Pareto Principles

Kevin Lewis

April 03, 2024

The Spatial Organization of Inequality
Marco Garrido
American Journal of Sociology, forthcoming

When is inequality felt as social difference? Charles Tilly argued that it is not simply the extent of inequality that matters but how it is organized. I build on this account by incorporating a view of spatial boundaries as organizing social interactions and directing perceptions of groupness; that is, as helping define the actors and contexts at stake. I argue that the spatial organization of inequality affects how we perceive and experience it. Where parties are unequal and in competition over resources, their segregation may promote categorical inequality, while their integration may inhibit it. I trace these obverse trajectories in the cases of Manila and Singapore. In Manila, social inequality increased despite economic inequality decreasing, whereas in Singapore, social inequality decreased despite economic inequality increasing. I show that spatial organization in the form of segregation and integration, respectively, played a significant role in the sharpening and muting of social boundaries.

Within-Firm Pay Inequality and Productivity
Melanie Wallskog et al.
NBER Working Paper, March 2024

Combining confidential Census worker and firm data, we find three key results. First, employees at more productive firms earn higher pay at all earnings levels. Second, this pay-productivity relationship strengthens with seniority, doubling from an elasticity of 0.07 for pay on productivity for the median-paid employee to 0.15 for the top-paid employee. Consequently, more productive firms have higher within-firm inequality. Our data suggests this is driven by their greater adoption of aggressive performance-pay bonus and management schemes. Finally, the magnitude of this pay-performance slope suggests rising productivity can explain 40% of the rise in within-firm inequality since 1980.

The Distributional Effects of Asset Returns
Jesús Fernández-Villaverde & Oren Levintal
NBER Working Paper, March 2024

We study the distributional effects of asset returns using a heterogeneous-agent model estimated to match the joint distribution of wealth and returns. In the model, endogenous portfolio decisions play a key role through their impact on households' wealth accumulation. We find substantial welfare effects of changes in asset returns. A permanent decline of one percentage point in expected returns increases the consumption share of the top 10% by 6% permanently. Our findings suggest that lower returns increase inequality, which contradicts Piketty's (2014) r-g formula. To resolve this contradiction, we derive a generalized formula that includes the consumption/wealth ratio and which is consistent with our empirical and theoretical findings. Nonetheless, wealth inequality within the Pareto tail is fairly insensitive to asset returns. Instead, inequality between the Pareto tail and the lower range of the distribution responds strongly to asset returns through their differential effects on active savings relative to wealth. Simulations suggest that asset price dynamics can explain the main variations in U.S. top wealth shares since the 1960s.

Has Intergenerational Progress Stalled? Income Growth Over Five Generations of Americans
Kevin Corinth & Jeff Larrimore
Federal Reserve Working Paper, February 2024

We find that each of the past four generations of Americans was better off than the previous one, using a post-tax, post-transfer income measure constructed annually from 1963-2022 based on the Current Population Survey Annual Social and Economic Supplement. At age 36–40, Millennials had a real median household income that was 18 percent higher than that of the previous generation at the same age. This rate of intergenerational progress was slower than that experienced by the Silent Generation (34 percent) and Baby Boomers (27 percent), but similar to that experienced by Generation X (16 percent). Slower progress for Generation X and Millennials is due to their stalled growth in work hours -- holding work hours constant, they experienced a greater intergenerational increase in real market income than Baby Boomers. Intergenerational progress for Millennials under age 30 has remained robust as well, although their income growth largely results from higher reliance on their parents. We also find that the higher educational costs incurred by younger generations is far outweighed by their lifetime income gains.

The Causal Effect of Parents’ Education on Children’s Earnings
Sang Yoon (Tim) Lee, Nicolas Roys & Ananth Seshadri
NBER Working Paper, March 2024

We present a model of endogenous schooling and earnings to isolate the causal effect of parents’ education on children’s education and earnings outcomes. The model suggests that parents’ education is positively related to children’s earnings, but its relationship with children’s education is ambiguous. Identification is achieved by comparing the earnings of children with the same length of schooling, whose parents have different lengths of schooling. The model also features heterogeneous preferences for schooling, and is estimated using HRS data. The empirically observed positive OLS coefficient obtained by regressing children’s schooling on parents’ schooling is mainly accounted for by the correlation between parents’ schooling and children’s unobserved preferences for schooling. This is countered by a negative, structural relationship between parents’ and children’s schooling choices, resulting in an IV coefficient close to zero when exogenously increasing parents’ schooling. Nonetheless, an exogenous one-year increase in parents’ schooling increases children’s lifetime earnings by 1.2 percent on average.

Inequality Within Countries is Falling: Underreporting-Robust Estimates of World Poverty, Inequality and the Global Distribution of Income
Maxim Pinkovskiy et al.
NBER Working Paper, March 2024

Household surveys suffer from persistent and growing underreporting. We propose a novel procedure to adjust reported survey incomes for underreporting by estimating a model of misreporting whose main parameter of interest is the elasticity of regional national accounts income to regional survey income, which is closely related to the elasticity of underreporting with respect to income. We find this elasticity to be substantial but roughly constant over time, implying a large but relatively constant correction to survey-derived inequality estimates. Underreporting of income by the bottom 50% of the world income distribution has become particularly important in recent decades. We reconfirm the findings of the literature that global poverty and inequality have declined dramatically between 1980 and 2019. Finally, we find that within-country inequality is falling on average, and has been largely constant since the 1990s.

Economic Inequality Reduces Preferences for Competent Leaders
Feiteng Long, Zi Ye & Guohua Liu
Personality and Social Psychology Bulletin, forthcoming

It is well-documented that economic inequality can harm political stability and social cohesion. In six experiments (total N = 1,907) conducted in China and the United Kingdom, we tested our primary hypothesis that high (vs. low) economic inequality leads to voters’ reduced preferences for competent political leaders. Across studies, this prediction was consistently supported by experimental evidence, regardless of the voter’s social status. We also found that high (vs. low) economic inequality indirectly diminished preferences for competent political leaders through heightened perceptions that politicians were less inclined to care about the populace in a highly (vs. lowly) unequal societal context. In essence, our findings underscore the idea that economic inequality curtails voters’ preferences for competent political leaders by amplifying their concerns about politicians’ indifference to the populace. It also stresses the need for policies and practices to address economic inequality and maintain the vitality of democracy.

Investigating How High Perceived Economic Inequality Exacerbates Intergroup Competition, Zero-Sum Beliefs, and Perceived Intergroup Prejudice
Jaclyn Lisnek et al.
Personality and Social Psychology Bulletin, forthcoming

Rising economic inequality is associated with more prejudice. Little empirical data, however, investigate how inequality affects individuals’ psychological processing and, in turn, exacerbates perceptions of prejudice in people’s geographic area. We hypothesized that higher perceived economic inequality triggers beliefs that unequal economies are zero-sum and leads to beliefs that people are in competition for limited resources, which may ultimately exacerbate perceived prejudice. Through nine experiments (Studies 1-5 in the manuscript and three additional studies in the Supplement), we provide evidence that higher perceived inequality increases perceived prejudice against a wide range of outgroups. Furthermore, zero-sum beliefs and perceived competition serially mediate this relationship (Studies 2 and 3). In Study 4, we investigate nuance in this hypothesized model by testing whether higher perceived economic inequality exacerbates perceived racial/ethnic prejudice among a large, diverse sample and find a similar pattern of results. Finally (Study 5), we demonstrate that assuaging competition beliefs mitigates perceived prejudice.

Left Partisanship, Corporatism, and the Reorientation of the Knowledge Economy in Advanced Capitalist Societies
Jingjing Huo
Social Forces, forthcoming

While the progress of the knowledge economy is inexorable, this paper argues that partisan politics and labor market institutions can affect the direction in which the knowledge economy progresses. In particular, a combination of corporatist industrial relations systems and left partisanship tends to foster greater wage restraint, and such a wage outcome tends to encourage the greater adoption of communications technology than information-processing technology in the economy. This reorientation of the knowledge economy toward communications technology, in turn, has egalitarian distributive implications. In particular, the greater adoption of communications technology reduces wage inequality across the board in lower 90–10, 50–10, as well as 90–50 wage ratios. These arguments are tested using data across 15–21 OECD countries (1970–2015).

Toward an Understanding of the Returns to Cognitive Skills Across Cohorts
Judith Hellerstein, Sai Luo & Sergio Urzúa
NBER Working Paper, March 2024

Recent research concludes that wage returns to cognitive skills have declined in the U.S. We reassess this finding. Using decomposition methods, we document the pivotal role played by dynamic shifts in the distributions of pre-labor market cognitive skills. Our findings show these shifts explain the declining estimated returns to cognitive skills, especially for white men. We discard measurement error as a potential driver. Although often overlooked, grappling with changing pre-labor market skill distributions is necessary for capturing the evolution of labor market returns to cognitive skills. This may prove especially important in the future given continuing changes in skill development in recent youth cohorts.

Moving mountains: Geography, neighborhood sorting, and spatial income segregation
Victor Yifan Ye & Charles Becker
Journal of Regional Science, forthcoming

Using a novel geospatial panel combined with data from the 2015 American Community Survey (ACS), we investigate the effect of topography -- altitude and terrain unevenness -- on income segregation at the neighborhood level. Specifically, we perform large-scale counterfactual simulations by estimating household preferences for topography, altering the topographical profile of each city, and observing the resulting neighborhood sorting outcome. We find that unevenness contributes to the segmentation of markets: in the absence of hilliness, rich and poor households experience greater mixing. Hillier cities are more income-segregated because of their unevenness; the opposite is true for flatter cities.


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