Inequality and Labor
Building a Better America - One Wealth Quintile at a Time
Michael Norton & Dan Ariely
Perspectives on Psychological Science, forthcoming
Abstract:
Disagreements about the optimal level of wealth inequality underlie policy debates ranging from taxation to welfare. We attempt to insert the desires of "regular" Americans into these debates by asking a nationally representative online panel to estimate the current distribution of wealth in the United States and to "build a better America" by constructing distributions with their ideal level of inequality. First, respondents dramatically underestimated the current level of wealth inequality. Second, respondents constructed ideal wealth distributions that were far more equitable than even their erroneously low estimates of the actual distribution. Most important from a policy perspective, we observed a surprising level of consensus: all demographic groups - even those not usually associated with wealth redistribution such as Republicans and the wealthy - desired a more equal distribution of wealth than the status quo.
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The Macroeconomic Implications of Rising Wage Inequality in the United States
Jonathan Heathcote, Kjetil Storesletten & Giovanni Violante
Journal of Political Economy, August 2010, Pages 681-722
Abstract:
In recent decades, American workers have faced a rising college premium, a narrowing gender gap, and increasing wage volatility. This paper explores the quantitative and welfare implications of these changes. The framework is an incomplete-markets life cycle model in which individuals choose education, intrafamily time allocation, and savings. Given the observed history of the U.S. wage structure, the model replicates key trends in cross-sectional inequality in hours worked, earnings, and consumption. Recent cohorts enjoy welfare gains, on average, as higher relative wages for college graduates and for women translate into higher educational attainment and a more even division of labor within the household.
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Good Times, Bad Times: Postwar Labor's Share of National Income in Capitalist Democracies
Tali Kristal
American Sociological Review, October 2010, Pages 729-763
Abstract:
This article returns to a classic question of political economy: the zero-sum conflict between capital and labor over the division of the national income pie. A detailed description of labor's share of national income in 16 industrialized democracies from 1960 to 2005 uncovers two long-term trends: an increase in labor's share in the aftermath of World War II, followed by a decrease since the early 1980s. I argue that the working class's relative bargaining power explains the dynamics of labor's share, and I model inter- and intra-class bargaining power in the economic, political, and global spheres. Time-series cross-section equations predicting the short- and long-term determinants of labor's share support most of my theoretical arguments and the main findings are robust to alternative specifications. Results suggest that the common trend in the dynamics of labor's share of national income is largely explained by indicators for working-class organizational power in the economic (i.e., unionization and strike activity) and political (i.e., government civilian spending) spheres, working-class structural power in the global sphere (i.e., southern imports and foreign direct investments), and indirectly by an indicator for working-class integration in the intra-class sphere (i.e., bargaining centralization).
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Cheap home goods and persistent inequality
Joanna Alexopoulos & Tiago de V. Cavalcanti
Economic Theory, December 2010, Pages 417-451
Abstract:
There exists a large literature which shows that public education is favorable for growth because it increases the level of human capital and at the same time it tends to produce a more even income distribution. More egalitarian societies are also associated with less social conflicts, and individuals have a lower tendency to report themselves happy when inequality is high. Therefore, it is important to study the reasons why the elite opposes the development of a strong public education system. It might be that education is related to social status and a strong public education system might threaten the elite's political power. We show that one aspect of social status is the specialization of skilled workers in high-paid jobs and the abundance of unskilled workers in the production of cheap "home goods" in the market, such as painting and cleaning a house, babysitting, and/or cooking. We emphasize the role of general equilibrium price adjustments to show that depending on the level of inequality, the elite might prefer an economy with a positive and "high" cost of education than an economy where skills are freely provided. We show that this result goes through even if the skilled wage is not directly affected by the ratio of skilled to unskilled workers. We also provide empirical evidence consistent with our theory.
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Analyzing skilled and unskilled labor efficiencies in the US
Bulent Unel
Journal of Macroeconomics, December 2010, Pages 957-967
Abstract:
In this paper, I analyze the time paths of the efficiencies of skilled and unskilled labor in a production framework where skilled and unskilled labor are imperfect substitutes. Their implications for economic growth and wage inequality in the US between 1950 and 2005 present two main findings. First, although skilled labor efficiency has a strong upward trend, I find no evidence of acceleration in its growth rate to support the common view that there has been an acceleration in the new skilled-biased technologies. Second, beginning around 1970, there has been a decline in the absolute level of the efficiency of unskilled labor, implying that the decline has played a significant role in the overall productivity slowdown and the substantial widening in the US wage structure.
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Ted Mouw & Arne Kalleberg
Social Forces, July 2010, Pages 2053-2077
Abstract:
To what extent did the increase in wage inequality among men in the United States over the past three decades result from job loss and/or employment instability? We propose a simple method for decomposing the change in wage inequality into components due to upward and downward between-employer mobility and within-employer wage changes using data on men's wages and job mobility from the 1977-2005 waves of the Panel Study of Income Dynamics. We find that downward employer mobility-a proxy for job displacement based on movement to a lower paid job with a new employer-has the largest effect on inequality over a two-year period. However, the effect of job displacement declines with time. We find that the effect of job loss accounts for 39 percent of the increase in wage inequality during the average eight-year period from 1977 through 2005, compared to 52 percent that is attributable to wage changes for workers who stay with the same employer.
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Inequality and growth in advanced economies: An empirical investigation
Amparo Castelló-Climent
Journal of Economic Inequality, September 2010, Pages 293-321
Abstract:
This paper empirically investigates the effect of income and human capital inequality on economic growth in different regions of the world. In the estimation of a dynamic panel data model that controls for country-specific effects and takes into account the persistency of the inequality indicators, the results show a different effect of inequality on growth depending on the level of development of the region. Specifically, we find a negative effect of income and human capital inequality on economic growth, both in the sample as a whole and in the low and middle-income economies, an effect that vanishes or becomes positive in the higher-income countries.
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Does Democracy Reduce Economic Inequality?
Jeffrey Timmons
British Journal of Political Science, October 2010, Pages 741-757
Abstract:
Democracy is frequently framed as a distributional game. Much of the evidence supporting this possibility rests on the World Bank's 1996 ‘high-quality' inequality dataset. Using the updated and revised ‘high-quality' dataset of 2007, this article revisits those results. Using the same country sample, more years and similar specifications to previous studies, as well as a larger country sample with more appropriate statistical models, we find no relationship between democracy/civil liberties and aggregate measures of economic inequality. Whether, and how, democracy decreases economic inequality remains an open question.
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The Effect of Direct Democracy on Income Redistribution: Evidence for Switzerland
Lars Feld, Justina Fischer & Gebhard Kirchgässner
Economic Inquiry, October 2010, Pages 817-840
Abstract:
In political economics, the impact of institutions on income redistribution is mainly studied by comparing different forms of representative democracy. In this article, we analyze the influence of direct democratic institutions on redistribution first focusing on welfare and nonwelfare spending using yearly panel data for Swiss cantons. Then, we estimate a model, which explains the determinants of actually achieved redistribution measured by Gini coefficients. While our results indicate that less public funds are used to redistribute income, inequality is not reduced to a lesser extent in direct than in representative democracies for a given initial income distribution.
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Worth, age, and social status in early modern England
Alexandra Shepard & Judith Spicksley
Economic History Review, forthcoming
Abstract:
This article introduces a new source for assessing the distribution of wealth in early modern England derived from witness depositions taken by the church courts. It discusses the accuracy of statements of ‘worth' provided by thousands of witnesses between the mid-sixteenth and later seventeenth centuries, and uses the monetary estimates of worth in goods that the majority of deponents supplied to assess the changing distribution of personal wealth. We argue that this data supports recent claims that the pre-industrial English economy experienced significant levels of economic growth, while showing that its benefits were increasingly unevenly distributed between different social groups. In particular, the century after 1550 witnessed spectacular increases in yeoman worth that outstripped inflation by a factor of 10. The relative wealth of yeomen was also underpinned by its more secure distribution over the life cycle which further compounded the differences between them and other social groups.
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Wealth concentration in the European periphery: Ireland, 1858-2001
John Turner
Oxford Economic Papers, October 2010, Pages 625-646
Abstract:
Using annual will indexes, a series of wealth concentration is constructed for the north of Ireland on a decennial basis for the period 1858 to 2001. Wealth was highly concentrated at the beginning of the sample period, but inequality falls towards the end of the nineteenth century and continues to fall until the 1970s. However, there does not appear to be a Kuznets-type process at work. Instead, using data on socio-occupational status, it is suggested that the fall in wealth concentration appears to be associated with the demise of the titled classes. Interestingly, similar to the findings of other studies, wealth has become more concentrated since the 1970s.
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Tax Treatment of Owner Occupied Housing and Wealth Inequality
Sang-Wook (Stanley) Cho & Johanna Francis
Journal of Macroeconomics, forthcoming
Abstract:
We construct a quantitative general equilibrium lifecycle model with housing tenure decisions to investigate the degree to which wealth inequality in the United States is affected by the preferential tax treatment of home-ownership. Favorable tax treatment of owner occupied housing in the form of home mortgage interest and property tax deductibility, and the untaxed nature of imputed rents, provides a financial incentive for home-ownership over renting as well as an incentive to "over-consume" housing since houses are not fungible. Since the favorable tax treatment of housing disproportionately creates tax savings for the upper quartiles of the income distribution, we quantify how it contributes to the heavily right skewed distribution of wealth in the United States using data from the Survey of Consumer Finances. We consider a revenue-neutral government response to the counter factual experiments of removing the current tax structure on housing. Our quantitative analysis shows that, in terms of distributional effects, removing all of the preferential tax treatments results in an aggregate increase in welfare. However, we do not find any reduction in inequality. We also find that while some re-allocation toward financial assets occurs, households primarily increase their consumption when imputed housing rents are taxed and the property tax deduction is removed. Thus housing tax policy may be effective at encouraging more overall saving through housing assets.
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Does income mobility equalize longer-term incomes? New measures of an old concept
Gary Fields
Journal of Economic Inequality, December 2010, Pages 409-427
Abstract:
This paper develops a new class of measures of mobility as an equalizer of longer-term incomes-a concept different from other notions such as mobility as time-independence, positional movement, share movement, income flux, and directional income movement. A number of properties are specified leading to a class of indices, one easily-implementable member of which is applied to data for the USA and France. Using this index, income mobility is found to have equalized longer-term earnings among US men in the 1970s but not in the 1980s or 1990s. In France, though, income mobility was equalizing throughout, and it has attained its maximum in the most recent period.
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The Growth of Family Earnings Inequality in Canada, 1980-2005
Yuqian Lu, René Morissette & Tammy Schirle
Review of Income and Wealth, forthcoming
Abstract:
In this study we document recent trends in family earnings inequality using data from the Canadian Census and provide insight into the various factors that drive changes in the family earnings distribution. Over the period 1980-95 we observe substantial increases in family earnings inequality. In contrast, we find that some decrease in inequality occurred over the period 1995-2005 although the earnings of the richest 1 percent of families increased substantially. We use semi-parametric decomposition methods to show that increases in the employment rates of men and women, increases in their educational attainment, and decreases in assortative mating tended to have equalizing effects on the family earnings distribution. We also show that increases in the returns to higher education and increases in the proportion of single individuals as well as lone-parent families drove increases in family earnings inequality.
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Heterogeneity in Ability and Inheritance, Disparities, and Development
Sherif Khalifa
International Economic Journal, June 2010, Pages 209-236
Abstract:
This paper investigates the impact of income inequality on economic growth. A two-period overlapping generations model is developed where agents are heterogeneous in innate abilities and inheritance. In the first period, they receive their inheritance and their abilities are revealed. There are only two types of abilities: high and low. Individuals decide on their education level, and divide their inheritance between spending on education and saving. In the second period, individuals supply their labor and allocate the labor income and the return to their saving between consumption and bequests to their offsprings. Initial capital stock is owned entirely by the capitalists. In this context, a more equal distribution of income enhances economic growth if the economy is lower than a threshold capital-labor ratio, while income inequality has an insignificant effect above this threshold. The predictions of the model are tested empirically using the Hansen (1999) threshold estimation. The results, using a panel of 70 countries for the period 1971-1999, suggest that there is a statistically significant threshold income per capita, below which the coefficient on the relationship between inequality and economic growth is significantly negative and above which the estimate is not significant.
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Nicholas Apergis, Oguzhan Dincer & James Payne
Public Choice, October 2010, Pages 125-135
Abstract:
We investigate the causality between corruption and income inequality within a multivariate framework using a panel data set of all 50 U.S. states over the period 1980 to 2004. The heterogeneous panel cointegration test by Pedroni (Oxf. Bull. Econ. Stat. 61:653-670, 1999; Econom. Theory 20:597-627, 2004) indicates that in the long run corruption and the unemployment rate have a positive and statistically significant impact on income inequality while a negative impact is found for real personal income per capita, education, and unionization rate. The Granger-causality results associated with a panel vector error correction model indicate both short-run and long-run bidirectional causality between corruption and income inequality.
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War Mobilization and the Great Compression
Carol Scotese
B.E. Journal of Economic Analysis & Policy, 2010
Abstract:
During the 1940s, the diversion of 55% of the workforce to wartime production, the induction of over 10 million young men into the armed forces, and the entry of millions of female, young, and elderly workers into the workplace subjected the labor force to large shocks. Also during the 1940s, the wage distribution compressed sharply and the returns to education fell. This paper uses wage changes between occupations to link wartime labor market shocks to the decline in the return to education and the decline in wage inequality. Wartime production favoring semi-skilled labor and the occupation-biased nature of the draft combined to compress both the lower and upper tails of the male wage distribution and the upper portion of the female wage distribution.