All or nothing

Kevin Lewis

April 01, 2016

Getting Serious about Inequality

Kevin Leicht

Sociological Quarterly, forthcoming

Sociologists have spent a great deal of energy studying social inequality, but in this presentation I suggest that we need to refocus our efforts a bit. I examine four popular myths among the general public, and among some in sociology, regarding the drivers of extreme inequality: (1) that most inequality is generated by race and gender, (2) that most inequality is driven by educational inequality, (3) that most inequality is driven by differences in family structure, and (4) that most inequality results from face-to-face interactions. I provide preliminary evidence that our explanations need some work. That work involves recognizing that most inequality is generated within demographic groups and that this inequality is growing rapidly. It also involves recognizing that there are few ways to incorporate underrepresented groups into the mainstream of a social and economic system where extreme inequality is getting worse and substantial percentages of the population face economic stagnation and downward mobility. The conclusion represents a call to focus on the most important group gap — the widening gap between the wealthy and the poor — and the mechanisms through which most people gain access to economic goods, services, and social respect — jobs and money.


Inequality, the Great Recession and slow recovery

Barry Cynamon & Steven Fazzari

Cambridge Journal of Economics, March 2016, Pages 373-399

Rising inequality reduced income growth for the bottom 95% of the US personal income distribution beginning about 1980. To maintain stable debt to income, this group’s consumption-income ratio needed to decline, which did not happen through 2006, and its debt-income ratio rose dramatically, unlike the ratio for the top 5%. In the Great Recession, the consumption-income ratio for the bottom 95% did finally decline, consistent with tighter borrowing constraints, whilst the top 5% ratio rose, consistent with consumption smoothing. We argue that higher inequality and the associated demand drag helps explain the slow recovery.


Ownership of the Means of Production

Glen Weyl & Anthony Lee Zhang

University of Chicago Working Paper, March 2016

Private property creates monopoly power. Common ownership can restore allocative efficiency, but it also destroys incentives for investments in the "capital" value common to all potential owners of an asset. Property rights should thus balance ex-ante capital investment and ex-post allocative efficiency through partial common ownership. A universal, self-assessed property tax with a universal right to force a sale at the self-assessed value implements this partial common ownership and is generically efficiency-enhancing compared to pure private ownership. At present, a range of calibrations suggests a 10% annual rate is robustly near optimal, implying expropriation of more than two thirds of capital income. However, the easiest application of our approach may be to assets with limited capital investment opportunities and administratively assigned property rights, such as radio spectrum or internet addresses, where taxes should be set at a higher rate equal to the (socially efficient) rate of annual asset turnover. This rate nonetheless retains some private ownership.


Bonus Culture: Competitive Pay, Screening, and Multitasking

Roland Bénabou & Jean Tirole

Journal of Political Economy, forthcoming

To analyze the impact of labor market competition on the structure of compensation, we embed multitasking and screening within a Hotelling framework. Competition for talent leads to an escalation of performance pay, shifting effort away from long-term investments, risk management, and cooperation. Efficiency losses can exceed those from a single principal, who dulls incentives to extract rents. As competition intensifies, monopsonistic underincentivization of low-skill agents first decreases and then gives way to growing overincentivization of high-skill ones. Aggregate welfare is thus hill-shaped, while inequality tends to rise monotonically. Bonus caps can help restore balance in incentives but may generate other distortions.


Top Incomes and Human Well-Being Around the World

Richard Burkhauser, Jan‐Emmanuel De Neve & Nattavudh Powdthavee

Cornell University Working Paper, January 2016

The share of income held by the top 1 percent in many countries around the world has been rising persistently over the last 30 years. But we continue to know little about how the rising top income shares affect human well-being. This study combines the latest data to examine the relationship between top income share and different dimensions of subjective well-being. We find top income shares to be significantly correlated with lower life evaluation and higher levels of negative emotional well-being, but not positive emotional well-being. The results are robust to household income, individual's socio-economic status, and macroeconomic environment controls.


Grabbing Your Bootstraps: Threats to Economic Order Boost Beliefs in Personal Control

Chris Goode & Lucas Keefer

Current Psychology, March 2016, Pages 142-148

Individuals are motivated to maintain perceptions of order and predictability in the social environment. Compensatory control theory proposes that when an individual’s perception of her or his own control is threatened, the individual can turn to external systems that may provide a perception of control (e.g., organized government). Conversely, the theory also predicts that when external systems of control are threatened, individuals may respond by exaggerating perceptions of personal control, although this effect has received relatively little empirical support. In the present study, we examined how a threat to an external system of economic control affects individual perceptions of personal control. Specifically, we found that a threat to the perceived distribution of economic resources based on hard work and effort (i.e., meritocracy) led to greater perceptions of personal control. Moreover, this increase in personal control directly increased participants’ optimism about their future economic outcomes. This study provides important insight into the broad influence of external systems on individuals' perceptions of personal control and assessment of future action.


Human Capital Investment, Inequality, and Economic Growth

Kevin Murphy & Robert Topel

Journal of Labor Economics, April 2016, Pages S99-S127

We treat rising inequality as an equilibrium outcome in which human capital investment fails to keep pace with rising demand for skills. Investment affects skill supply and prices on three margins: the type of human capital in which to invest, how much to acquire, and the intensity of use. The latter two represent the intensive margins of human capital acquisition and utilization. These choices are substitutes for the creation of new skilled workers, yet they are complementary with each other, magnifying inequality. When skill-biased technical change drives economic growth, greater inequality reduces growth.


The Impact of Taxes on Income Mobility

Mario Alloza

University College London Working Paper, January 2016

This paper investigates how taxes affect relative mobility in the income distribution in the US. Household panel data drawn from the PSID between 1967 and 1996 is employed to analyse the relationship between marginal tax rates and the probability of staying in the same income decile. Exogenous variation in marginal tax rates is identified by using counterfactual rates based on legislated changes in the tax schedule. I find that higher marginal tax rates reduce income mobility. An increase in one percentage point in marginal tax rates causes a decline of around 0.8% in the probability of changing to a different income decile. Tax reforms that reduce marginal rates by 7 percentage points are estimated to account for around a tenth of the average movements in the income distribution in a year. Additional results suggest that the effect of taxes on income mobility differs according to the level of human capital and that it is particularly significant when considering mobility at the bottom of the distribution.


Stress at Work: Differential Experiences of High versus Low SES Workers

Sarah Damaske, Matthew Zawadzki & Joshua Smyth

Social Science & Medicine, May 2016, Pages 125–133

This paper asks whether workers with greater socioeconomic status (SES) experience different levels of stress at work than workers with lower SES and, if so, what might explain these differences. We collected innovative assessments of immediate objective and subjective measures of stress at multiple time points across consecutive days from 122 employed men and women. We find that in comparison to higher SES individuals, those with lower SES reported greater happiness at work, less self-reported stress, and less perceived stress; cortisol, a biological marker of stress, was unrelated to SES. Worker’s momentary perceptions of the workplace were predicted by SES, with higher SES individuals more commonly reporting feeling unable to meet work demands, fewer work resources, and less positive work appraisals. In turn, perceptions of the workplace had a generally consistent and robust effect on positive mood, subjective stress, and cortisol.


Three-generation Mobility in the United States, 1850-1940: The Role of Maternal and Paternal Grandparents

Claudia Olivetti, Daniele Paserman & Laura Salisbury

NBER Working Paper, March 2016

This paper estimates intergenerational elasticities across three generations in the United States in the late 19th and early 20th centuries. We extend the methodology in Olivetti and Paserman (2015) to explore the role of maternal and paternal grandfathers for the transmission of economic status to grandsons and granddaughters. We document three main findings. First, grandfathers matter for income transmission, above and beyond their effect on fathers' income. Second, the socio-economic status of grandsons is influenced more strongly by paternal grandfathers than by maternal grandfathers. Third, maternal grandfathers are more important for granddaughters than for grandsons, while the opposite is true for paternal grandfathers. We present a model of multi-trait matching and inheritance that can rationalize these findings.


Personal income inequality and aggregate demand

Laura Carvalho & Armon Rezai

Cambridge Journal of Economics, March 2016, Pages 491-505

This paper presents a theoretical and empirical investigation of how changes in the size distribution of income can affect aggregate demand and the demand regime of an economy. After presenting empirical evidence for the US economy that the propensity to save increases significantly from the bottom to the top quintile of wage earners, we demonstrate that more equal distributions always lead to higher output in the traditional neo-Kaleckian macroeconomic model. We also present conditions under which a reduction of income inequality among workers results in demand becoming more wage led. This view is supported by the results of an econometric study for the USA (1967–2010), which show that the rise after 1980 in income inequality has made the US economy more profit led.


Welfare Consequences of Asymmetric Growth

Daniel Murphy

Journal of Economic Behavior & Organization, June 2016, Pages 1–17

Standard models in macroeconomics and development economics imply that growth in the aggregate enhances welfare for everyone in the economy. I show that instead, if economic growth is biased towards the consumption bundle of the rich, the welfare of the poor may fall. I document the relevance of this mechanism during the latter part of the Twentieth Century by showing that new information technology disproportionately benefited sectors consumed by the rich.


A Comparison of Inequality and Living Standards in Canada and the United States Using an Extended Income Measure

Edward Wolff et al.

Eastern Economic Journal, Spring 2016, Pages 171–192

We use the Levy Institute Measure of Economic Well-Being (LIMEW) to compare living standards and inequality in Canada and the United States. LIMEW includes non-cash government transfers, public consumption, annuitized wealth, and household production and nets out all personal taxes. We compare our results to the standard US Census measure, gross money income (MI). We expected a smaller inter-country gap in median LIMEW than median MI and relatively lower LIMEW inequality in Canada because of the more extensive Canadian welfare state. Instead, we found that the measured gap in the level and inequality of economic well-being was higher based on LIMEW than MI.


An allegory of the political influence of the top 1%

Philippe De Donder & John Roemer

Business and Politics, forthcoming

We study how rich shareholders use their political influence to deregulate firms that they own, thus skewing the income distribution towards themselves. Individuals differ in productivity and choose how much labor to supply. High productivity individuals also own shares in the productive sector and thus earn capital income. All individuals vote over a linear tax rate on (labor and capital) income whose proceeds are redistributed lump sum. Shareholders also lobby in order to ease the price cap imposed on the private firm. We first solve analytically for the Kantian equilibrium of this lobbying game together with the majority voting equilibrium over the tax rate. We then proceed to a comparative statics analysis of the model with the help of numerical simulations. We obtain that, as the capital income distribution becomes more concentrated among the top productivity individuals, increased lobbying effort generates efficiency as well as equity costs, with lower labor supply and lower average utility levels in society.


Decomposing Trends in Inequality in Earnings into Forecastable and Uncertain Components

Flávio Cunha & James Heckman

Journal of Labor Economics, April 2016, Pages S31-S65

A substantial empirical literature documents the rise in wage inequality in the American economy. It is silent on whether the increase in inequality is due to components of earnings that are predictable by agents or whether it is due to greater uncertainty facing them. These two sources of variability have different consequences for both aggregate and individual welfare. Using data on two cohorts of American males, we find that a large component of the rise in inequality for less skilled workers is due to uncertainty. For skilled workers, the rise is less pronounced.


Income-comparison Attitudes in the US and the UK: Evidence from Discrete-choice Experiments

Hitoshi Shigeoka & Katsunori Yamada

NBER Working Paper, February 2016

Economists have long been aware of utility externalities such as a tendency to compare own income with others'. If welfare losses from income comparisons are significant, any governmental interventions that alter such attitudes may have large welfare consequences. We conduct an original online survey of discrete-choice questions to estimate such attitudes in the US and the UK. We find that the UK respondents compare incomes more than US respondents do. We then manipulate our respondents with simple information to examine whether the attitudes can be altered. Our information treatment suggesting that comparing income with others may diminish welfare even when income levels increase makes UK respondents compare incomes more rather than less. Interestingly, US respondents are not affected at all. The mechanism behind the UK results seems to be that our treatment gives moral license to make income comparisons by providing information that others do so.


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