Lecture 23 Inequality

Question 1

three main measures of inequality

Answer 1

quantiles of the distribution, the gini coefficient, top income inequality (income share of the top 5%, 1%, 0.01%…)

Question 2

the τ-quantile of the income distribution

Answer 2

the value x^τ such that τ% of individuals have an income less than x^τ

Question 3

popular quantiles

Answer 3

90-10 difference: difference between the 90th and 10th quantile
the interquartile range (IQR): difference between the 75th and 25th quantile
the median: the 50% quantile
the quintiles of a distribution: 0%, 20%, 40%…
the percentiles of a distribution: 0%, 1%, 2%…
the deciles of a distribution: 0%, 10%, 20%…

Question 4

Gini coefficient

Answer 4

a summary measure of the entire income distribution, ranges from 0 to 1 and measures “how far away we are from perfect equality” (gini of 0 means perfect equality, gini of one means maximum inequality, one individual has everything), the area between the Lorenz curve and the line of perfect equality

Question 5

Gini coefficient equation

Answer 5

A/(A+B), A being the area between the 45 degree line of equality and the Lorenz curve, B being the area under the Lorenz curve

Question 6

source of inequality

Answer 6

almost entirely due to rising wages at the (very) top, the wages of the top 10% relative to middle 10% have been rising, but middle 10% to bottom 10% haven’t– the 98% quantile of wage distribution has increased much more than the 95% quantile

Question 7

earnings

Answer 7

wages * hours or weeks worked

Question 8

wage and earning dynamics

Answer 8

same dynamics for top earners and the middle class
large drop in hours for low-income households

Question 9

convergence

Answer 9

between 1950 and 1950, faster wage growth at the bottom of the income percentile range

Question 10

divergence

Answer 10

between 1980 and 2014, much faster wage growth at the top of the income percentile range

Question 11

1940-1980

Answer 11

period of inclusive growth

Question 12

wealth inequality

Answer 12

much larger than income inequality:
top 1% earn 1/3 of US wealth
top 0.01% each 10% of all US wealth
bottom 50% own essentially none of US wealth
increased dramatically

Question 13

rising return to skill

Answer 13

college premium (average hourly wage of college graduates relative to people without a degree): 90% premium for men
abstract cognitive premium (average hourly wage in abstract cognitive occupations relative to routine occupations): similar to college premium

Question 14

gender premium

Answer 14

ratio of the average hourly wage of men to the average hourly wage of women
steep decline since 1980 (70% more to 30% more)

Question 15

decomposing the gender gap

Answer 15

1) 1/3 of the gender gap can’t be explained through observational differences
2) women work, on average, in lower-paying occupations (teacher vs lawyer)
3) women have, on average, less experience (number of years worked in the job)
4) women are, on average, more educated

Question 16

racial wage gap

Answer 16

hourly wage gap between white and black workers
has declined for men, but slightly increased for women (today white men earn 30% more, in 1970 it was 50%)
sizable unexplained component (~40%)

Question 17

ways the government redistributes income

Answer 17

taxes and transfers

Question 18

inequality in disposable income vs household earnings

Answer 18

inequality in disposable income rises less than in household earnings (10% quantile of disposable income increases, still: much faster growth for richer households)

Question 19

why did inequality increase?

Answer 19

1) technology: skill biased-technical change (ex IT)
2) international trade
3) US policies: tax cuts, low minimum wages, decline of manufacturing employment (“good middle class jobs”), rise in inequality across all sectors of the economy
4) market power of firms:change sin corporate concentration and culture “squeezes” workers’ wages