Chapter 15 Flashcards
(26 cards)
Kuznet curve
Inverted U-shape curve showing the relationship between inequality and income per capita
Process:
- Pre-industrial societies: subsistence economies -> thin crust of elites unable to exploit workers/capital and extract surplus -> relatively equal societies.
- Industrial revolution: capital accumulation as the main source of growth -> rising incomes mainly to owners of capital -> capitalists (minority population) able to extract most income -> inequality rises
- Post-industrial revolution: rising labour incomes (higher wages due to human capital accumulation) -> workers’ share of total income increases -> inequality falls.
- Supported by actions of state e.g. protection of labour through collective bargaining -> allow labour’s increasing share of income.
- Higher taxation -> Spending on education -> Increase human capital -> Increase wages for skilled labour
Emperical evidence for Kuznet curve
Western European experience supports conjecture -> until 1970s
Asian countries show monotonic (ever-decreasing) fall of inequality -> does not support
Increasing national inequality since 1980s.
Skill biased technical change
Technical change raise demand for skilled or unskilled labour?
Skill-biased technical change:
- Technical change favours skilled workers more
- Increases skilled workers productivity -> demand for skilled workers increases -> raises skilled wages relative to unskilled wages -> source of income inequality
- 20th century: computer revolution -> demand for skilled labour increases
Unskilled-biased technical change
- Unskilled wages increase relative to skilled wage
- 19th century: industrialisation, mass production -> demand for skilled labour reduces
Migration
- Migration -> increase relative supply of skilled/unskilled labour
- E.g. large unskilled migration into US -> increase supply -> reduce unskilled wages.
- Relative supply shifts affects relative wages (unskilled vs skilled) -> ceteris paribus.
Trade
- More exposure to trade -> affects demand for domestically produced goods
- Derived demand for labour affected (unskilled vs skilled).
- E.g. India unable to increase tariff barriers to protect cotton industry -> Britain takeover of industry (export to India cheaply) -> relative decline in cotton industry in India as demand shifts away from domestic cotton production -> unemployment of skilled textile workers -> increase income inequality
Institutions and Policy
- Tax policy: flat tax/progressive tax/regressive tax affecting distribution of income and wealth
- Progressive taxation: tax rates increase as taxable income increases -> reduce post-income inequality
- Minimum wages: force up wages for unskilled -> but possible increase in unemployment
- Welfare payments and benefits: increase income for low income households -> reduce inequality
- Unions/employer organisations -> use collective bargaining to force wage increases
- Wage setting arrangements -> coordinated wages set in economy-wide decisions
- Racial and gender inequality -> laws that restrict women who have children from working in the US in 1970s
Piketty: Private Capital Accumulation
- Historically over time: Rate of return on capital/investment > economic growth
- r = profits, dividends, interest, rents
- g = rise in national income/output
- r > g means investment profits accumulate -> wealthy become wealthier
- Inherited wealth grows faster than output, wages and incomes -> unequal wealth distribution
- Natural process disrupted only by disasters (war and depressions)
- Accumulation is weaker if economic growth is strong (g is high) -> higher average incomes
Measuring inequality: Relative factor incomes
Skill premium: ratio of skilled to unskilled wages -> skilled/unskilled labour
Capital/labour income ratio -> share of national income to capital relative to labour
Measuring inequality: Income shares of
Top 10%/1%/0.01% share of national income
Higher income share to top decile etc. -> higher inequality
Tend to be more volatile
Measuring Inequality: Gini coefficient:
measure of income dispersion (0 = perfect equality, 1 = perfect inequality)
Lorenz curve: cumulative share of total income for the cumulative share of people (lowest to highest)
Area between Lorenz Curve and Line of Equality = A
Area below Lorenz Curve = B
Gini = A/(A+B)
Different measures capture different aspects -> no correlation.
Sources for inequality:
Household budget surveys: report household income and expenditure in a given period of time.
Tax records (income tax): end of c.19th
Social tables (historical periods): educated guesses of earnings in a class
Population and GDP statistics.
Inequality Within And Between Countries
20th Century Inequality Key Explanations
- Industrial revolution -> capital profits accumulation by capitalists -> high inequality in early c.20th
- Shocks/aftershocks of 2 World Wars -> impact on economy (formation of institutions, rise of welfare state, government intervention, trade liberalisation).
- Financial crises e.g. 1929, 2008
- Evolution of welfare state: rise post-WW2 and fall during Thatcher-era -> impact on progressive taxation, egalitarian wage setting, benefits
- Globalisation
- European catching-up (Pre-WWI and Post-WW2) and Asian economic miracle
US Inequality Over The 20th Century
Skill Premia: premium for receiving a certain level of education (Goldin & Katz)
- 1910: High wage premium for high school (0.45) and college (0.65) education -> higher wages for those finishing high school/college.
- Increasing high school graduation rates (10% to 70%)
- 1910-1950: Premia fall rapidly (0.2 and 0.3)
- High school/college education less significant to future incomes ◊ lower inequality
- Post-1950 divergence in premia:
- High school premium remain low only increasing to 0.3 by 2010.
- High school graduates not earning more than those without.
- High school premium remain low only increasing to 0.3 by 2010.
- College premium increases to 0.65 (2010)
- College graduate wage premium substantially higher than high school graduate premium.
US Inequality Over The 20th Century
Increasing college admissions
65%
But: college completion rate not increased at same rate -> only 30% completed (1980) ->do not receive wage premium despite incurring high tuition fees -> inequality increases
US Inequality Over The 20th Century
Students completing college by income quartile
upward sloping
- Top income quartile more likely to complete university than low income quartile
- This effect (top quartile completing college) has increased over time: 40% to 50% (top quartile income)
- Students already rich paid even higher wage premium
- Shows that the higher college graduate wage premium over time is from upper end of income distribution -> increased inequality
US Inequality Over The 20th Century
Top income shares:
- Share of income of top 10%
- 1917-1927: Rising inequality: 40% to 50% -> r > g
- 1940-1945: Falling inequality: 45% to 33% -> major shock reorganising economy
- 1945-1977: Constant low inequality at 33% -> Golden Age rapid growth -> r=g
- 1977: Steadily increasing inequality to 50% -> growth slowdown (r > g), policy changes
- Important events:
- WWII -> welfare state -> redistribution of income -> equalising factor
- Neo-liberal reforms from 1980s -> increase in income inequality.
US Inequality Over The 20th Century
Top US Marginal Tax Rate (tax rate on the richest workers):
- 1920s: New Deal – Low marginal tax rate (25%) to stimulate economy -> higher inequality
- 1930s-65: High marginal tax rates (90%) -> WWII and post-WWII period (finance expenditure and rising welfare state) -> lower inequality.
- 1965-onwards fall in marginal tax rate to 30-40% -> decline in progressive taxation in US post-1970s
US Inequality Over The 20th Century
Composition of top incomes
- 1929: Higher top percentile -> more income from capital income and less from wage income
- Rich receive most of income from capital income (returns on investment)
- 1998: Higher top percentile -> more income from capital income and less from wage income
- BUT more of income from wages for all income groups.
- Less rent-seeking incomes from capital accumulation -> wages as share of income are more important -> indicator of falling inequality (less profits from capital)
Summary of why inequality occurs
- Shocks: large implications for capital fortunes (wars/depression)
- Institutions change: taxation and wage setting -> restrains inequality post-1950
- Decline of progressive taxation post-1970s -> similarly timed changes in other countries
Global Inequality Over c.20th
- Income inequality trends within other countries -> downward sloping over 20th century
- English speaking countries -> high inequality early c.20th -> decreasing inequality over post-war period -> rising inequality since 1970s
- Middle and Southern Europe, and Japan -> high inequality early c.20th -> constant decline since 1950s -> no increase.
Global Inequality Over c.20th
Trends In Inequality: (ignoring country boundaries)
Before: growth and convergence -> models of GDP/capita assume 1 income per country
Global inequality to create income distribution for entire world -> treat all citizens equally
Global Inequality Over c.20th
Global Gini Coefficient
- Increased at a decreasing rate: 0.5 (1820) to 0.65 (2000) (Bourguignon & Morrison)
- Growth to 1929 – due to income growth and convergence within Europe and offshoots
- Levelling off after 1950 – growth slows in core (Europe and US) -> catch-up growth in Asia accelerates (East Asian tigers, India, China).
- China and Indian share of income increasing since 1988 -> small growth in SSA
Global Inequality Over c.20th
Global Inequality In Health Trends
- Income inequality different to life-expectancy inequality
- Income inequality has increased over c.19th and c.20th
- Life expectancy inequality between countries decreased after 1940/50 ◊ other measures of welfare are important as well (Bourguignon & Morrisson)
- Due to advancements in health technology and public healthcare ◊ may be poor but healthy
