For richer, for poorer

Kevin Lewis

July 22, 2016

Nonmarital First Births, Marriage, and Income Inequality

Andrew Cherlin, David Ribar & Suzumi Yasutake

American Sociological Review, forthcoming

Many aggregate-level studies suggest a relationship between economic inequality and sociodemographic outcomes such as family formation, health, and mortality; individual-level evidence, however, is lacking. Nor is there satisfactory evidence on the mechanisms by which inequality may have an effect. We study the determinants of transitions to a nonmarital first birth as a single parent or as a cohabiting parent compared to transitions to marriage prior to a first birth among unmarried, childless young adults in the National Longitudinal Survey of Youth, 1997 cohort, from 1997 to 2011. We include measures of county-group-level household income inequality and the availability of jobs typically held by high school graduates that pay above-poverty wages (i.e., middle-skilled jobs). We find that greater income inequality is associated with a reduced likelihood of transitioning to marriage prior to a first birth for both women and men. The association between levels of inequality and transitions to marriage can be partially accounted for by the availability of middle-skilled jobs. Some models also suggest that greater income inequality is associated with a reduced likelihood of transitioning to a first birth while cohabiting.


Do Rising Top Incomes Lead to Increased Borrowing in the Rest of the Distribution?

Jeffrey Thompson

Federal Reserve Working Paper, May 2016

One potential consequence of rising concentration of income at the top of the distribution is increased borrowing, as less affluent households attempt to maintain standards of living with less income. This paper explores the “keeping up with the Joneses” phenomenon using data from the Survey of Consumer Finances. Specifically, it examines the responsiveness of payment-to-income ratios for different debt types at different parts of the income distribution to changes in the income thresholds at the 95th and 99th percentiles. The analysis provides some evidence indicating that household debt payments are responsive to rising top incomes. Middle and upper-middle income households take on more housing-related debt and have higher housing debt payment to income ratios in places with higher top income levels. Among households at the bottom of the income distribution there is a decline in non-mortgage borrowing and debt payments in areas with rising top-income levels, consistent with restrictions in the supply of credit. The analysis also consistently shows that 95th percentile income has a greater influence on borrowing and debt payment across in the rest of the distribution than the more affluent 99th percentile level.


Negative emotions, income, and welfare: Causal estimates from the PSID

David Clingingsmith

Journal of Economic Behavior & Organization, October 2016, Pages 1–19

I use instrumental variables to estimate the causal effect of family income on the frequency with which individuals experience negative emotions. Doubling income reduces the experience of negative emotions by 0.26 SD on average. Percentage changes in income have a constant effect on negative emotion for family incomes below $80,000. Above $80,000, the effect of percentage changes declines, reaching zero at $200,000. A dollar change in family income has an eight times larger effect at the 20th percentile of income than the 80th percentile. Effects of income are similar on the high levels of negative emotion characteristic of mental illness, except there is no satiation.


Genes, Education, and Labor Market Outcomes: Evidence from the Health and Retirement Study

Nicholas Papageorge & Kevin Thom

NYU Working Paper, June 2016

Recent advances in behavioral genetics allow us to overcome past limitations on the study of genes and human capital accumulation. We build on this progress to explore the relationship between observed genetic variants, educational attainment, and labor market outcomes in the Health and Retirement Study (HRS). We demonstrate that observed genetic variants, summarized as a genetic score variable, can explain 3.2-6.6 percent of the variation in educational attainment depending on the specification. Incorporating this genetic information into economic analysis using a rich longitudinal data set allows us to better understand the structure of ability endowments, including how they interact with childhood environments to predict a host of labor market outcomes. Understanding these interactions is particularly important for designing appropriate policies to reduce economic disparities. A recurring theme in our findings is that individuals who grew up in economically disadvantaged households face worse outcomes compared to individuals with the same genetic score, but from higher-SES households. This suggests the existence of unrealized human potential and also raises the possibility that human capital investments could lead to a more efficient use of human resources.


Mergers and Acquisitions, Technological Change and Inequality

Wenting Ma, Paige Parker Ouimet & Elena Simintzi

University of North Carolina Working Paper, June 2016

This paper documents important shifts in the occupational composition of industries following high merger and acquisition (M&A) activity as well as accompanying increases in mean wages and wage inequality. We propose mergers and acquisitions act as a catalyst for skill-biased and routine-biased technological change (Autor, Levy, and Murnane, 2003). We argue that due to an increase in scale, improved efficiency or lower financial constraints, M&As facilitate technology adoption and automation, disproportionately increasing the productivity of high-skill workers and enabling the displacement of occupations involved in routine-tasks, typically mid-income occupations. An increase in M&A intensity of 10% is associated with a 33% reduction in industries’ routine share intensity and a ten percentage point increase in the share of high skill workers. These results have important implications on wage inequality: An increase in M&A activity by 10% is associated with a 25% increase in the mean industry wage and a 22% increase in industry wage polarization. We also show evidence that human capital complementary investments increase following M&As, while investments unrelated to human capital do not change. Our results are robust to instrumenting the M&A activity in a given industry with M&A activity in the corresponding customer/supplier industries and to controlling for industry shocks that may simultaneously lead to a merger wave and changes to labor and capital decisions.


Class Bias in Voter Turnout, Representation, and Income Inequality

William Franko, Nathan Kelly & Christopher Witko

Perspectives on Politics, June 2016, Pages 351-368

The mass franchise led to more responsive government and a more equitable distribution of resources in the United States and other democracies. Recently in America, however, voter participation has been low and increasingly biased toward the wealthy. We investigate whether this electoral “class bias” shapes government ideology, the substance of economic policy, and distributional outcomes, thereby shedding light on both the old question of whether who votes matters and the newer question of how politics has contributed to growing income inequality. Because both lower and upper income groups try to use their resources to mobilize their supporters and demobilize their opponents, we argue that variation in class bias in turnout is a good indicator of the balance of power between upper and lower income groups. And because lower income voters favor more liberal governments and economic policies we expect that less class bias will be associated with these outcomes and a more equal income distribution. Our analysis of data from the U.S. states confirms that class bias matters for these outcomes.


Subjective beliefs about the income distribution and preferences for redistribution

Lionel Page & Daniel Goldstein

Social Choice and Welfare, June 2016, Pages 25-61

We investigate whether beliefs about the income distribution are associated with political positions for or against redistribution. Using a novel elicitation method, we assess individuals’ beliefs about the shape of the income distribution in the United States. We find that respondents’ beliefs approximate the actual distribution on average. However they tend to overestimate the median income and underestimate the level of inequality. Surprisingly we find that beliefs about overall inequality, measured in terms of income dispersion, play only a marginal role in political positions as well as prospects of future wealth. Political preferences, however, are predicted by first, beliefs about the level of income of the poorest members of society, and second, a belief in an open society with equal opportunities for all. Support for redistribution is lower for people who give higher estimates of the income level of the poorest members of society and for people who perceive that opportunities for upward mobility are available.


Lagged Associations of Metropolitan Statistical Area- and State-Level Income Inequality with Cognitive Function: The Health and Retirement Study

Daniel Kim et al.

PLoS ONE, June 2016

Methods: In a nationally-representative cohort of older Americans from the Health and Retirement Study, we examined state- and metropolitan statistical area (MSA)-level income inequality as predictors of individual-level cognitive function measured by the 27-point Telephone Interview for Cognitive Status (TICS-m) scale. We modeled latency periods of 8–20 years, and controlled for state-/metropolitan statistical area (MSA)-level and individual-level factors.

Results: Higher MSA-level income inequality predicted lower cognitive function 16–18 years later. Using a 16-year lag, living in a MSA in the highest income inequality quartile predicted a 0.9-point lower TICS-m score (β = -0.86; 95% CI = -1.41, -0.31), roughly equivalent to the magnitude associated with five years of aging. We observed no associations for state-level income inequality. The findings were robust to sensitivity analyses using propensity score methods.

Conclusions: Among older Americans, MSA-level income inequality appears to influence cognitive function nearly two decades later. Policies reducing income inequality levels within cities may help address the growing burden of declining cognitive function among older populations within the United States.


Growing Apart: The Changing Firm-Size Wage Effect and Its Inequality Consequences

Adam Cobb, Ken-Hou Lin & Paige Gabriel

University of Pennsylvania Working Paper, May 2016

Wage inequality in the United States has risen dramatically over the past several decades, prompting scholars to develop a number of theoretical accounts for the upward trend. This study takes an organizational approach to examine how changes in the firm-size wage effect (FSWE) — a phenomenon whereby otherwise similar workers earn more when employed by large firms — have affected the wage distribution in the U.S labor market. Using data from the Current Population Survey and Survey of Income and Program Participation, our findings reveal that in 1987, although all workers benefited from a firm-size wage premium, the premium was significantly higher for individuals at the bottom (e.g., 10th and 25th percentiles) and middle of the wage distribution (e.g., 50th percentile) compared to those at the top (90th percentile). Between 1987 and 2014, however, whereas the average FSWE declined markedly, the decline was exclusive to those at the bottom and middle of the wage distribution while there was no change for those at the top. As such, the uneven declines in the FSWE across the wage distribution explain between 20 and 30 percent of rising wage inequality during this period, suggesting firms are of great importance to the study of rising inequality.


Endowment inequality in public goods games: A re-examination

Shaun Hargreaves Heap, Abhijit Ramalingam & Brock Stoddard

Economics Letters, forthcoming

We present a clean test of whether inequality in endowments affects contributions to a public good. It is a clean test because, to our knowledge, it is the first to control for possible endowment effects. We find that the key adverse effect of inequality arises because the rich reduce their contributions when there is inequality.


Trickle-Down Preferences: Preferential Conformity to High Status Peers in Fashion Choices

Jeff Galak et al.

PLoS ONE, May 2016

How much do our choices represent stable inner preferences versus social conformity? We examine conformity and consistency in sartorial choices surrounding a common life event of new norm exposure: relocation. A large-scale dataset of individual purchases of women’s shoes (16,236 transactions) across five years and 2,007 women reveals a balance of conformity and consistency, moderated by changes in location socioeconomic status. Women conform to new local norms (i.e., average heel size) when moving to relatively higher status locations, but mostly ignore new local norms when moving to relatively lower status locations. In short, at periods of transition, it is the fashion norms of the rich that trickle down to consumers. These analyses provide the first naturalistic large-scale demonstration of the tension between psychological conformity and consistency, with real decisions in a highly visible context.


The Z-Axis: Elevation Gradient Effects in Urban America

Victor Yifan Ye & Charles Becker

Duke University Working Paper, June 2016

This paper presents a comprehensive analysis of hilliness effects in American urban communities. Using data from seventeen cities, robust relationships are established between elevation patterns and density and income gradients. We find that high-income households display strong preference for high-altitude, high-unevenness locations, leading to spatial income stratification at both the city and tract-level. We further analyze potential causes of this propensity: micro-climate, crime, congestion, view effects, and use of public transit. We conclude that the role of elevation in urban systems should not be neglected. Multi-dimensional spatial methods are crucial to investigations of cities with substantial unevenness. Redistributive social and economic policies must struggle with a fundamental, topographical dimension to inequality.


Decomposing Global Inequality

Jørgen Modalsli

Review of Income and Wealth, forthcoming

This paper provides an intuitive additive decomposition of the global income Gini coefficient with respect to differences within and between countries. In 2005, nearly half the total global income inequality is due to income differences between Europeans and North Americans on the one side and inhabitants of Asia on the other, with the China-USA income differences alone accounting for six percent of global inequality. Historically, income differences between Asia and Europe have driven a large part of global inequality, but the quantitative importance of within-Asia income inequality has increased substantially since 1950.


Inequality and Financial Fragility

Yuliyan Mitkov

Rutgers University Working Paper, March 2016

I study how the distribution of wealth influences the government’s response to a banking crisis and the fragility of the financial system. When the wealth distribution is unequal, the government’s bailout policy during a systemic crisis will be shaped in part by distributional concerns. In particular, government guarantees of deposits will tend to be credible for relatively poor investors, but may not be credible for wealthier investors. As a result, wealthier investors will have a stronger incentive to panic and, in equilibrium, the institutions in which they invest are more likely to experience a run and receive a bailout. Thus, without political frictions and under a government that is both benevolent and utilitarian, bailouts will tend to benefit wealthy investors at the expense of the general public. Rising inequality can strengthen this pattern. In some cases, more progressive taxation reduces financial fragility and can even raise equilibrium welfare for all agents.


The Perverse Consequences of Policy Restrictions in the Presence of Asymmetric Information

Rafael Hortala-Vallve & Valentino Larcinese

Political Science Research and Methods, forthcoming

Institutions have the power to limit a government’s policy options. Policy restrictions are often used as solutions to coordination failures or time inconsistency problems. However, policy constraints can have significant drawbacks and these disadvantages have, to date, been overlooked in the literature. When institutional constraints tie a government’s hands, citizens will have less incentive to become informed about politics and participate in collective decision-making. This is because policy restrictions lower the private returns of political information. A fiscal policy restriction, for example, may decrease redistribution by lowering a poorer voters’ acquisition of political information. We illustrate our theoretical findings with numerical simulations and find that in one in three cases these policy restrictions make poorer voters worse off.


Changing Roles of Ability and Education in U.S. Intergenerational Mobility

Jeremiah Richey & Alicia Rosburg

Economic Inquiry, forthcoming

Using data on young adults from the 1979 and 1997 National Longitudinal Survey of Youth, we investigate the changing roles of ability and education in the transmission of economic status across generations. We find that ability plays a substantially diminished role for the most recent cohort whereas education plays a much larger role. The first finding results primarily from a smaller effect of children's ability on status, the second from an increased correlation between parental status and educational attainment. A replication of the analysis by gender reveals that the changes in the role of ability are largely driven by men whereas the changes in education's role are largely driven by women.


Preschoolers' Preference for Syntactic Complexity Varies by Socioeconomic Status

Kathleen Corriveau, Katelyn Kurkul & Sudha Arunachalam

Child Development, forthcoming

Two experiments investigated whether 4- and 5-year-old children choose to learn from informants who use more complex syntax (passive voice) over informants using more simple syntax (active voice). In Experiment 1 (N = 30), children viewed one informant who consistently used the passive voice and another who used active voice. When learning novel words from the two informants, children were more likely to endorse information from the passive informant. Experiment 2 (N = 32) explored whether preference for the passive informant varied by socioeconomic status (SES; eligibility for free/reduced lunch). Although higher SES children selectively preferred the passive informant, lower SES children preferred the active informant. Explanations are discussed for why SES might moderate children's sensitivity to syntactic complexity when choosing from whom to learn.


Compared to Whom? Inequality, Social Comparison, and Happiness in the United States

Arthur Alderson & Tally Katz-Gerro

Social Forces, forthcoming

We contribute to the literature on positional goods and subjective well-being by providing new evidence on the following questions: Is the effect of income on subjective well-being mainly relative or absolute? Does the intensity of social comparison condition the effect of income on well-being? Does the reference group for comparison condition this effect? We present results from the Social Status, Consumption, and Happiness Survey, a national survey of Americans conducted in 2012. The findings suggest that the more highly individuals rate their income relative to others, the happier they are; that individuals who find it important to compare their income to that of others are less happy; and that the reference group that is salient for comparison conditions the association between income and well-being. We situate these findings in the literatures on the dynamics of inequality, social comparison, and well-being.


The “Veblen” effect, targeted advertising and consumer welfare

Lynne Pepall & Joseph Reiff

Economics Letters, August 2016, Pages 218–220

The technology of advertising in the twenty-first century allows for better targeting of consumers and better identification of consumer subgroups in the population. This makes it easier for firms to create in their advertising a desire to belong to the group identified with a product. We explore this kind of advertising in a monopoly model. The firm has an incentive to target this kind of advertising to the most lucrative segment of a particular social grouping and while advertising does create value for the consumer, it leads to an outcome where less output is sold at a higher price in a narrower or more segmented market than in the standard monopoly model. As a result even though consumers value the identification effect they are worse off. This is because the firm uses advertising to exploit a form of price discrimination and appropriate more surplus.


Height, Income and Voting

Raj Arunachalam & Sara Watson

British Journal of Political Science, forthcoming

The claim that income drives political preferences is at the core of political economy theory, yet empirical estimates of income’s effect on political behavior range widely. Drawing on traditions in economic history and anthropology, we propose using height as a proxy for economic well-being. Using data from the British Household Panel Study, this article finds that taller individuals are more likely to support the Conservative Party, support conservative policies and vote Conservative; a one-inch increase in height increases support for Conservatives by 0.6 per cent. As an extension, the study employs height as an instrumental variable for income, and finds that each additional thousand pounds of annual income translates into a 2–3 percentage point increase in the probability of supporting the Conservatives, and that income drives political beliefs and voting in the same direction.


The division of inter-vivos parental transfers in Europe

Javier Olivera

Journal of the Economics of Ageing, forthcoming

This paper explores the patterns of the division of inter-vivos financial transfers from old parents to adult children in a sample of 14 European countries drawn from two waves of the Survey of Health, Ageing, and Retirement in Europe. Contrary to previous research, mostly focused on the US, this study finds a higher number of parents who divide their financial transfers among their adult children equally. On average, 36% of European parents divide equally. These results contrast sharply with the approximately 6.4%-9.2% of American parents giving equal transfers. It is possible that altruistic parents are also concerned with a norm of equal division, and therefore they do not fully offset the differences of income among their children as predicted by the standard model of altruism. The econometric results show that parents are more likely to give equal transfers if, in their view, income inequality among their children is not too high. Furthermore, the analysis is extended by adding variables at the country level. In this regard, income inequality, pension expenditures, the societal level of altruism and inheritance taxes are key to explaining country differences.


Trends in Income-Related Gaps in Enrollment in Early Childhood Education: 1968 to 2013

Katherine Magnuson & Jane Waldfogel

AERA Open, May 2016

We use data from the 1968–2013 October Current Population Survey to document trends in 3- and 4-year-old children’s enrollment in center-based early childhood education, focusing on gaps in enrollment among children from low-, middle-, and high-income families. We find that income-related gaps in enrollment widened in the 1970s and 1980s but appear to have plateaued or narrowed for succeeding cohorts. These patterns are consistent with recent trends in income-related gaps in school achievement.


The Genetics of Success: How Single-Nucleotide Polymorphisms Associated With Educational Attainment Relate to Life-Course Development

Daniel Belsky et al.

Psychological Science, July 2016, Pages 957-972

A previous genome-wide association study (GWAS) of more than 100,000 individuals identified molecular-genetic predictors of educational attainment. We undertook in-depth life-course investigation of the polygenic score derived from this GWAS using the four-decade Dunedin Study (N = 918). There were five main findings. First, polygenic scores predicted adult economic outcomes even after accounting for educational attainments. Second, genes and environments were correlated: Children with higher polygenic scores were born into better-off homes. Third, children’s polygenic scores predicted their adult outcomes even when analyses accounted for their social-class origins; social-mobility analysis showed that children with higher polygenic scores were more upwardly mobile than children with lower scores. Fourth, polygenic scores predicted behavior across the life course, from early acquisition of speech and reading skills through geographic mobility and mate choice and on to financial planning for retirement. Fifth, polygenic-score associations were mediated by psychological characteristics, including intelligence, self-control, and interpersonal skill. Effect sizes were small. Factors connecting DNA sequence with life outcomes may provide targets for interventions to promote population-wide positive development.


A tale of two Ginis in the US, 1921–2012

Markus Schneider & Daniele Tavani

International Review of Applied Economics, forthcoming

Following a methodology by Jantzen and Volpert (2012), we use IRS Adjusted Gross Income data for the US (1921–2012) to estimate two Gini-like indices representing inequality at the bottom and the top of the income distribution, and to calculate the overall Gini as a function of the parameters underlying the two indices. A steady increase in the overall Gini since the Second World War actually hides two different periods of distributional changes. First, the increase in inequality from the mid 1940s to the late 1970s is driven by rising inequality at the bottom of the income distribution that more than offsets a decrease in inequality at the top. The implication is that middle-income earners gained relative to high-incomes, and especially relative to low-income earners. Second, the rise in the Gini after 1981 is driven by rising inequality at the top. Third, top-driven inequality follows a U-shaped trajectory consistent with Piketty and Saez (2003, 2006). Fourth, the welfare effects of the different distributional changes behind increasing inequality can be evaluated in light of the Lorenz-dominance criterion by Atkinson (1970): we argue that the rise in inequality since 1981 is much more likely to be associated with a social welfare loss net of compensating growth.


Educational Mobility across Three Generations of American Women

Sarah Kroeger & Owen Thompson

Economics of Education Review, August 2016, Pages 72–86

We analyze the intergenerational transmission of education in a three-generation sample of women from the 20th century US. We find strong three-generation educational persistence, with the association between the education of grandmothers and their granddaughters approximately two times stronger than would be expected under the type of first-order autoregressive transmission structure that has been assumed in much of the existing two-generation mobility literature. These findings are robust to using alternative empirical specifications and sample constructions, and are successfully replicated in a second independently drawn data set. Analyses that include males in the youngest and oldest generations produce very similar estimates. A variety of potential mechanisms linking the educational outcomes of grandparents and grandchildren are discussed and where possible tested empirically.


The Gift of Moving: Intergenerational Consequences of a Mobility Shock

Emi Nakamura, Jósef Sigurdsson & Jón Steinsson

NBER Working Paper, July 2016

We exploit a volcanic “experiment” to study the costs and benefits of geographic mobility. We show that moving costs (broadly defined) are very large and labor therefore does not flow to locations where it earns the highest returns. In our experiment, a third of the houses in a town were covered by lava. People living in these houses where much more likely to move away permanently. For those younger than 25 years old who were induced to move, the “lava shock” dramatically raised lifetime earnings and education. Yet, the benefits of moving were very unequally distributed within the family: Those older than 25 (the parents) were made slightly worse off by the shock. The town affected by our volcanic experiment was (and is) a relatively high income town. We interpret our findings as evidence of the importance of comparative advantage: the gains to moving may be very large for those badly matched to the location they happened to be born in, even if differences in average income are small.


Far from Equilibrium: Wealth Reallocation in the United States

Yonatan Berman, Ole Peters & Alexander Adamou

London Mathematical Laboratory Working Paper, May 2016

Studies of wealth inequality often assume that an observed wealth distribution reflects a system in equilibrium. This constraint is rarely tested empirically. We introduce a simple model that allows equilibrium but does not assume it. To geometric Brownian motion (GBM) we add reallocation: all individuals contribute in proportion to their wealth and receive equal shares of the amount collected. We fit the reallocation rate parameter required for the model to reproduce observed wealth inequality in the United States from 1917 to 2012. We find that this rate was positive until the 1980s, after which it became negative and of increasing magnitude. With negative reallocation, the system cannot equilibrate. Even with the positive reallocation rates observed, equilibration is too slow to be practically relevant. Therefore, studies which assume equilibrium must be treated skeptically. By design they are unable to detect the dramatic conditions found here when data are analysed without this constraint.


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