably ignore the effects of domestic tax policy on those in other nations. But consistent use of the behind-the-veil criterion would mean that analysts cannot treat people who live in rich, developed economies differently than they treat people who live in poor, less-developed economies. ...
Increasing world trade is an example of the tension between policies that help those in developing countries versus those that help those lower in the income distribution in developed countries. According to a World Bank Study, in the three decades between 1981 and 2010, the rate of extreme poverty in the developing world (subsisting on less than $1.25 per day) has gone down from more than one out of every two citizens to roughly one out of every five, all while the population of the developing world increased by 59 percent.8 This reduction in extreme poverty represents the single greatest decrease in material human deprivation in history.
But this decrease in extreme poverty in the developing world has coincided with a marked increase in income inequality in the developed world, and the latter has received much more attention, at least from policy analysts in these richer nations.
One possible cause of both trends has been the increase in international trade, which lessens the market value of less-skilled labor in developed countries while increasing its value in developing countries.9 If one uses a behind-the-veil criterion focused only on developed countries, then the increase in trade has made things worse. If instead one considers the entire world, then the trade increase has made the world phenomenally better. ...
We conclude that using the behind-the-veil-of-ignorance criterion to advocate for redistributive policies within developed countries while ignoring the effect of these policies on people in poor countries violates the criterion itself and is therefore fundamentally misguided.
Many economic analysts use social welfare functions in which, implicitly, only the well-being of domestic residents matters. This type of analysis is acceptable as long as the analyst acknowledges that such a social welfare function is not developed from deeper ethical considerations. A giant literature in public finance justifies such social welfare functions by appealing to the veil-of-ignorance. Our point simply is that those who use this criterion should weight the welfare of poor people in Chad, the world’s poorest nation, very heavily. To our knowledge, very little if any of the relevant research does so.

'Are American Schools Making Inequality Worse?'

Education is not the only cause of inequality, but it's part of the problem:

Are American schools making inequality worse?, American Educational Research Association: The answer appears to be yes. Schooling plays a surprisingly large role in short-changing the nation's most economically disadvantaged students of critical math skills, according to a study published today in Educational Researcher, a peer-reviewed journal of the American Educational Research Association.
Findings from the study indicate that unequal access to rigorous mathematics content is widening the gap in performance on a prominent international math literacy test between low- and high-income students, not only in the United States but in countries worldwide.
Using data from the 2012..., researchers from Michigan State University and OECD confirmed not only that low-income students are more likely to be exposed to weaker math content in schools, but also that a substantial share of the gap in math performance between economically advantaged and disadvantaged students is related to those curricular inequalities. ...
"Our findings support previous research by showing that affluent students are consistently provided with greater opportunity to learn more rigorous content, and that students who are exposed to higher-level math have a better ability to apply it to addressing real-world situations of contemporary adult life, such as calculating interest, discounts, and estimating the required amount of carpeting for a room," said Schmidt, a University Distinguished Professor of Statistics and Education at Michigan State University. "But now we know just how important content inequality is in contributing to performance gaps between privileged and underprivileged students."
In the United States, over one-third of the social class-related gap in student performance on the math literacy test was associated with unequal access to rigorous content. The other two-thirds was associated directly with students' family and community background. ...
"Because of differences in content exposure for low- and high-income students in this country, the rich are getting richer and the poor are getting poorer," said Schmidt. "The belief that schools are the great equalizer, helping students overcome the inequalities of poverty, is a myth."
Burroughs, a senior research associate at Michigan State University, noted that the findings have major implications for school officials, given that content exposure is far more subject to school policies than are broader socioeconomic conditions.

Monday, September 28, 2015

'Why We Must End Upward Pre-Distribution to the Rich'

Robert Reich:

Why We Must End Upward Pre-Distribution to the Rich: You often hear inequality has widened because globalization and technological change have made most people less competitive, while making the best educated more competitive.
There’s some truth to this. The tasks most people used to do can now be done more cheaply by lower-paid workers abroad or by computer-driven machines.
But this common explanation overlooks a critically important phenomenon: the increasing concentration of political power in a corporate and financial elite that has been able to influence the rules by which the economy runs.
As I argue in my new book, “Saving Capitalism: For the Many, Not the Few” (out this week), this transformation has amounted to a pre-distribution upward. ...

After a large number of examples illustrating how changes in the rules of the game driven by political influence have worked against the economic interests of the working class, he concludes

... The underlying problem, then, is not just globalization and technological changes that have made most American workers less competitive. Nor is it that they lack enough education to be sufficiently productive.
The more basic problem is that the market itself has become tilted ever more in the direction of moneyed interests that have exerted disproportionate influence over it, while average workers have steadily lost bargaining power—both economic and political—to receive as large a portion of the economy’s gains as they commanded in the first three decades after World War II.
Reversing the scourge of widening inequality requires reversing the upward pre-distributions within the rules of the market, and giving average people the bargaining power they need to get a larger share of the gains from growth.
The answer to this problem is not found in economics. It is found in politics. Ultimately, the trend toward widening inequality in America, as elsewhere, can be reversed only if the vast majority join together to demand fundamental change.
The most important political competition over the next decades will not be between the right and left, or between Republicans and Democrats. It will be between a majority of Americans who have been losing ground, and an economic elite that refuses to recognize or respond to its growing distress.

Wednesday, September 23, 2015

'Education Gap Between Rich and Poor Is Growing Wider'

Eduardo Porter:

Education Gap Between Rich and Poor Is Growing Wider, NY Times: the 1970s..., African-American children had nowhere near the same educational opportunities as whites. The civil rights movement, school desegregation and the War on Poverty helped bring a measure of equity to the playing field. Today,... racial disparities in education have narrowed significantly. ... But ...the achievement gaps between more affluent and less privileged children is wider than ever... Today the biggest threat to the American dream is class.
Education is today more critical than ever. ... And yet American higher education is increasingly the preserve of the elite. ... The problem, of course, doesn’t start in college. ...
“If we could equalize achievement from age zero to 14,” Professor [Jane] Waldfogel told me, “that would go a long way toward closing the college enrollment and completion gaps.”
It can be done. Australia, Canada — even the historically class-ridden Britain — show much more equitable outcomes..., yet the strains from our world of increasing income inequality raise doubts about our ability to narrow the educational divide... The ... rich ... are spending hand over fist to ensure that their children end at the front of the rat race. Our public school system has proved no match to the forces reproducing inequality across the generations. ...
Today, the proficiency gap between the poor and the rich is nearly twice as large as that between black and white children. In other words, even as one achievement gap narrowed, another opened wide. ...

Friday, September 18, 2015

'The Typical Male U.S. Worker Earned Less in 2014 Than in 1973'

More on income stagnation and inequality:

The typical male U.S. worker earned less in 2014 than in 1973: The median male worker who was employed year-round and full time earned less in 2014 than a similarly situated worker earned four decades ago. And those are the ones who had jobs. ...
What about women? Well, they haven’t closed the pay gap with men, but the inflation-adjusted earnings of the median female worker increased more than 30% between 1973 and 2014... But back to men. Why are wages for the typical male worker stagnating? ... I contacted Larry Katz, the Harvard University labor economist. He identified three factors to explain the stagnation of men’s wages:
1. Although this is not the major factor, workers have been getting more of their compensation in benefits as opposed to the cash wages that the Census tallies. ...
2. Labor’s share of national income has been declining since 2000 and capital’s share has been rising. Labor’s compensation (wages and benefits) has not been keeping pace with productivity growth. ...EPI’s Josh Bivens and Larry Mishel argue, “ This decoupling coincided with the passage of many policies that explicitly aimed to erode the bargaining power of low- and moderate-wage workers in the labor market.”
3. The “most important factor,” Mr. Katz says, is the rise in wage inequality, the gap between the earnings of the best-paid workers and the ones at the middle and the bottom that has been widening steadily since about 1980. Economists differ over how much of this is the result of globalization, technological change, changing social mores, and government policies, but there is no longer much dispute about the fact that inequality is increasing.
... It’s not hard to understand why so many voters ... are drawn to candidates who acknowledge this reality, lambast incumbents for not doing more to address it, and style themselves as outsiders with fresh approaches to one of the nation’s most alarming economic problems.

To me, it's interesting how much the explanation for inequality has shifted away from the "skill-biased technical change" and technological based arguments and towards "changing social mores, and government policies." Even so, I think these types of arguments -- those that explain the decline in bargaining power in wage negotiations -- have more explanatory power than many people acknowledge. But even if we acknowledge that we aren't sure about the degree to which inequality can be explained by market-based versus institutional structure arguments, what seems clear to me is that the market won't solve this problem by itself. There do not appear to be forces within capitalism that necessarily push us toward an equal distribution of income. Thus, there is no assurance that heeding calls for government to get out of the way would help to reduce inequality, and it could make it worse. To me, policies that increase the ability of workers to bargain for a fair share of what they produce holds the most promise for solving the inequality problem (in a way that avoids direct redistribution). How to actually accomplish this is a difficult problem, unions have less power in a world where the threat of moving production to another country is very real (or a region within the US where the laws are more favorable), but at the very least we ought to ensure that new legislation does not make the highly unequal wage bargaining problem any worse (see Scott Walker).

Wednesday, September 16, 2015

'Income Stagnation in 2014'

[Source: EPI]

Thursday, September 10, 2015

'Growing Economic Segregation Among School Districts and Schools'

This is probably not the path to reduced inequality:

Growing economic segregation among school districts and schools: ... Rising income inequality means those at the top have a growing resource advantage. Some high-income families use these resources to pay for housing in particular neighborhoods, resulting in increasing segregation by income between neighborhoods over the past four decades. Residential segregation creates inequalities between neighborhoods, and neighborhood contexts are critical for children’s development. Children who grow up in disadvantaged neighborhoods have worse educational and occupational outcomes later in life. ...
In a recent study, Sean F. Reardon, Christopher Jencks, and I documented trends in economic segregation between schools and school districts. ... We found that segregation by family income between school districts within metropolitan areas rose from 1970 to 2010. Looking only at families with children enrolled in public school from 1990 to 2010, segregation by family income between school districts rose by nearly 20 percent. ...
Segregation of upper-middle-class and affluent families from all others increased the most. In 2010, families with incomes in the top 10 percent of the national income distribution lived in the most homogenous districts, with other affluent families like them. In contrast, we found that poor families have become slightly more integrated by income between school districts. However, given that high-income families have distanced themselves from others, poor families are likely integrating with working-poor or lower-middle-class families rather than the affluent.
We then examined segregation between schools within school districts. Available data limit our investigation to measuring segregation between students that qualify for free lunch and those that do not. We found that segregation based on free lunch eligibility between schools within districts was 10 percent higher in 2010 than 1991. Focusing only on the 100 largest districts in the U.S., segregation by free lunch status between schools increased by 30 percent. Therefore, students increasingly attend school with students whose family incomes are similar to their own. ....
Our findings have serious implications for future inequality. ...

Wednesday, September 09, 2015

'How Rising Inequality Increases Political Polarization'

This research is examines how state-level income inequality impacts political polarization within state legislatures. It's from one of our graduate students, John Voorheis (who will be on the job market at the AEA meetings this year), along with Nolan McCarty at Princeton and Boris Shor at Georgetown (who have very good state level legislator ideology data).

They have some preliminary results, which were presented this at last weekend's APSA meetings (there is a preliminary working paper on SSRN). Here's a thumbnail sketch of the results:

  • They use a simulated instrument for state level inequality to address potential endogeneity between state politics and state income distributions. That allows them to estimate the causal effect of inequality on polarization (a first for this literature).
  • They find robust evidence that increases in state inequality cause increased political polarization (i.e. the ideological distance between Democratic and Republican parties).
  • Inequality affects the mean position of both Democratic and Republican parties, but the effect is larger and more precisely estimated for Democrats.
  • Income Inequality also causes a rightward shift in the average ideology of state legislatures.
  • They conclude that inequality's effect on polarization primarily occurs through moving the moderate wing of the Democratic party to the left; this occurs through replacing moderate Democrats with Republicans, which results in a more liberal Democratic party but a more conservative legislature overall.

John's work was supported by a young scholar grant from the Washington Center for Equitable Growth.

Monday, September 07, 2015

'Support for Redistribution in an Age of Rising Inequality: New Stylized Facts and Some Tentative Explanations'

From the NBER:

Support for Redistribution in an Age of Rising Inequality: New Stylized Facts and Some Tentative Explanations, by Vivekinan Ashok, Ilyana Kuziemko, and Ebonya Washington, NBER Working Paper No. 21529 Issued in September 2015 [open link to earlier version]: Despite the large increases in economic inequality since 1970, American survey respondents exhibit no increase in support for redistribution, in contrast to the predictions from standard theories of redistributive preferences. We replicate these results but further demonstrate substantial heterogeneity by demographic groups. In particular, the two groups who have most moved against income redistribution are the elderly and African-Americans. We find little evidence that these subgroup trends are explained by relative economic gains or growing cultural conservatism, two common explanations. We further show that the elderly trend is uniquely American, at least relative to other developed countries with comparable survey data. While we are unable to provide definitive evidence on the cause of these two groups' declining redistributive support, we offer additional correlations which may offer fruitful directions for future research on the topic. One story consistent with the data on elderly trends is that older Americans worry that redistribution will come at their expense, in particular via cuts to Medicare. We find that the elderly have grown increasingly opposed to government provision of health insurance and that controlling for this tendency explains about 40% of their declining support for redistribution. For blacks, controlling for their declining support of race-targeted aid explains nearly 45% of their differential decline in redistributive preferences (raising the question of why support for race-targeted aid has fallen during a period when black economic catch-up to whites has stalled).

Thursday, September 03, 2015

'The Dangerous Separation of the American Upper Middle Class'

Richard Reeves at Brookings:

The dangerous separation of the American upper middle class: The American upper middle class is separating, slowly but surely, from the rest of society. This separation is most obvious in terms of income—where the top fifth have been prospering while the majority lags behind. But the separation is not just economic. Gaps are growing on a whole range of dimensions, including family structure, education, lifestyle, and geography. Indeed, these dimensions of advantage appear to be clustering more tightly together, each thereby amplifying the effect of the other.
In a new series of Social Mobility Memos, we will examine the state of the American upper middle class: its composition, degree of separation from the majority, and perpetuation over time and across generations. Some may wonder about the moral purpose of such an exercise. After all, what does it matter if those at the top are flourishing? To be sure, there is a danger here of indulging in the economics of envy. Whether the separation is a problem is a question on which sensible people can disagree. The first task, however, is to get a sense of what’s going on.

Skipping the extensive analysis covering:

“We are the 80 percent!” Not quite the same ring as “We are the 99 percent!” ...
Defining the upper middle class...
Upper middle class incomes: on the up...
“Where did you get your second degree?” The upper middle class and education...
Families, marriage and social class...
Voting and Attitudes...

The conclusion is:

Conclusion The writer and scholar Reihan Salam has developed some downbeat views about the upper middle class. Writing in Slate, he despairs that “though many of the upper-middle-class individuals I’ve come to know are good, decent people, I’ve come to the conclusion that upper-middle-class Americans threaten to destroy everything that is best in our country.”
Hyperbole, of course. But there is certainly cause for concern. Salam points to the successful rebellion against President Obama’s plans to curb 529 college savings plans, which essentially amount to a tax giveaway to the upper middle class. While the politics of the reform were badly bungled, it was indeed a reminder that the American upper middle class knows how to take care of itself. Efforts to increase redistribution, or loosen licensing laws, or free up housing markets, or reform school admissions can all run into the solid wall of rational, self-interested upper middle class resistance. This is when the separation of the upper middle class shifts from being a sociological curiosity to an economic and political problem.
In the long run, an even bigger threat might be posed by the perpetuation of upper middle class status over the generations. There is intergenerational ‘stickiness’ at the bottom of the income distribution; but there is at least as much at the other end,  and some evidence that the U.S. shows particularly low rates of downward mobility from the top. When status becomes more strongly inherited, inequality hardens into stratification, open societies start to close up, and class distinctions sharpen.

The Divergence Between Productivity and Pay

From Larry Mishel and Josh Bivens at the EPI:

Understanding the Historic Divergence Between Productivity and a Typical Worker’s Pay: Why It Matters and Why It’s Real, by Josh Bivens and Lawrence Mishel: Introduction and key findings Wage stagnation experienced by the vast majority of American workers has emerged as a central issue in economic policy debates, with candidates and leaders of both parties noting its importance. This is a welcome development because it means that economic inequality has become a focus of attention and that policymakers are seeing the connection between wage stagnation and inequality. Put simply, wage stagnation is how the rise in inequality has damaged the vast majority of American workers.

The Economic Policy Institute’s earlier paper, Raising America’s Pay: Why It’s Our Central Economic Policy Challenge, presented a thorough analysis of income and wage trends, documented rising wage inequality, and provided strong evidence that wage stagnation is largely the result of policy choices that boosted the bargaining power of those with the most wealth and power (Bivens et al. 2014). As we argued, better policy choices, made with low- and moderate-wage earners in mind, can lead to more widespread wage growth and strengthen and expand the middle class.

This paper updates and explains the implications of the central component of the wage stagnation story: the growing gap between overall productivity growth and the pay of the vast majority of workers since the 1970s. A careful analysis of this gap between pay and productivity provides several important insights for the ongoing debate about how to address wage stagnation and rising inequality. First, wages did not stagnate for the vast majority because growth in productivity (or income and wealth creation) collapsed. Yes, the policy shifts that led to rising inequality were also associated with a slowdown in productivity growth, but even with this slowdown, productivity still managed to rise substantially in recent decades. But essentially none of this productivity growth flowed into the paychecks of typical American workers. Second, pay failed to track productivity primarily due to two key dynamics representing rising inequality: the rising inequality of compensation (more wage and salary income accumulating at the very top of the pay scale) and the shift in the share of overall national income going to owners of capital and away from the pay of employees. Third, although boosting productivity growth is an important long-run goal, this will not lead to broad-based wage gains unless we pursue policies that reconnect productivity growth and the pay of the vast majority.

Ever since EPI first drew attention to the decoupling of pay and productivity (Mishel and Bernstein 1994), our work has been widely cited in economic analyses and by policymakers. It has also attracted criticisms from those looking to deny the facts of inequality. Thus in this paper we not only provide an updated analysis of the productivity–pay disconnect and the factors behind it, we also explain why the measurement choices we have made are the correct ones. As we demonstrate, the data series and methods we use to construct our graph of the growing gap between productivity and typical worker pay best capture how income generated in an average hour of work in the U.S. economy has not trickled down to raise hourly pay for typical workers. ...

Key findings from the paper include:

  • For decades following the end of World War II, inflation-adjusted hourly compensation (including employer-provided benefits as well as wages) for the vast majority of American workers rose in line with increases in economy-wide productivity. Thus hourly pay became the primary mechanism that transmitted economy-wide productivity growth into broad-based increases in living standards.
  • Since 1973, hourly compensation of the vast majority of American workers has not risen in line with economy-wide productivity. In fact, hourly compensation has almost stopped rising at all. Net productivity grew 72.2 percent between 1973 and 2014. Yet inflation-adjusted hourly compensation of the median worker rose just 8.7 percent, or 0.20 percent annually, over this same period, with essentially all of the growth occurring between 1995 and 2002. Another measure of the pay of the typical worker, real hourly compensation of production, nonsupervisory workers, who make up 80 percent of the workforce, also shows pay stagnation for most of the period since 1973, rising 9.2 percent between 1973 and 2014. Again, the lion’s share of this growth occurred between 1995 and 2002.
  • Net productivity grew 1.33 percent each year between 1973 and 2014, faster than the meager 0.20 percent annual rise in median hourly compensation. In essence, about 15 percent of productivity growth between 1973 and 2014 translated into higher hourly wages and benefits for the typical American worker. Since 2000, the gap between productivity and pay has risen even faster. The net productivity growth of 21.6 percent from 2000 to 2014 translated into just a 1.8 percent rise in inflation-adjusted compensation for the median worker (just 8 percent of net productivity growth).
  • Since 2000, more than 80 percent of the divergence between a typical (median) worker’s pay growth and overall net productivity growth has been driven by rising inequality (specifically, greater inequality of compensation and a falling share of income going to workers relative to capital owners). Over the entire 1973–2014 period, rising inequality explains over two-thirds of the productivity–pay divergence.
  • If the hourly pay of typical American workers had kept pace with productivity growth since the 1970s, then there would have been no rise in income inequality during that period. Instead, productivity growth that did not accrue to typical workers’ pay concentrated at the very top of the pay scale (in inflated CEO pay, for example) and boosted incomes accruing to owners of capital.
  • These trends indicate that while rising productivity in recent decades provided the potential for a substantial growth in the pay for the vast majority of workers, this potential was squandered due to rising inequality putting a wedge between potential and actual pay growth for these workers.
  • Policies to spur widespread wage growth, therefore, must not only encourage productivity growth (via full employment, education, innovation, and public investment) but also restore the link between growing productivity and the typical worker’s pay.
  • Finally, the economic evidence indicates that the rising gap between productivity and pay for the vast majority likely has nothing to do with any stagnation in the typical worker’s individual productivity. For example, even the lowest-paid American workers have made considerable gains in educational attainment and experience in recent decades, which should have raised their productivity.


Tuesday, August 25, 2015

'The Politics of Income Inequality'

I have a new column:

The Politics of Income Inequality: f the policies favored by some Republicans seeking the nomination for president turned into reality, we’d roll back or eliminate our social insurance programs, cut taxes on the wealthy, cut spending even more to slash the deficit, and turn health care over to the private sector. 
The “you’re on your own no matter what bad luck comes your way” society is a desirable outcome according to this view because it creates the correct incentives for people to be gainfully employed and take care of themselves. Never mind that history shows many people won’t prepare for retirement, purchase health care, set aside funds in case of job loss, and so on unless they are forced to do so by government programs, and will thus then end up being an even bigger burden to the rest of society, Those who support these policies appear to believe that this time will somehow be different. 
What do these issues have in common? ...

Sunday, August 23, 2015

Thomas Piketty: New Thoughts on Capital in the Twenty-First Century


Saturday, August 22, 2015

'Did Socialism Keep Capitalism Equal?'

Branko Milanovic:

Did socialism keep capitalism equal?: This is an interesting idea and I think that it will gradually become more popular. The idea is simple: the presence of the ideology of socialism (abolition of private property) and its embodiment in the Soviet Union and other Communist states made capitalists careful: they knew that if they tried to push workers too hard, the workers might retaliate and capitalists might end up by losing  all.
Now, this idea comes from the fact that rich capitalist countries experienced an extraordinary period of decreasing inequality from around 1920s to 1980s, and then since the 1980s, contradicting what a simple Kuznets curve would imply, inequality went up.  It so happens that the turning  point in 1980s coincides with (1) acceleration of skill-biased technological progress, (2) increased globalization and entry of Chinese workers into the global labor market, (3) pro-rich policy changes (lower taxes), (4) decline of the trade unions, and (5) end of Communism as an ideology. So each of these five factors can be used to explain the increase in inequality in rich capitalist countries.
The socialist story recently received a boost from two papers. ...
 I am not sure that this particular story can alone explain the decline in inequality in the West, and certainly it is a story that one hears less often in the US than in Europe, as the United States  believed itself to be sufficiently protected from the Communist virus (although when you look at the repression in the 1920s and McCarthyism in the 1950s, one is not so sure). But even Solow’s recent mention of the changing power relations between capitalists and workers (the end of the Detroit treaty) as ushering in the period of rising inequality is not inconsistent with this view. In a recent conversation, and totally unaware of the literature, an Italian high-level diplomat explained to me why inequality in Italy increased recently: “in then 1970s, capitalists were afraid of the Italian Communist Party”. So there is, I think, something in the ... story.
The implication is of course rather unpleasant: left to itself, without any countervailing powers, capitalism will keep on generating high inequality and so the US may soon look like South Africa. That’s where I think differently: I think there are, in the longer-term, forces that would lead toward reduction in inequality (and that would not be the return of Communism).

Tuesday, August 18, 2015

'Wealth and Income Distribution: New Theories Needed for a New Era '

More from Joe Stiglitz (along with Ravi Kanbur) on what needs to change in economics:

Wealth and income distribution: New theories needed for a new era, Vox EU: Six decades ago, Nicholas Kaldor (1957) put forward a set of stylized facts on growth and distribution for mature industrial economies. The first and most prominent of these was the constancy of the share of capital relative to that of wealth in national income. At about the same time, Simon Kuznets (1955) put forward a second set of stylized facts -- that while the interpersonal inequality of income distribution might increase in the early stages of development, it declines as industrialized economies mature.

These empirical formulations brought forth a generation of growth and development theories whose object was to explain the stylized facts. Kaldor himself presented a growth model which claimed to produce outcomes consistent with constancy of factor shares, as did Robert Solow. Kuznets also developed a model of rural-urban transition consistent with his prediction, as did many others (Kanbur 2012).

Kaldor-Kuznets facts no longer hold

However, the Kaldor-Kuznets stylized facts no longer hold for advanced economies. The share of capital as conventionally measured has been on the rise, as has interpersonal inequality of income and wealth. Of course, there are variations and subtleties of data and interpretation, and the pattern is not uniform. But these are the stylized facts of our time. Bringing these facts center stage has been the achievement of research leading up to Piketty (2014).

It stands to reason that theories developed to explain constancy of factor shares cannot explain a rising share of capital. The theories developed to explain the earlier stylized facts cannot very easily explain the new trends, or the turnaround. At the same time, rising inequality has opened once again a set of questions on the normative significance of inequality of outcomes versus inequality of opportunity. New theoretical developments are needed for positive and normative analysis in this new era.

What sort of new theories? In the realm of positive analysis, Piketty has himself put forward a theory based on the empirical observation that the rate of return to capital, r, systematically exceeds the rate of growth, g; the famous r > g relation. Much of the commentary on Piketty’s facts and theorizing has tried to make the stylized fact of rising share of capital consistent with a standard production function F (K, L) with capital ‘K’ and labor ‘L’. But in this framework a rising share of capital can be consistent with the other stylized fact of rising capital-output ratio only if the elasticity of substitution between capital and labor is greater than unity, which is not consistent with the broad empirical findings (Stiglitz, 2014a). Further, what Piketty and others measure as wealth ‘W’ is a measure of control over resources, not a measure of capital K, in the sense that that is used in the context of a production function.

Differences between K and W

There is a fundamental distinction between capital K, thought of as physical inputs to production, and wealth W, thought of as including land and the capitalized value of other rents which give command over purchasing power. This distinction will be crucial in any theorizing to explain the new stylized facts. ‘K’ can be going down even as ‘W’ increases; and some increases in W may actually lower economic productivity. In particular, new theories explaining the evolution of inequality will have to address directly changes in rents and their capitalized value (Stiglitz 2014). Two examples will illustrate what we have in mind.

  • Consider first the case of all sea-front property on the French Riviera.

As demand for these properties rises, perhaps from rich foreigners seeking a refuge for their funds, the value of sea frontage will be bid up. The current owners will get rents from their ownership of this fixed factor. Their wealth will go up and their ability to command purchasing power in the economy will rise correspondingly. But the actual physical input to production has not increased. All else constant, national output will not rise; there will only be a pure distributional effect.

  • Consider the case where the government gives an implicit guarantee to bail out banks.

This contingent support to income flows from ownership of bank shares will be capitalized into the value of these shares. Of course, there is an equal and opposite contingent liability on all others in the economy, in particular on workers -- the owners of human capital. Again, without any necessary impact on total output, the political economy has created rents for share owners, and the increase in their wealth will be reflected in rising inequality. One can see this without going through a conventional production function analysis. Of course, the rents once created will provide further resources for rentiers to lobby the political system to maintain and further increase rents. This will set in motion a spiral of increasing inequality, which again does not go through the production system at all -- except to the extent that the associated distortions represent a downward shift in the productivity of the economy (at any level of inputs of ‘K’ and labor).

Analyzing the role of land rents in increases in inequality can be done in a variant of standard neoclassical models -- by expanding inputs to include land; but explaining increase in inequality as a result of an increase in other forms of rent will need a theory of rents which takes us beyond the competitive determination of factor rewards.

Differences in inequality: Capital income versus labor income

The translation from factor shares to interpersonal inequality has usually been made through the assumption that capital income is more unequally distributed than labor income. Inequality of capital ownership then translates into inequality of capital income, while inequality of income from labor is assumed to be much smaller. The assumption is made in its starkest form in models where there are owners of capital who save and workers who do not.

These stylized assumptions no longer provide a fully satisfactory explanation of income inequality because: (i) there is more widespread ownership of wealth through life cycle savings in various forms including pensions; and (ii) increasingly unequal returns to increasingly unequally distributed human capital has led to sharply rising inequality of labor income.

Sharply rising inequality of labor income focuses attention on inequality of human capital in its most general sense:

  • Starting with unequal prenatal development of the foetus;
  • Followed by unequal early childhood development and investments by parents;
  • Unequal educational investments by parents and society; and
  • Unequal returns to human capital because of discrimination at one end and use of parental connections in the job market at the other end.

Discrimination continues to play a role, not only in the determination of factor returns given the ownership of assets, including human capital; but also on the distribution of asset ownership.

  • At each step, inequality of parental resources is translated into inequality of children’s outcomes.

An exploration of this type of inequality requires a different type of empirical and theoretical analysis from the conventional macro-level analysis of production functions and factor shares (Heckman and Mosso, 2014, Stiglitz, 2015).

In particular, intergenerational transmission of inequality is more than simple inheritance of physical and financial wealth. Layered upon genetic inequalities are the inequalities of parental resources. Income inequality across parents, due to inequality of income from physical and financial capital on the one hand, and inequality due to inequality of human capital on the other, is translated into inequality of financial and human capital of the next generation. Human capital inequality perpetuates itself through intergenerational transmission just as wealth inequality caused by politically created rents perpetuates itself.

Given such transmission across generations, it can be shown that the long-run, ‘dynastic’ inequality will also be higher (Kanbur and Stiglitz 2015). Although there have been advances in recent years, we still need fully developed theories of how the different mechanisms interact with each other to explain the dramatic rises in interpersonal inequality in advanced economies in the last three decades.1

High inequality: New realities and old debates

The new realities of high inequality have revived old debates on policy interventions and their ethical and economic rationale (Stiglitz 2012). Standard analysis which balances the tradeoff between efficiency and equity would suggest that taxation should now become more progressive to balance the greater inherent inequality against the incentive effects of progressive taxation (Kanbur and Tuomala,1994 ).

One counter argument is that what matters is not inequality of ‘outcome’ but inequality of ‘opportunity’. According to this argument, so long as the prospects are the same for all children, the inequality of income across parents should not matter ethically. What we should aim for is equality of opportunity, not income equality. However, when income inequality across parents translates into inequality of prospects across children, even starting in the womb, then the distinction between opportunity and income begins to fade and the case for progressive taxation is not undermined by the ‘equality of opportunity’ objective (Kanbur and Wagstaff 2015).

Concluding remarks

Thus, the new stylized facts of our era demand new theories of income distribution.

  • First, we need to break away from competitive marginal productivity theories of factor returns and model mechanisms which generate rents with consequences for wealth inequality.

This will entail a greater focus on the ‘rules of the game.’ (Stiglitz et al 2015).

  • Second, we need to focus on the interaction between income from physical and financial capital and income from human capital in determining snapshot inequality, but also in determining the intergenerational transmission of inequality.
  • Third, we need to further develop normative theories of equity which can address mechanisms of inequality transmission from generation to generation.2


Bevan, D and J E Stiglitz (1979), "Intergenerational Transfers and Inequality", The Greek Economic Review, 1(1), August, pp. 8-26.

Heckman, J and S Mosso (2014), "The Economics of Human Development and Social Mobility", Annual Reviews of Economics, 6: 689-733.

Kaldor, N (1957), "A Model of Economic Growth", The Economic Journal, 67(268): 591-624.

Kanbur, R (2012), "Does Kuznets Still Matter?" in S. Kochhar (ed.), Policy-Making for Indian Planning: Essays on Contemporary Issues in Honor of Montek S. Ahluwalia, Academic Foundation Press, pp. 115-128, 2012.

Kanbur, R and J E Stiglitz (2015), "Dynastic Inequality, Mobility and Equality of Opportunity", CEPR Discussion Paper No. 10542.

Kanbur, R and M Tuomala (1994), ‘‘Inherent Inequality and the Optimal Graduation of Marginal Tax Rates", (with M. Tuomala), Scandinavian Journal of Economics, Vol. 96, No. 2, pp. 275-282, 1994.

Kuznets, S (1955), "Economic Growth and Income Inequality", The American Economic Review, 45(1): 1-28.

Piketty, T (2014), Capital in the Twenty-First Century, Cambridge Massachusetts: The Belknap Press of Harvard University Press.

Piketty, T, E Saez, and S Stantcheva (2011), “Taxing the 1%: Why the top tax rate could be over 80%”,, 8 December.

Roemer, J E and A Trannoy (2014), "Equality of Opportunity", in A B Atkinson and F Bourguignon (eds.) Handbook of Income Distribution SET Vols 2A-2B. Elsevier.

Stiglitz, J E, et. al. (2015) "Rewriting the Rules of the American Economy", Roosevelt Institute.

Stiglitz, J E (1969), "Distribution of Income and Wealth Among Individuals", Econometrica, 37(3), July, pp. 382-397. (Presented at the December 1966 meetings of the Econometric Society, San Francisco.)

Stiglitz, J E (2012), The Price of Inequality: How Today’s Divided Society Endangers Our Future, New York: W.W. Norton.

Stiglitz, J E (2014), "New Theoretical Perspectives on the Distribution of Income and Wealth Among Individuals", paper presented to the International Economic Association World Congress, Dead Sea, June and forthcoming in Inequality and Growth: Patterns and Policy, Volume 1: Concepts and Analysis, to be published by Palgrave MacMillan.

Stiglitz, J E (2015), "New Theoretical Perspectives on the Distribution of Income and Wealth Among Individuals: Parts I-IV", NBER Working Papers 21189-21192, May.


1 For early discussions of such transmission processes, see Stiglitz (1969) and Bevan and Stiglitz (1979).

2 Developments in this area are exemplified by Roemer and Trannoy (2014).

Saturday, August 15, 2015

'Marxists and Conservatives Have More in Common than Either Side Would Like to Admit'

Chris Dillow on common ground between Marxists and Conservatives:

Fairness, decentralization & capitalism: Marxists and Conservatives have more in common than either side would like to admit. This thought occurred to me whilst reading a superb piece by Andrew Lilico.

He describes the Brams-Taylor procedure for cutting a cake in a fair way - in the sense of ensuring envy-freeness - and says that this shows that a central agency such as the state is unnecessary to achieve fairness:...

The appropriate mechanism here is one in which there is a balance of power, such that no individual can say: "take it or leave it."

This is where Marxism enters. Marxists claim that, under capitalism, the appropriate mechanism is absent. Marx stressed that ... the labour market is an arena in which power is unbalanced...

Nor do Marxists expect the state to correct this, because the state is captured by capitalists - it is "a committee for managing the common affairs of the whole bourgeoisie."...

Instead, Marx thought that fairness can only be achieved by abolishing both capitalism and the state - something which is only feasible at a high level of economic development - and replacing it with some forms of decentralized decision-making. ...

In this sense, Marxists agree with Andrew: people can find fair allocations themselves without a central agency. ...

Thursday, August 13, 2015

'The Future of Work: Why Wages Aren't Keeping Up'

This is from Robert Solow writing at Pacific Standard magazine:

The Future of Work: Why Wages Aren't Keeping Up: One of the more puzzling and damaging features of the American labor market in the last few decades has been the failure of real (i.e. inflation-adjusted) wages and benefits to keep up with the increase in productivity. ...
The custom is to think of value added in a corporation (or in the economy as a whole) as just the sum of the return to labor and the return to capital. But that is not quite right. There is a third component which I will call “monopoly rent” or, better still, just “rent.” ...
The suggestion I want to make is that one important reason for the failure of real wages to keep up with productivity is that the division of rent in industry has been shifting against the labor side for several decades. This is a hard hypothesis to test in the absence of direct measurement. But the decay of unions and collective bargaining, the explicit hardening of business attitudes, the popularity of right-to-work laws, and the fact that the wage lag seems to have begun at about the same time as the Reagan presidency all point in the same direction: the share of wages in national value added may have fallen because the social bargaining power of labor has diminished. ...
Now I would like to connect this hypothesis with another change taking place in the labor market..., the casualization of labor. The proportion of part-time workers has been rising... So are the numbers of workers on fixed-term contracts and independent contractors...
Casual workers have little or no effective claim to the rent component of any firm’s value added... If the division of corporate rents has indeed been shifting against labor, an increasingly casual work force will find it very hard to reverse that trend.

Thursday, August 06, 2015

'The Declining Impact of U.S. Income Taxes on Wealth Inequality'

Nick Bunker:

The declining impact of U.S. income taxes on wealth inequality: A growing number of papers measuring U.S. wealth inequality and its continuing growth were published over the past year. One of those key papers, by economists Emmanuel Saez of the University of California-Berkeley and Gabriel Zucman of the London School of Economics, finds that the share of wealth held by the top 0.1 percent of families in the United States grew from about 7 percent in the late 1970s to 22 percent in 2012. Yet it’s important to note that Saez and Zucman’s results and similar estimates look at the distribution of wealth before accounting for the impact of taxation. A new paper looks at the post-tax distribution of wealth and finds that the federal income tax system is doing significantly less to reduce wealth inequality than in the past. And there are signs that the federal tax system in recent years might actually be increasing wealth inequality.
The paper by economists Adam Looney at the Brookings Institution and Kevin B. Moore at the U.S. Federal Reserve looks at trends in wealth inequality from 1989 to 2013 using data from the Fed’s Survey of Consumer Finances. ...
Looney and Moore’s analysis is, as they note, the first attempt to analyze trends in post-tax wealth inequality. So their paper is just the beginning of the investigation into this area. But if their results hold up they would have strong implications for how we think about the tax code and wealth inequality.

Sunday, August 02, 2015

'The Myth of Mobility'

In case you somehow missed that socioeconomic mobility is low in the US relative to many other countries, this is Anne Kim at Washington Monthly:

The Myth of Mobility: ... Surveys find that nearly two-thirds of Americans believe it’s “still possible to start out poor in this country, work hard and become rich,” while also discounting the value of family background and connections in achieving success. In a 2014 survey by the Pew Research Center, just 18 percent of Americans said “belonging to a wealthy family” was “very important” for getting ahead.
But a mounting pile of evidence is beginning to show that family background is, in fact, determinative. ...
“[C]hildren raised in low-income families will probably have very low incomes as adults, while children raised in high-income families can anticipate very high incomes as adults,” write co-authors Pablo Mitnik and David Grusky of the Stanford University Center on Poverty and Inequality in a report published by the Pew Charitable Trusts and the Russell Sage Foundation.
In particular, the study finds, children raised in wealthy households can expect to enjoy incomes that are at least 200 percent larger than the expected incomes of children raised in low-income households and 75 percent larger than the incomes of children from the middle class.
As a result of the persistence of these advantages - and disadvantages - from generation to generation, Mitnik and Grusky conclude: “[T]he United States is very immobile.” ...

And remember:

Our findings suggest that wealth transmission is not primarily because children from wealthier families are inherently more talented or more able...

Friday, July 31, 2015

'U.S. Paychecks Grow at Record-Slow Pace'

Martin Feldstein says that when it comes to income inequality, you're all a bunch of whiners:

...we should not lose sight of how well middle-income families have actually done over the past few decades. Unfortunately, the political debate is distorted by misleading statistics that grossly understate these gains..., the US middle class has been doing much better than the statistical pessimists assert. ...

So it's yet another another round of "inequality has not grown as much as Democrats claim." Thought we had gotten beyond that. Today's news:

U.S. wages and benefits grew in the spring at the slowest pace in 33 years, stark evidence that stronger hiring isn't lifting paychecks much for most Americans. The slowdown also likely reflects a sharp drop-off in bonus and incentive pay for some workers.
The employment cost index rose just 0.2 percent in the April-June quarter after a 0.7 increase in the first quarter, the Labor Department said Friday. The index tracks wages, salaries and benefits. Wages and salaries alone also rose 0.2 percent.
Both measures recorded the smallest quarterly gains since the second quarter of 1982.
Salaries and benefits for private sector workers were unchanged, the weakest showing since the government began tracking the data in 1980. ...
The employment cost index figures now match the sluggish pace of growth reported in the average hourly pay data that's part of the monthly jobs report. ...

Monday, July 27, 2015

'Poor Little Rich Kids? The Determinants of the Intergenerational Transmission of Wealth'

Genes are not as important as people think:

Poor Little Rich Kids? The Determinants of the Intergenerational Transmission of Wealth, by Sandra E. Black, Paul J. Devereux, Petter Lundborg, and Kaveh Majlesi, NBER Working Paper No. 21409 Issued in July 2015: Wealth is highly correlated between parents and their children; however, little is known about the extent to which these relationships are genetic or determined by environmental factors. We use administrative data on the net wealth of a large sample of Swedish adoptees merged with similar information for their biological and adoptive parents. Comparing the relationship between the wealth of adopted and biological parents and that of the adopted child, we find that, even prior to any inheritance, there is a substantial role for environment and a much smaller role for genetics. We also examine the role played by bequests and find that, when they are taken into account, the role of adoptive parental wealth becomes much stronger. Our findings suggest that wealth transmission is not primarily because children from wealthier families are inherently more talented or more able but that, even in relatively egalitarian Sweden, wealth begets wealth.

[Open link]

Friday, July 24, 2015

'What Is Wrong with the West’s Economies?'

This is from Edmund Phelps. It was kind of hard to highlight the main points in brief extracts, so you may want to take a look at the full article:

What Is Wrong with the West’s Economies?: What is wrong with the economies of the West—and with economics? ...
Many of us in Western Europe and America feel that our economies are far from just...
With little or no effective policy initiative giving a lift to the less advantaged, the jarring market forces of the past four decades—mainly the slowdowns in productivity that have spread over the West and, of course, globalization, which has moved much low-wage manufacturing to Asia—have proceeded, unopposed, to drag down both employment and wage rates at the low end. The setback has cost the less advantaged not only a loss of income but also a loss of what economists call inclusion—access to jobs offering work and pay that provide self-respect. And inclusion was already lacking to begin with. ...
How might Western nations gain—or regain—widespread prospering and flourishing? Taking concrete actions will not help much without fresh thinking: people must first grasp that standard economics is not a guide to flourishing—it is a tool only for efficiency. Widespread flourishing in a nation requires an economy energized by its own homegrown innovation from the grassroots on up. For such innovation a nation must possess the dynamism to imagine and create the new—economic freedoms are not sufficient. And dynamism needs to be nourished with strong human values.
Of the concrete steps that would help to widen flourishing, a reform of education stands out. The problem here is not a perceived mismatch between skills taught and skills in demand. ... The problem is that young people are not taught to see the economy as a place where participants may imagine new things, where entrepreneurs may want to build them and investors may venture to back some of them. It is essential to educate young people to this image of the economy.
It will also be essential that high schools and colleges expose students to the human values expressed in the masterpieces of Western literature, so that young people will want to seek economies offering imaginative and creative careers. Education systems must put students in touch with the humanities in order to fuel the human desire to conceive the new and perchance to achieve innovations. This reorientation of general education will have to be supported by a similar reorientation of economic education.
We will all have to turn from the classical fixation on wealth accumulation and efficiency to a modern economics that places imagination and creativity at the center of economic life.

I'm skeptical that this is the answer to our inequality/job satisfaction problems.

Friday, July 17, 2015

Paul Krugman: Liberals and Wages

We can do more to encourage firms to raise wages:

Liberals and Wages, by Paul Krugman, Commentary, NY Times: Hillary Clinton gave her first big economic speech on Monday, and progressives were by and large gratified. For Mrs. Clinton’s core message was that the federal government can and should use its influence to push for higher wages. ...
Mrs. Clinton’s speech reflected major changes, deeply grounded in evidence, in our understanding of what determines wages. And a key implication of that new understanding is that public policy can do a lot to help workers without bringing down the wrath of the invisible hand.
Many economists used to think of the labor market as being pretty much like the market for anything else, with the prices of different kinds of labor — that is, wage rates — fully determined by supply and demand. So if wages for many workers have stagnated or declined, it must be because demand for their services is falling.
In particular, the conventional wisdom attributed rising inequality to technological change, which was raising the demand for highly educated workers while devaluing blue-collar work. And there was nothing much policy could do to change the trend... But the case for “skill-biased technological change” as the main driver of wage stagnation has largely fallen apart. ...
Meanwhile, our understanding of wage determination has been transformed by an intellectual revolution...
The ... market for labor isn’t like the market for, say, wheat, because workers are people. And because they’re people, there are important benefits, even to the employer, from paying them more: better morale, lower turnover, increased productivity. These benefits largely offset the direct effect of higher labor costs, so that raising the minimum wage needn’t cost jobs after all.
The direct takeaway from this intellectual revolution is, of course, that we should raise minimum wages. But there are broader implications, too: Once you take what we’ve learned from minimum-wage studies seriously, you realize that they’re not relevant just to the lowest-paid workers.
For employers always face a trade-off between low-wage and higher-wage strategies — between, say, the traditional Walmart model of paying as little as possible and accepting high turnover and low morale, and the Costco model of higher pay and benefits leading to a more stable work force. And there’s every reason to believe that public policy can, in a variety of ways — including making it easier for workers to organize — encourage more firms to choose the good-wage strategy.
So there was a lot more behind Hillary’s speech than I suspect most commentators realized. ...

Wednesday, July 15, 2015

'Have Changing Job and Worker Characteristics Restrained Wage Growth?'

John Robertson and Ellyn Terry at the Atlanta Fed's macroblog:

Have Changing Job and Worker Characteristics Restrained Wage Growth?: In the wake of the Great Recession, nominal wage growth has been subdued. But it is unclear how much of this relatively low wage growth reflects protracted weakness in the labor market versus other factors, such as changes in the composition of the workforce and jobs over time. Wage growth tends to vary across personal and job characteristics, so it stands to reason that changes in the composition of the workforce, alongside demographic and work characteristics, could be an important explanation of overall movements in wage growth.
In this post, we explore the impact of the changing mixture of worker characteristics (by age and education) and types of jobs (by industry and occupation) on the Atlanta's Fed Wage Growth Tracker. We find that composition effects do not account for the low median wage growth experienced in recent years. Holding worker and job characteristics fixed at their 1997 shares raises the median wage growth in 2014 by only about 0.2 percentage point. Our results are consistent with the analysis in a previous macroblog post, which found that changing industry-employment shares could not explain much of the sluggish growth in the average hourly earnings data from the payroll survey. ...

Tuesday, July 07, 2015

'Effects of Income Inequality on Economic Growth'

One more from Vox EU. This is by Markus Brückner and Daniel Lederman:

Effects of income inequality on economic growth: ... Conclusion Our empirical analysis is motivated by the theoretical work of Galor and Zeira (1993). who examined the relationship between inequality and aggregate output in the presence of credit market imperfections and indivisibilities in human capital investment. Galor and Zeira’s model predicts heterogeneity in the effects of inequality on aggregate output across countries' initial income levels. Taking this prediction seriously, our econometric model included an interaction between measures of income inequality and countries' initial level of GDP per capita. Instrumental variables estimates showed that income inequality has a significant negative effect on aggregate output for the average country in the sample. However, for poor countries income inequality has a significant positive effect. We document that this heterogeneity is also present when considering investment – in particular, investment in human capital – as a channel through which inequality affects aggregate output. Overall, our empirical results provide support for the hypothesis that income inequality is beneficial to economic growth in poor countries, but that it is detrimental to economic growth in advanced economies.

Monday, July 06, 2015

'The Great Recession and its Aftermath: What Role Do Structural Changes Play?'

Jesse Rothstein at the WCEG:

The Great Recession and its aftermath: What role do structural changes play?: Overview The last seven years have been disastrous for many workers, particularly for lower-wage workers with little education or formal training, but also for some college-educated and higher-skilled workers. One explanation is that lackluster wage growth and, until recently, high unemployment reflect cyclical conditions—a combination of a lack of demand in the U.S. economy and greater sensitivity of workers on the bottom-rungs of the job ladder to changes in the business cycle. A second explanation attributes stagnant wages and employment losses to structural changes in the labor market, including long-term industrial and demographic shifts and policy changes that reduce the incentive to work. This explanation interprets recent trends as the “new normal” and suggests that the U.S. economy will never return to pre-recession labor market conditions unless policies are changed dramatically.
My research, based on a review of extensive data on labor market outcomes since the end of the Great Recession of 2007-2009, finds no basis for concluding that the recent trend of stagnant wages and low employment is the “new normal.” Rather, the data point to continued business cycle weakness as the most important determinant of workers’ outcomes over the past several years. It is only in the past few months that we have started to see data consistent with growing labor market tightness, and even this trend is too new to be confident. The continued stagnation of wages through the end of 2014 implies that, at a minimum, a fair amount of slack remained in the labor market as of that late date. In turn, policies that would promote faster recoveries and encourage aggregate demand during and after recessions remain key policy tools. ...

Sunday, July 05, 2015

'De-Industrialisation, 'New Speenhamland' and Neo-Liberalism'

Via Vox EU:

De-industrialisation, ‘new Speenhamland’ and neo-liberalism, by Jim Tomlinson: In the run-up to the recent general election, 65 Social Policy professors wrote to the Guardian in the following terms:
"Now the majority of children and working-age adults in poverty live in working, not workless, households. In other words – and ironically in view of the coalition’s rhetoric – many of those forced to claim the working-age benefits targeted for further cuts are not what the prime minister calls ‘shirkers’ but, in fact, ‘hard working families’" (5th May).
Plainly, the authors were concerned to make an immediate political point about the government’s austerity policies. But the sentences cited above, I suggest, indicate a profound, long-term shift in the social security system and beneath that, a shift of the British economy.
To indicate the significance of this shift we need to go back to two key moments in Britain’s modern history. First is 1795, when the Speenhamland system was introduced in a parish of that name near Newbury in the South of England. Under this system, wages deemed to be below those sufficient for subsistence were subsidized through the Poor Law out of taxes (local poor rates). This system was not actually new, nor did it become universal, but it has been widely recognized as symbolizing the rejection of a crucial principle of liberal political economy (Polanyi 1947). The principle is that wages should be determined in a market, and should not be subsidized out of the public purse. Hostility to Speenhamland was widespread amongst the governing class of the time and especially amongst political economists, who argued that such a system created no incentives for the workers to maximize their wages, nor for employers to pay what was affordable to them. These perverse consequences were held-up as the typical result of well-intentioned but misguided intervention in the labor market. Eventually, at another key moment, under the Poor Law Amendment Act of 1834, such subsidies were outlawed, and liberal political economy emerged triumphant.
Another component of this political economy was the assumption that wages would not need to be subsidized to provide adequate wages; that waged work would be an effective route out of poverty. Of course, this principle was breached at the margins by such mechanisms as Wages Boards (later Councils) which imposed minimum pay on certain sectors of the economy. But here, of course, there was no state subsidy; the state just insisted that employers pay the minimum wage.  
The classic mid-20th century Beveridge analysis of the sources of poverty suggested the problem lay fundamentally in ‘interruption to earnings’ (by unemployment, sickness, or age) along with large numbers of children, the latter to be addressed by ‘Family Allowances’ (Cutler et al 1987). While this analysis always misrepresented the labor market, not least in its barely-qualified notion of the ‘male-breadwinner household’, its fundamental idea that normally paid work would provide a route out of poverty has underpinned most modern understandings of how society works down to the present day.
But as the social policy professors’ letter indicates, we have come a long way from a Beveridgean world. My argument is that structural changes in the labor market have brought about profound changes in the social security system. What has changed in the period of de-industrialization has been the numbers earning poverty wages, and being supported by in-work benefits. Effectively we have moved towards a huge ‘new Speenhamland’ system of ‘outdoor relief’ of the employed; or, viewed differently, large subsidies to employers, which has mitigated, but not cured the problem of poverty-level wages (Farnsworth 2012). ...

Saturday, July 04, 2015

'Professor Hubbard’s Claim about Wage and Compensation Stagnation Is Not True'

Larry Mishel:

Professor Hubbard’s Claim about Wage and Compensation Stagnation Is Not True: ...A New York Times editorial points out ... that Glenn Hubbard, a leading conservative economist and key adviser to GOP candidate Jeb Bush, does not seem to believe there is a wage stagnation problem. As an earlier New York Times article pointed out: “Mr. Hubbard argued that ‘compensation didn’t stagnate,’ citing large increases that employers have paid out in health and pension benefits.”

Hubbard is definitely mistaken, as the New York Times indicates and as I demonstrate below by examining actual wage and benefit trends. Shifting the discussion from wages to compensation (wages and benefits) does not alter any of the salient facts about stagnant pay in recent years, especially for the typical worker or for low-wage workers, and not even for the ‘average’ worker (including high wage as well as low and middle-wage workers). In fact, there has been an even greater growth of inequality in total compensation than there has been in wages alone.

The intuition behind Hubbard’s claim is that the costs of benefits provided by employers–especially those for health care insurance–have risen rapidly, suggesting that compensation has risen far more quickly than wages. What this ignores, of course, is that many workers in the bottom half receive very few health or pension benefits and employers provide fewer and fewer workers with health insurance and pension benefits each year. Hubbard’s intuition also ignores that employers have actually cut back on some benefits, particularly pensions, with a concomitant decline in the quality of those benefits (such as by providing defined contribution rather than defined benefit plans). ...

Thursday, July 02, 2015

'Poverty & Ideology'

Chris Dillow:

... Two big facts, however, suggest that the link between child poverty and parental failure is weak. One comes from the DWP's own report:

Children  in  families where at least one adult was in work made up around 64 per cent of all children  in  low  income  [before housing costs]  in  2013/14 (p46 of this pdf).

Think what it means to be in work. It means you've impressed an employer sufficiently to get hired, and you are managing to turn up roughly on time most days. You have, in short, got your shit together. And yet you're still unable to get your family out of relative poverty.

Secondly, Andrew Dickerson and Gurleen Popli point out that there is zero correlation between material child poverty and a measure of parental involvement based upon facts such as whether parents read to their children or given them regular meal times and bed times. There is, therefore, no link between bad parenting (on this measure) and material poverty.

These two facts suggest another, bigger reason for child poverty. Quite simply, it has become harder for less skilled people to provide for their families. ...

Monday, June 29, 2015

'The Stimulative Effect of Redistribution'

Bart Hobijn and Alexander Nussbacher in the SF Fed's Economic Letter:

The Stimulative Effect of Redistribution, by Bart Hobijn and Alexander Nussbacher: The idea of taking from the rich and giving to the poor goes back long before the legend of Robin Hood. This kind of redistribution sounds desirable out of a sense of fairness. However, economists often judge a policy less on whether it is fair, and more in terms of whether it is efficient or inefficient, as well as whether it stimulates or slows economic activity.
In this Economic Letter we evaluate the stimulative effect of redistributing income from rich to poor households in a few distinct steps. We first provide a simple back-of-the-envelope calculation of the potential stimulus from redistributive policies. We then review the two main assumptions behind this policy prescription. We argue that the stimulative impact of such policies is likely to be lower than the simple calculation suggests. ...

'U.S. Income Inequality Persists Amid Overall Growth in 2014'

Emmanuel Saez:

U.S. income inequality persists amid overall growth in 2014, by Emmanuel Saez, WCEG: Income inequality in the United States grew more acute in 2014, yet the bottom 99 percent of income earners registered the best real income growth (after factoring in inflation) in 15 years. The latest data from the U.S. Internal Revenue Service show that incomes for the bottom 99 percent of families grew by 3.3 percent over 2013 levels, the best annual growth rate since 1999. But incomes for those families in the top 1 percent of earners grew even faster, by 10.8 percent, over the same period. ...
More broadly, the top 1 percent of families captured 58 percent of total real income growth per family from 2009 to 2014, with the bottom 99 percent of families reaping only 42 percent. ...
The higher tax rates for top U.S. income earners enacted in 2013 as part of the Obama Administration and Congress’ federal budget deal seem to have had only a fleeting impact on the outsized accumulation of pre-tax income by families in the top 1 percent and 0.1 percent of income earners.
To be sure, there was a shifting  of income among high-income earners ... as these wealthy families sought to avoid the higher rates enacted in 2013. This adjustment created a spike in the share of top incomes accumulated by the very wealthy in 2012 followed by a trough in 2013. By 2014, however, top incomes shares were back to their upward trajectory. This suggests that the higher tax rates starting in 2013, while not negligible, will not be sufficient by themselves to curb the enormous increase in pre-tax income concentration that has taken place in the United States since the 1970s.

Friday, June 26, 2015

'Lunch with the FT: Thomas Piketty'

A small part of an interview of Thomas Piketty in the Financial Times:

... Piketty says his interest in inequality crystallised after the collapse of the Berlin Wall and the first Gulf war. He recalls visiting Moscow in 1991 and being struck by “the lines in front of shops”. He came back vaccinated against communism — “I believe in capitalism, private property, the market” — but also with a question central to his work: “How come those people had been so afraid of inequality and capitalism in the 19th and 20th century that they created such a monstrosity? How can we tackle inequality without repeating this disaster?” ...

And a point I've been making for a long time about taxes and incentives:

... Though Piketty concedes that the global wealth tax he recommends is a “utopian” dream, he also says a confiscatory tax rate of more than 80 per cent on earnings exceeding $1m would work. In fact, he continues, such a rate was in place for five decades before the presidency of Ronald Reagan, and would curb exuberant executive pay without hurting productivity. “It did not kill US capitalism then — productivity grew the fastest during that time,” he notes. “This idea, according to which no one will accept to work hard for less than $10m per year . . .  It’s OK to pay someone 10, 20 times the average worker’s salary but do you really need to pay them 100 or 200 times to get their arses in gear?” ...

Wednesday, June 24, 2015

'Growth’s Secret Weapon: The Poor and the Middle Class'

Era Dabla-Norris, Kalpana Kochhar, and Evridiki Tsounta at the IMF:

Growth’s Secret Weapon: The Poor and the Middle Class: The gap between the rich and the poor is at its widest in decades in advanced countries, and inequality is also rising in major emerging markets...  It is becoming increasingly clear that these developments have profound economic implications.
Earlier IMF work has shown that income inequality is bad for growth and its sustainability. Our new research shows that income distribution itself—not just the level of income inequality—matters for growth.
Specifically, we find that making the rich richer by one percentage point lowers GDP growth in a country over the next five years by 0.08 percentage points—whereas making the poor and the middle class one percentage point richer can raise GDP growth by as much as 0.38 percentage points...  Put simply, boosting the incomes of the poor and the middle class can help raise growth prospects for all.
One possible explanation is that the poor and the middle class tend to consume a higher fraction of their income than the rich. ... What this means is that the poor and the middle class are key engines of growth. But with inequality on the rise, those engines are stalling.
Over the longer run, persistent inequality means that the the poor and the middle class have fewer opportunities to get educated, enhance their skills, and pursue their entrepreneurial dreams.  As a result, labor productivity and growth suffer. ...

Friday, June 12, 2015

The Education-Deficit Does Not Explain Rising Inequality

Brad DeLong:

Discussion of Matthew Rognlie: "Deciphering the Fall and Rise in the Net Capital Share": The Honest Broker for the Week of June 14, 2015, b J. Bradford DeLong: ... I was weaned on the education-deficit explanation of recent trends in US inequality, perhaps best set out by the very sharp Claudia Goldin and Larry Katz (2009) in The Race Between Education and Technology. In their view, the bulk of U.S. inequality trends since the 1980s were driven by education's losing this race. In the era that had begun in 1636 the United States-to-be had made increasing the educational level of the population a priority. But that era came to an end in the 1970s, while skill-biased technological change continues. That meant that the return to education-based skills began to rise. And it was that rise that was the principal driver of rising income inequality.
But, recently, reality does not seem to agree with what had once seemed to me to be a satisfactory explanation. First, to get large swings in the income distribution out of small changes in the relative supply of educated workers requires relatively low substitutability between college-taught skills and other factors of production. As inequality has risen, the required substitutability to fit the data has dropped to what now feels to me an unreasonably low magnitude. Second, while it is true that we have seen higher experience-skill premiums and sharply higher education-skill premiums, the real action in inequality appears now to be unduly concentrated in the upper tail. The distribution of the rise in inequality does not seem to match the distribution of technology-complementary skills at all. ...
Looking simply at my own family history, my Grandfather Bill reached not just the 1% or the 0.1% but the 0.01% back in the late 1960s in the days before the rise in inequality by selling his construction company to a conglomerate back in 1968. A good many of those of us who are his grandchildren have been very successful... But even should any of us be as lucky as my Grandfather Bill was in terms of our peak income and wealth as a multiple of median earnings, we would still be a multiple of his rank further down in the percentile income distribution.
Today, you need roughly 3.5 times the wealth now in the U.S. and 8 times the wealth worldwide to achieve the same percentile rank in the distribution... I find it simply impossible to conceptualize such an extreme concentration as in any way a return to a factor of production obtained as the product of "hours spent studying" times "brainpower", even when you also multiply by a factor "luck" and a factor "winner-take-all-economy".
So what, then, is going on and driving the sharp rise in inequality, if not some interaction between our education policy on the one hand and the continued progress of technology on the other? Thomas Piketty (2014) has a guess. Piketty guesses that the real explanation is that 1914-1980 is the anomaly. Without great political disturbances, wealth accumulates, concentrates, and dominates. The inequality trends we have seen over the past generation are simply a return to the normal pattern of income distribution in an industrialized market economy in which productivity growth is not unusually fast and political, depression, and military shocks not unusually large and prevalent. ...

[He goes on to talk about Matthew Rognlie's "Deciphering the Fall and Rise in the Net Capital Share."]

Wednesday, June 10, 2015

'Inequality of Opportunity: Useful Policy Construct or Will o’ the Wisp?'

Can economic opportunity be separated from economic outcomes?:

Inequality of opportunity as a policy construct: ...Concluding remarks
Any attempt to separate circumstances from effort – to identify that portion of the inequality of outcomes which is a legitimate target for redistribution – is fraught with empirical and conceptual difficulties.[4] Fine-grained distinctions between inequality of opportunity and inequality of outcomes do not hold water in practice, and we are likely to greatly underestimate inequality of opportunity and hence the need for intervention.
Further, what if one person’s effort becomes another person’s circumstance, as when income generated through parents’ effort provides a better start in life for some children? Or when freely made choices by one group of upper-income house buyers push up prices for others who may have lower incomes? Is it legitimate or is it not legitimate to intervene in this case?
These arguments support the case for generalised social protection in dimensions such as income, health and education, irrespective of whether the outcomes can be specifically attributed to circumstance or to effort.
The important questions then relate to what the best available policy instruments are for delivering this social protection, what effects they have on incentives, and how best they can be deployed. To be sure, we may make some Type I and Type II errors in doing so; we may penalize effort when we should not, and we may not fully compensate for circumstances when we should. But this is preferable to being frozen into perpetually underestimating the need for intervention by a focus on that will o’ the wisp, inequality of opportunity.

Walmart and Wages

Paul Krugman:

Notes on Walmart and Wages (Wonkish): Walmart reports that its recent wage hike is paying off via reduced turnover, which produces cost savings that offset the direct expense of the higher wages. In other words, efficiency wage theory is vindicated. What are the political/policy implications? What follows is a slightly wonkish note, largely to myself.
Efficiency wage theory is the idea that for any of a number of reasons, employers get more out of their workers when they pay more. It could be effort, it could be morale, it could be turnover. The causes of the efficiency gain could lie in psychology, or simply in the fact that workers are less willing to risk better-paying jobs with bad behavior. ...
Or to put it differently, efficiency wages suggest right away that the invisible hand’s grip on labor is a lot looser than people imagine, that wages are relatively easy to shift with social and political pressure. And this is one important reason attempts to reduce inequality can and should involve working on the distribution of market income as well as ex-post redistribution through taxes and transfers.

Tuesday, June 02, 2015

To Overcome Rising Inequality, Workers Need More Bargaining Power

I have a new column:

To Overcome Rising Inequality, Workers Need More Bargaining Power: There is widespread agreement that inequality increased over the last several decades, but why that has happened is the subject of considerable debate.
  • Is it because technological change reduced the number of good, middle class jobs?
  • Is it the result of downward pressure on wages due to globalization?
  • Can the changes be traced to the rise of “winner take all” markets?
  • Or is the decline of unions the main reason for the change in the distribution of income?
  • What about the fall in the inflation-adjusted minimum wage, was that a factor?
  • Did immigration have anything to do with it?
  • How much of an impact did the reduction in income and inheritance taxes for those at the very top have on inequality?
  • Should we focus mainly on differential educational opportunities between those at the top and those at the bottom, and the networking opportunities the top schools provide?
  • What role did politics play in undermining unions, altering tax rates, resisting increases in the minimum wage, and failing to support educational initiatives that benefit the disadvantaged?
Some of these are easier to rule out than others based upon the empirical evidence. For example, there’s little evidence that immigration played a significant role in generating rising inequality. And it’s probably the case that there are multiple causes of rising inequality rather than a single factor, and that some of these factors interact. The decline in unions, for example, is related to the threat of offshoring in a globalized economy as well as political factors that undermined union authority.
But there is one factor, the presence of market power in both product and labor markets, that, in my view, does not get enough attention in this debate. ...[continue]...

For the Poor, the Graduation Gap Is Even Wider Than the Enrollment Gap

Susan Dynarski on inequality in education:

For the Poor, the Graduation Gap Is Even Wider Than the Enrollment Gap: Rich and poor students don’t merely enroll in college at different rates; they also complete it at different rates. The graduation gap is even wider than the enrollment gap.
In 2002, researchers with the National Center for Education Statistics started tracking a cohort of high school sophomores. The project, called the Education Longitudinal Study, recorded information about the students’ academic achievement, college entry, work history and college graduation. A recent publication examines the completed education of these young people, who are now in their late 20s. ...
Thirteen years later, we can see who achieved their goals. Among the participants from the most disadvantaged families, just 14 percent had earned a bachelor’s degree. That is, one out of four of the disadvantaged students who had hoped to get a bachelor’s had done so. Among those from the most advantaged families, 60 percent had earned a bachelor’s, about two-thirds of those who had planned to. ...

And the gap looks just as bad when students with similar academic achievement in high school are compared, e.g. among the "teenagers who scored among the top 25 percent of students on the math test..., the students from the top socioeconomic quartile had very high bachelor’s degree completion rates: 74 percent... But only 41 percent of the poorest students with the top math scores did so. That’s a completion gap of 33 percentage points, not much smaller than the overall gap of 46 percentage points."

Thursday, May 28, 2015

'Income Inequality, Social Mobility, and the Decision to Drop Out of High School'

Melissa S. Kearney and Phillip B. Levine at Vox EU:

Income inequality, social mobility, and the decision to drop out of high school: Compared to other developed countries, the US ranks high on income inequality and low on social mobility. This could be particularly concerning if such a trend is self-perpetuating. In this column, the authors argue that there is a causal relationship between income inequality and high school dropout rates among disadvantaged youth. In particular, moving from a low-inequality to a high-inequality state increases the likelihood that a male student from a low socioeconomic status drops out of high school by 4.1 percentage points. The lack of opportunity for disadvantaged students, therefore, may be self-perpetuating.

Wednesday, May 27, 2015

'Whatever Happened to Antitrust?'

Robert Reich believes, as I do, that monopoly power is one of the reasons that the distribution of income has been skewed toward the top:

Whatever Happened to Antitrust?: Last week’s settlement between the Justice Department and five giant banks reveals the appalling weakness of modern antitrust. 
The banks had engaged in the biggest price-fixing conspiracy in modern history. Their self-described “cartel” used an exclusive electronic chat room and coded language to manipulate the $5.3 trillion-a-day currency exchange market. It was a “brazen display of collusion” that went on for years, said Attorney General Loretta Lynch. 
But there will be no trial, no executive will go to jail, the banks can continue to gamble in the same currency markets, and the fines – although large – are a fraction of the banks’ potential gains and will be treated by the banks as costs of doing business.
America used to have antitrust laws that permanently stopped corporations from monopolizing markets, and often broke up the biggest culprits. 
No longer. Now, giant corporations are taking over the economy – and they’re busily weakening antitrust enforcement. 
The result has been higher prices for the many, and higher profits for the few. It’s a hidden upward redistribution from the majority of Americans to corporate executives and wealthy shareholders. ...
Antitrust has been ambushed by the giant companies it was designed to contain.
Congress has squeezed the budgets of the antitrust division of the Justice Department and the bureau of competition of the Federal Trade Commission. Politically-powerful interests have squelched major investigations and lawsuits. Right-wing judges have stopped or shrunk the few cases that get through. 
We’re now in a new gilded age of wealth and power similar to the first gilded age when the nation’s antitrust laws were enacted. But unlike then, today’s biggest corporations have enough political clout to neuter antitrust. 
Conservatives rhapsodize about the “free market” and condemn government intrusion. Yet the market is rigged. And unless government unrigs it through bold antitrust action to restore competition, the upward distributions hidden inside the “free market” will become even larger.

Inequality - What To Do About It?

A follow up to yesterday's post on what to do about inequality:

Inequality has been on the rise since the 1970s - Tony Atkinson and Sabine Alkire ask what can be done about it? Inequality was a topic covered in The Economic Journal 125th Anniversary Special Issue, available for free online:

Watch the full session here:

Tuesday, May 19, 2015

'The Great Utility of the Great Gatsby Curve'

Alan Krueger kicks off a debate on the relationship between inequality and mobility:

The great utility of the Great Gatsby Curve: Every so often an academic finding gets into the political bloodstream. A leading example is "The Great Gatsby Curve," describing an inverse relationship between income inequality and intergenerational mobility. Born in 2011, the Curve has attracted plaudits and opprobrium in almost equal measure. Over the next couple of weeks, Social Mobility Memos is airing opinions from both sides of the argument, starting today with Prof Alan Krueger, the man who made the Curve famous.

Building on the work of Miles Corak, Anders Björklund, Markus Jantti, and others, I proposed the “Great Gatsby Curve” in a speech in January 2012. The idea is straightforward: greater income inequality in one generation amplifies the consequences of having rich or poor parents for the economic status of the next generation. 

The curve is predicted by economic theory…

There are strong theoretical underpinnings for the Great Gatsby Curve. Gary Solon has shown, for example, that the relationship is predicted by a standard intergenerational model if the payoff to education increases over time. This causes inequality to rise in one generation, but also increases the significance of this inequality for children’s economic success, since well-off parents have more resources and more incentive to invest in their children’s education. 

Other mechanisms could also underlie the Great Gatsby Curve. For example, if social connections are important for success in the economy (e.g., getting the right summer internship), and wealthy parents have access to job networks, then a spreading out of the income distribution would leave children from the bottom of the distribution in a more disadvantaged position in terms of gaining access to networks that will ultimately lead to a higher paid job. 

…and supported by evidence

Most of the available empirical evidence supports the Great Gatsby Curve. ...

Consistent with the Great Gatsby Curve, several studies also point to a growing gap in the resources devoted to education between high- and low-income American families. As predicted by the Great Gatsby Curve, it appears that the dramatic rise in income inequality has created a more tilted playing field for the next generation. ... 

The two key remaining questions now are:

  1. What are the main mechanisms underlying the Great Gatsby Curve?  
  2. What policy actions can be taken to improve economic opportunities for children born in disadvantaged circumstances? 

Learning more about the former can help us to achieve the latter — which is, in the end, the most important goal of all.

Wednesday, May 13, 2015

Video: Stiglitz on Inequality, Wealth, and Growth: Why Capitalism is Failing

Tuesday, May 12, 2015

'The Rules are What Matter for Inequality'

Mike Konczal:

The Rules are What Matter for Inequality: Our New Report: I’m very excited to announce the release of “Rewriting the Rules of the American Economy” (pdf report), Roosevelt Institute’s new inequality agenda report by Joe Stiglitz. I’m thrilled to be one of the co-authors...
As we argue, inequality is not inevitable: it is a choice that we’ve made with the rules that structure our economy. Over the past 35 years, the rules, or the regulatory, legal and institutional frameworks, that make up the economy and condition the market have changed. These rules are a major driver of the income distribution we see, including runaway top incomes and weak or precarious income growth for most others. Crucially, however, these changes in the rules have not made our economy better off than we would be otherwise; in many cases we are weaker for these changes. We also now know that “deregulation” is, in fact, “reregulation”—that is, a new set of rules for governing the economy that favor a specific set of actors, and that there's no way out of these difficult choices. But what were these changes? ...
This report describes what has happened, going far deeper than this summary here. It also has a policy agenda focused on both taming the top and growing the rest of the economy. Some may emphasize some pieces more than others; but no matter what this argument about the rules is what is missing in the current debates over the economy. ...

Tuesday, May 05, 2015

Explaining US Inequality Exceptionalism

Paul Krugman:

Explaining US Inequality Exceptionalism: Disposable income in the United States is more unequally distributed than in most other advanced countries. But why? ... Janet Gornick and Branko Milanovic at the CUNY Graduate Center’s Luxembourg Income Study Center shed light on the question, partly overturning what all of us believed until recently. They explain their findings in the first Research Brief in a new series launched on the LIS Center website.
The standard story up until now has been that the source of US inequality exceptionalism lies in the unusually low amount of redistribution we do through our tax and transfer system. ...
But can this be right? We know that the US has unusually weak unions, a low minimum wage, an exceptionally wide skills premium and, of course, an exceptionally imperial one percent. Shouldn’t all this leave some mark on market income?
What Gornick and Milanovic realized (helped by suggestions from a number of colleagues, notably Larry Mishel at EPI) was that true US market inequality might be being masked by another exceptional piece of the US system – delayed retirement, causing many older households to have positive market income where comparable households in other countries have no or very little market income. ...
To correct for this possible problem, they recalculated the numbers for households containing only persons under age 60... The US remains the most unequal nation (after taxes and transfers), but now a main driver of that inequality is market inequality. ... Indeed, America also does less redistribution than several other rich countries, European countries in particular, so that’s still part of the story, but it’s not the whole story or even most of it. ...

Sunday, May 03, 2015

Milanovic on Solow on Rents and the Decoupling of Productivity and Wages

Branko Milanovic:

Bob Solow on rents and decoupling of productivity and wages: Atypical or difficult to explain movements in the capital/labor ratio, productivity per worker and real wages have stimulated recent attempts to square them with neoclassical economics, make some adjustments in the neoclassical paradigm or scrap it altogether. ...
Bob Solow explored a ... possibility. Going back to his own initial work on the theory of growth, some 60 years ago, Solow asked...: why did we assume that there is perfect competition and that factors are paid their perfect completion marginal products? ... Solow said: “I could not find a good reason, but since theory and facts were broadly in accord, nobody bothered much with the assumption”. That is, until recently. How can we explain, continued Solow, a sustained ... divergence between nonfarm sector productivity and the real wage..., that goes against everything we thought we knew! ...
However, if you assume a model of imperfect competition..., there is also a rent (due to the fact that price is greater than the marginal revenue product), the issue becomes: how is that rent going to be distributed between labor and capital? And until the early 1980, due to trade union density (“The treaty of Detroit”), relative shortage of labor, trilateral (government-capital-labor) negotiations etc., the rent was divided in a way that favored labor. But with the decline of the unions, ideological assault on labor (the Reagan revolution) and a huge expansion of available wage-labor worldwide (as China and Eastern Europe rejoined the world economy), the bargaining power of labor waned and that of capital increased. Consequently, the share of capital in national income increased, and productivity growth got decoupled from real wage growth.
This is my interpretation of Solow’s talk..., I might have gotten something wrong. ...
If, as Solow said, we came up with an estimate that (say) 20-30% of national income is rent, then surely political factors can explain why capital share is up. If our estimate of rent is 2-3% of national income, then this is not a promising story. So, it is back to empirics!—a nice theory to test where many a young economist can hope to make a difference...