Growing apart
The effects of economic growth on income inequality in the US
Amir Rubin & Dan Segal
Journal of Macroeconomics, forthcoming
Abstract:
The paper analyzes the relation between growth and income inequality in the US during the post-war years (1953–2008). We show that the income of the top income groups is more sensitive to growth, defined broadly as current growth and changes in expectations of future growth, compared to the income of the lower income groups. We provide evidence that this increased sensitivity arises for two reasons: (a) the top income groups receive a large portion of their income from wealth, which is more sensitive to growth than labor income, and (b) the top income groups receive a large portion of their labor income in the form of pay-for-performance (equity compensation), which is also sensitive to growth. Consequently, we conclude that growth and income inequality are positively associated.
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Global Inequality of Opportunity: How Much of Our Income Is Determined by Where We Live?
Branko Milanovic
Review of Economics and Statistics, May 2015, Pages 452-460
Abstract:
Suppose that all people in the world are allocated only two characteristics over which they have (almost) no control: country of residence and income distribution within that country. Assume further that there is no migration. We show that more than one-half of variability in income of world population classified according to their household per capita in 1% income groups (by country) is accounted for by these two characteristics. The role of effort or luck cannot play a large role in explaining the global distribution of individual income.
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James Avery
Political Behavior, forthcoming
Abstract:
A growing body of research examines the political sources of economic inequality in the United States. A second literature examines the political consequences of who votes. The current study contributes to both literatures by examining the influence of income bias in voter turnout on income inequality in the American states from 1980 to 2010. I use power resources theory and research demonstrating growing partisan polarization across income levels as theoretical foundations. Using time-series and cross-sectional analysis, I find that states with greater income bias in turnout have higher levels of income inequality than states with greater parity in voter turnout across income levels, findings that are robust across various model specifications. The implications of these findings for our understanding of economic inequality, low-income voter turnout, and state electoral laws are discussed.
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Economic Inequality and U.S. Public Policy Mood Across Space and Time
Christopher Johnston & Benjamin Newman
American Politics Research, forthcoming
Abstract:
While classic theories suggest that growing inequality will generate mass support for redistribution, recent research suggests the opposite: increases in inequality in the United States are associated with decreases in support for redistribution among both low and high income citizens. We reconsider this conclusion. First, we examine the methods of this research, and find that the claims made are not robust to important corrections in model specification. We then utilize a distinct methodological approach, leveraging spatial variation in local inequality, and examine average differences in preferences across geographic context. Here we find a small, but positive relationship of inequality to support for redistribution. In both our reexamination of previous work and our extensions, we find little support for the claim that inequality reduces the demand for redistribution.
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Raj Chetty & Nathaniel Hendren
Harvard Working Paper, May 2015
Abstract:
We characterize the effects of neighborhoods on children's earnings and other outcomes in adulthood by studying more than five million families who move across counties in the U.S. Our analysis consists of two parts. In the first part, we present quasi-experimental evidence that neighborhoods affect intergenerational mobility through childhood exposure effects. In particular, the outcomes of children whose families move to a better neighborhood – as measured by the outcomes of children already living there – improve linearly in proportion to the time they spend growing up in that area. We distinguish the causal effects of neighborhoods from confounding factors by comparing the outcomes of siblings within families, studying moves triggered by displacement shocks, and exploiting sharp variation in predicted place effects across birth cohorts, genders, and quantiles. We also document analogous childhood exposure effects for college attendance, teenage birth rates, and marriage rates. In the second part of the paper, we identify the causal effect of growing up in every county in the U.S. by estimating a fixed effects model identified from families who move across counties with children of different ages. We use these estimates to decompose observed intergenerational mobility into a causal and sorting component in each county. For children growing up in families at the 25th percentile of the income distribution, each year of childhood exposure to a one standard deviation (SD) better county increases income in adulthood by 0.5%. Hence, growing up in a one SD better county from birth increases a child's income by approximately 10%. Low-income children are most likely to succeed in counties that have less concentrated poverty, less income inequality, better schools, a larger share of two-parent families, and lower crime rates. Boys' outcomes vary more across areas than girls, and boys have especially poor outcomes in highly-segregated areas. In urban areas, better areas have higher house prices, but our analysis uncovers significant variation in neighborhood quality even conditional on prices.
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Jae Song et al.
NBER Working Paper, May 2015
Abstract:
Earnings inequality in the United States has increased rapidly over the last three decades, but little is known about the role of firms in this trend. For example, how much of the rise in earnings inequality can be attributed to rising dispersion between firms in the average wages they pay, and how much is due to rising wage dispersion among workers within firms? Similarly, how did rising inequality affect the wage earnings of different types of workers working for the same employer — men vs. women, young vs. old, new hires vs. senior employees, and so on? To address questions like these, we begin by constructing a matched employer-employee data set for the United States using administrative records. Covering all U.S. firms between 1978 to 2012, we show that virtually all of the rise in earnings dispersion between workers is accounted for by increasing dispersion in average wages paid by the employers of these individuals. In contrast, pay differences within employers have remained virtually unchanged, a finding that is robust across industries, geographical regions, and firm size groups. Furthermore, the wage gap between the most highly paid employees within these firms (CEOs and high level executives) and the average employee has increased only by a small amount, refuting oft-made claims that such widening gaps account for a large fraction of rising inequality in the population.
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The Great Escape: Intergenerational Mobility Since 1940
Nathaniel Hilger
NBER Working Paper, May 2015
Abstract:
Tax records indicate that intergenerational mobility (IM) has been stable for cohorts entering the labor market since the 1990s. I show that when using educational attainment as a proxy for adult income, stable IM is a new phenomenon: IM rose significantly for cohorts entering the labor market from 1940 to 1980. I measure IM directly in historical Census data for children still living with their parents at ages 22-25, and indirectly for other children using an imputation procedure that I validate in multiple data sets with parent-child links spanning the full 1940-2000 period. Post-war mobility gains were larger in the South and for blacks, and were driven by gains in high school rather than college enrollment. Controlling for region and year, states with higher IM have had lower income inequality, higher income levels, more educational inputs, higher minimum dropout ages, and lower teen birth rates. IM gains plausibly increased aggregate annual earnings growth by 0.125-0.25 percentage points over the 1940-1980 period.
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Turning to Space: Social Density, Social Class and the Value of Things in Stores
Thomas Clayton O'Guinn, Robin Tanner & Ahreum Maeng
Journal of Consumer Research, forthcoming
Abstract:
This paper is about social space and material objects for sale within that space. We draw primarily on Goffman's (1971) concepts of use space and possession territories to predict that as the social density of a given space increases, inferences of the subjective social class and income of people in that space fall. Eight studies confirm that this is indeed the case, with the result holding even for stick figures, thus controlling for typical visual indicators of social class such as clothing or jewelry. Furthermore, these social class inferences mediate a relationship between social density and product valuation, with individuals assessing both higher prices and a greater willingness to pay for products presented in less crowded contexts. This effect of inferred class on product valuation is explained by status motivated individuals desire to associate with higher status people. To the best of our knowledge, this research is the first to reveal the link between social density, status inferences and object valuations. As such it makes a novel contribution to what has come be known in sociology as the topological turn: a renewed focus on social space.
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Socioeconomic Status and Learning from Financial Information
Camelia Kuhnen & Andrei Miu
NBER Working Paper, May 2015
Abstract:
The majority of lower socioeconomic status (SES) households do not have any stock investments, which is detrimental to wealth accumulation. Here, we examine one potential driver of this puzzling fact, namely, that SES may influence the process by which people learn from information in financial markets. In an experimental setting we find that low SES participants, relative to medium or high SES ones, form more pessimistic beliefs about the distribution of stock investment outcomes and are less likely to invest in stocks. The pessimism bias in assessing risky assets induced by low SES is robust to several ways of measuring one's socioeconomic standing and it replicates out of sample. These results suggest that SES shapes in predictable ways people's beliefs about financial assets, which in turn may induce large differences across households in their propensity to participate in financial markets.
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Higher in status, (Even) better-than-average
Michael Varnum
Frontiers in Psychology, April 2015
Abstract:
In 5 studies (total N = 1357) conducted online using Amazon's MTurk the relationship between socioeconomic status (SES) and the better-than-average effect (BTAE) was tested. Across the studies subjective measures of SES were positively correlated with magnitude of BTAE. Effects of objective measures (income and education) were weaker and less consistent. Measures of childhood SES (both objective and subjective) were positively correlated with BTAE magnitude, though less strongly and less consistently than measures of current subjective SES. Meta-analysis revealed all measures of chronic SES (with the exception of education) were significantly correlated with BTAE. However, manipulations of SES in terms of subjective status (Study 2), power (Study 3), and dominance (Study 4) did not have strong effects on BTAE magnitude (d's ranging from −0.04 to −0.14). Taken together the results suggest that chronic, but not temporary, status may be linked with a stronger tendency to overestimate one's abilities and positive traits.
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Inequality in the very long run: Inferring inequality from data on social groups
Jørgen Modalsli
Journal of Economic Inequality, June 2015, Pages 225-247
Abstract:
This paper presents a new method for calculating Gini coefficients from tabulations of the mean income of social classes. Income distribution data from before the Industrial Revolution usually come in the form of such tabulations, called social tables. Inequality indices generated from social tables are frequently calculated without adjusting for within-group income dispersion, leading to a systematic downward bias in the reporting of pre-industrial inequality. The correction method presented in this paper is applied to an existing collection of twenty-five social tables, from Rome in AD 1 to India in 1947. The corrections, using a variety of assumptions on within-group dispersion, lead to substantial increases in the Gini coefficients.
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Martin Dribe, Jonas Helgertz & Bart van de Putte
Research in Social Stratification and Mobility, September 2015, Pages 25–39
Abstract:
This article studies class attainment and mobility in a long-term perspective, covering the entire transition from a preindustrial to a mature industrial society. Using longitudinal individual-level data for men in a community of southern Sweden we test different hypotheses linking changing social mobility and status attainment to the industrialization process. The data allows an analysis of Sweden's complete transition from an agrarian to an industrialized society, and thus to comprehensively address core hypotheses in the stratification literature. Both absolute and relative mobility increased, mainly explained by upward mobility becoming more prevalent. By looking at status attainment into different segments of the middle class and elite, we also clearly see the increasing role played by formal education and meritocracy for the opportunities of people from low-class origin to advance socially. However, this development is more connected with the maturing of industrial society than with industrialization as such.
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Joseph Stiglitz
NBER Working Paper, May 2015
Abstract:
This paper investigates the determination of the equilibrium distribution of income and wealth among individuals within a simple equilibrium growth model, where there is consistency between the movements of aggregate variables and the savings, bequest, and reproduction behavior of individuals. It describes centrifugal and centripetal forces, (leading to more or less unequal distributions), identifies the factors that may have contributed to the observed increase in inequality, and provides explicit expressions for the level of tail-inequality in terms of the underlying parameters of the economy and policy variables. Among the key results are: (i) The magnitude of wealth inequality does not, in general depend on the difference between the rate of interest (r) and the rate of growth (g); the former is itself an endogenous variable that needs to be explained. In the standard generalization of the Solow model, in the long run not only is r < g, but sr < g (where s is the savings rate). (ii) An increase in capital taxation may be (and in some of the central models is) fully shifted, and so may not lead to lower levels of inequality. (iii) If the capital tax is progressive and/or the proceeds go to public investment, wealth inequality may be reduced the well-being of workers may be increased.
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Joseph Stiglitz
NBER Working Paper, May 2015
Abstract:
This paper extends the standard life cycle model to a world in which there are also capitalists. We obtain simple formulae describing the equilibrium fraction of wealth held by life-cycle savers. Using these formulae, we ascertain the effects of tax policy or changes in the parameters of the economy. The relative role of life cycle savings increases with the rate of growth and with the relative savings rate of life-cycle savers and capitalists. An increase in the savings rate of workers has no effect on output per capita; life cycle savings simply crowds out inherited savings. A tax on capital (even if proceeds are paid out to workers) is so shifted that capitalists are unaffected and that workers' income (after transfers) and their share in national wealth are reduced. If the government invests the proceeds, the share of capital owned by life cycle savers may increase. We extend the analysis to endogenously derive the distribution of the population between life cycle savers and capitalists, in a model in which all individuals have identical non-linear savings functions. When wealth is low enough, bequests drop to zero. With stochastic returns, individuals move between the two groups. A second extension analyzes the effects of land. We ask whether land holding displaces the holding of capital, resulting in workers being worse off. A tax on land, while reducing the value of land, leaves unchanged the capital-labor ratio, output per capita, and wages. But the tax reduces the aggregate value of wealth, and if the proceeds of the tax are distributed to workers, their income and life cycle savings are increased. On both accounts, wealth inequality is reduced. Thus, consistent with Henry George's views, a tax on the returns on land, including capital gains, reduces inequality with no adverse effect on national income.
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National income and its distribution
Markus Brueckner, Era Dabla Norris & Mark Gradstein
Journal of Economic Growth, June 2015, Pages 149-175
Abstract:
This paper revisits the effect of national income on distributional equality. Although the link between the two has featured prominently in the literature, a causal effect has been difficult to pin down due to the endogeneity of these variables. We use plausibly exogenous variations in the incomes of countries' trading partners weighted by the level of trade flows, and international oil price shocks, as instruments for within-country variations in countries' real GDP per capita. Controlling for country and time fixed effects, our instrumental variables regressions show that increases in national income have a significant moderating effect on income inequality: a 1 % increase in real GDP per capita reduces the Gini coefficient by around 0.08 percentage points on average. We document that education is one possible channel that mediates this relationship, and explore the implications of our findings for the welfare effect of national income growth.
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The political economics of redistribution, inequality and tax avoidance
Carlos Bethencourt & Lars Kunze
Public Choice, June 2015, Pages 267-287
Abstract:
A central result in the political economy of taxation is that the degree of redistribution is positively linked to income inequality. However, empirical evidence supporting such a relationship turns out to be mixed. This paper shows how the different empirical reactions can be rationalized within a simple model of tax avoidance and costly tax enforcement. By focusing on structure-induced equilibrium in which taxpayers vote over the size of the income tax and the level of tax enforcement, we show that more inequality may well reduce the extent of redistribution, depending on two opposing effects: the standard political effect and a negative tax base effect working through increases in the average level of tax avoidance and the share of enforcement expenditures in total tax revenue.
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Vladimir Gimpelson & Daniel Treisman
NBER Working Paper, May 2015
Abstract:
Since Aristotle, a vast literature has suggested that economic inequality has important political consequences. Higher inequality is thought to increase demand for government income redistribution in democracies and to discourage democratization and promote class conflict and revolution in dictatorships. Most such arguments crucially assume that ordinary people know how high inequality is, how it has been changing, and where they fit in the income distribution. Using a variety of large, cross-national surveys, we show that, in recent years, ordinary people have had little idea about such things. What they think they know is often wrong. Widespread ignorance and misperceptions of inequality emerge robustly, regardless of the data source, operationalization, and method of measurement. Moreover, we show that the perceived level of inequality — and not the actual level — correlates strongly with demand for redistribution and reported conflict between rich and poor. We suggest that most theories about political effects of inequality need to be either abandoned or reframed as theories about the effects of perceived inequality.
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Erin Godfrey & Sharon Wolf
Cultural Diversity and Ethnic Minority Psychology, forthcoming
Objectives: Economic inequality is a growing concern in the United States and globally. The current study uses qualitative techniques to (a) explore the attributions low-income racial/ethnic minority and immigrant women make for poverty and wealth in the U.S., and (b) clarify important links between attributions, critical consciousness development, and system justification theory.
Methods: In-depth interview transcripts from 19 low-income immigrant Dominican and Mexican and native African American mothers in a large Northeastern city were analyzed using open coding techniques. Interview topics included perceptions of current economic inequality and mobility and experiences of daily economic hardships.
Results: Almost all respondents attributed economic inequality to individual factors (character flaws, lack of hard work). Structural explanations for poverty and wealth were expressed by fewer than half the sample and almost always paired with individual explanations. Moreover, individual attributions included system-justifying beliefs such as the belief in meritocracy and equality of opportunity and structural attributions represented varying levels of critical consciousness.
Conclusions: Our analysis sheds new light on how and why individuals simultaneously hold individual and structural attributions and highlights key links between system justification and critical consciousness. It shows that critical consciousness and system justification do not represent opposite stances along a single underlying continuum, but are distinct belief systems and motivations. It also suggests that the motive to justify the system is a key psychological process impeding the development of critical consciousness. Implications for scholarship and intervention are discussed.
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Preferences over Equality in the Presence of Costly Income Sorting
Gilat Levy & Ronny Razin
American Economic Journal: Microeconomics, May 2015, Pages 308-337
Abstract:
We analyze preferences over redistribution in societies with costly (positive) sorting according to income. We identify a new motivation for redistribution, where individuals support taxation in order to reduce the incentives to sort. We characterize a simple condition over income distributions which implies that even relatively rich voters — with income above the mean — will prefer full equality (and thus no sorting) to societies with costly sorting. We show that the condition is satisfied for relatively equal income distributions. We also relate the condition to several statistical properties which are satisfied by a large family of distribution functions.
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Not Separate and Not Equal? Achievement and Attainment Equity in College Towns
Robert Maranto & Jeffery Dean
Social Science Quarterly, forthcoming
Objectives: A vast literature documents unequal outcomes in American public education (e.g., Duncan and Murname, 2011), but no prior research explores whether inequities are moderated in progressive communities such as college towns. We test whether college towns have more equal educational outcomes than similar communities that lack higher education institutions.
Methods: We conduct two tests. First, we employ cross-sectional ordinary least squares (OLS) regression predicting high school graduation (attainment) rates in 8,841 school districts, including 184 college town districts, with data taken from the U.S. Department of Education's Common Core of Data. Since attainment is a blunt measure, we also use OLS regression to predict test score (achievement) results in Pennsylvania, a state with a large number of college town school districts.
Results: Nationally, controlling for a range of characteristics, college towns have slightly but significantly lower attainment rates. Regarding achievement, low-income students in Pennsylvania college towns are at a slight disadvantage in math achievement compared to low-income students elsewhere.
Conclusions: We find some evidence that college towns have less equal educational outcomes and speculate as to causes, with the caveat that given the modest statistical impacts found, more research is needed.
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Income Inequality and Policy Responsiveness
Robert Erikson
Annual Review of Political Science, 2015, Pages 11-29
Abstract:
The growing concern about economic inequality leads to a similar concern about political inequality. This article explores the seeming contradiction between the literature pointing to inequality in political representation in the United States and the literature showing that public policy does tend to represent public opinion in general. Low-income voters are much less likely to vote or to be politically knowledgeable than high-income voters, which limits their influence and creates an upper-income bias to effective public opinion. Considerable research suggests that low-income voters' opinions count for even less than would be implied by their low participation rate, a matter that should continue to be the subject of research. Seemingly contrary to any upper-income bias to policy making, major legislation usually moves policy in the direction favored by low-income voters (e.g., redistribution, government programs). Upper-income voters and interest groups, however, are able to slow the pace of liberal change.
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Carol Hostetter, Sabrina Williamson Sullenberger & Leila Wood
Journal of Poverty, Spring 2015, Pages 133-152
Abstract:
This article investigates high school seniors' attitudes about socioeconomic status in two historical contexts: the growing economy of the mid-1990s and the recent economic recession. High school seniors (N = 72) were provided with identical scenarios and questions that prompted them to evaluate social stratification. The 1996 cohort expressed belief in the American Dream and individual mobility whereas the 2011 cohort articulated more understanding of structural issues that affect social class mobility. Analysis showed greater awareness of the economy's impact on family life in the 2011 cohort. Finally, the 2011 cohort noted the strong role of technology as an indicator of status.
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Trust and the Welfare State: The Twin Peaks Curve
Yann Algan, Pierre Cahuc & Marc Sangnier
Economic Journal, forthcoming
Abstract:
We show the existence of a twin peaks relation between trust and the size of the welfare state that stems from two opposing forces. Uncivic people support large welfare states because they expect to benefit from them without bearing their costs. But civic individuals support generous benefits and high taxes only when they are surrounded by trustworthy individuals. We provide empirical evidence for these behaviors and this twin peaks relation in the OECD countries.
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How Status Concerns Can Make Us Rich and Happy
Holger Strulik
Economica, forthcoming
Abstract:
This paper considers an overlapping generations model of economic growth populated by two types of individuals. Competitive types compare future consumption (i.e. wealth) with the mean. Self-sufficient types derive utility simply from their own consumption and do not compare themselves with others. I derive a condition under which the utility (happiness) of both types increases when the economy is populated by a larger share of competitive types. I show that a sufficiently high share of competitive types in a society can be inevitable for long-run economic growth to exist.
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Income Inequality, Capitalism, and Ethno-linguistic Fractionalization
Jan-Egbert Sturm & Jakob De Haan
American Economic Review, May 2015, Pages 593-597
Abstract:
We examine the relationship between capitalism and income inequality for a large sample of countries using an adjusted economic freedom index as proxy for capitalism. Our results suggest that there is no robust relationship between economic freedom and Gini coefficients based on gross income. Subsequently, we analyze the relationship between income redistribution and ethno-linguistic fractionalization. We find that the impact of ethno-linguistic fractionalization on income redistribution is conditional on the level of economic freedom: countries that have a high degree of fractionalization redistribute income less, while capitalist countries that have a low degree of fractionalization redistribute income more.
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Paulo Reis Mourão & Joaquim Santos Teixeira
Applied Economics, forthcoming
Abstract:
The level of income inequality in a European country influences the competitive balance of its major soccer leagues. We test this hypothesis using cointegration techniques for seven male professional soccer leagues (the Dutch, English, French, German, Italian, Spanish and Ukrainian soccer leagues) from the 1980/1981 season to the 2011/2012 season. Controlling for the level of income inequality using variables such as real GDP per capita, trade openness and the emigration rate, we conclude that income inequality (measured by the Gini index) causes changes in the measures of competitive balance that we employ (the Hirschman–Herfindahl index and the SD) concerning the final number of points scored by the various teams.