Category Archives: income distribution-wealth-poverty

Russ Roberts Asks an Easy Question

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He writes,

There are lots of claims about inequality and what is really going on. But this chart makes whatever explanation you believe in harder to explain. Chew on it.

Nick Schulz and I wrote about what we called the Sergey Brin Effect. We pointed out that the “game” of income distribution has been re-shaped by immigration, assortative mating, and technology.

The chart the Roberts refers to shows major differences in trends by education category. It also shows that, controlling for level of education, women have done better than men. My guess is that this is due to technology. We have seen an increase in the comparative advantage of people who can get into well-protected credentials cartels or who can help companies formulate and execute complex business strategies. I think that explains the education-income trend. We have seen a decline in the comparative advantage of workers who are good at lifting, shaping, and applying finishing to metal but who are not so good at interacting with customers and co-workers. That also explains the education-income trend, but I think it also helps explain the male-female trend.

The chart also shows more earnings growth at the top of the education ladder. That, along with assortative mating by education, should really drive household inequality.

Larry Summers on the Great Factor Substitution

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He said,

If there are only two factors, they have to be complements. If there’s more capital, the wage has to rise. Now imagine that…you can take some of the stock of machines and, by designing them appropriately, you can have them do exactly what labor did before…When capital is reallocated to substituting for [replacing] labor, the stock of effective labor rises and the stock of conventional capital falls, and so wage rates fall. Third, the capital share, understood to include the total return to capital of both varieties, rises. That’s just a corollary of output rising and wages falling. This pattern is similar to what we have seen take place. I suspect that this reflects the nature of the technical changes that we have seen: increasingly they take the form of capital that effectively substitutes for [replaces] labor.

Pointer from Tyler Cowen, who I’m surprised did not make a bigger deal about it.

My one quibble/criticism is that this describes a closed economy. In the real world, with China and India developing, factor-price equalization is at least as important as factor substitution. To put this another way, include those countries when you calculate trends in labor’s share of income.

Also, Summers writes,

Where production has taken place in the classic way we teach, productivity growth has continued. There has been progress. Real wages measured in those terms have increased substantially. It’s just that a larger and larger share of our economy is in sectors that are not well thought of as widgets produced by competitive firms. They are sectors where property rights, scarcities, intellectual property, and the like are of fundamental importance.

My take on this is to be wary of talking about “the” real wage. Your real wage is much higher if you abstain from making extravagant use of modern medicine and private colleges. See The Reality of the ‘real wage’.

He concludes by raising the issue that Nick Schulz and I called the New Commanding Heights. Summers writes,

Whether the expansion of those sectors as a share of the economy necessitates a growing share of the public sector in the economy, or whether the share of healthcare and education that takes place in the public sector should decline will be a matter of great public debate. As a country, and not without controversy, we do not seem to be moving toward a smaller public role in healthcare. Nor do other countries in the world. But that will, perhaps, change over time.

Factor-Price Equalization, Illustrated

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Timothy Taylor writes,

It used to be said back in the 1960s that the global distribution of income was bi-modal–that is, it had one hump representing the large number of people who were very low-income and then a smaller hump representing those in the high-income countries…But over time, the highest point in the income distribution is shifting to the right, and by 2008, the world has moved fairly close to having a unimodal or one-hump distribution of income.

Read the whole post, which discusses a paper by Christoph Lakner and Branko Milanovic. Globalization, and in particular the growth of China, has flattened out the rich-country “hump,” leaving only the global hump. Average is over for the rich countries, in part because average has started for China.

Occupations of the Future

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David Brooks writes,

Millions of people begin online courses, but very few actually finish them. I suspect that’s because most students are not motivated to impress a computer the way they may be motivated to impress a human professor. Managers who can motivate supreme effort in a machine-dominated environment are going to be valuable.

Actually, I think that a big reason that people drop online courses is that those courses are a misfit for them. An advantage of a typical live course is that most of the students have been selected to have similar abilities and experiences. A lot of people sign up for online courses who otherwise would be discouraged from doing so. That is not necessarily a problem with online learning.

However, that is why MOOCs are not the answer, in my view. My line is that we need instruction that is many-to-one, not one-to-many. Indeed, Jonathan Haber suggests that MOOCs might be a step backward, and he links to something I wrote in 2002.

suppose that we had all of the highly-touted electronic technologies for distance learning, and then someone came along and invented the book. My guess is that the book would be greeted as a technological marvel–easy to hold, convenient to carry, outstanding resolution, and so forth. This thought experiment leads me to suspect that electronic distance learning is a fad.

On the subject of the future, my joke is that the ideal occupation will be a yoga instructor working in an old-age home. That lines up with the trends toward more spending on health care, education, and leisure, along with an older demographic.

A Famous NYT Columnist Looks at the Minimum Wage and Income Inequality

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He tries to offer a balanced view.

The federal minimum did not change from 1981 to 1990, causing its inflation-adjusted value to fall 30 percent during that time. Wages in the bottom of the income distribution fell sharply, even more sharply than they have in the last decade. The inflation-adjusted wage of a worker at the 20th percentile of the distribution dropped 9.5 percent from 1981 to 1990, according an analysis of government data in the forthcoming book “The State of Working America, 12th Edition,” by the Economic Policy Institute.

…Since 1990, though, the minimum wage has risen. If you’re trying to understand why every income group except for the affluent has taken an income cut over the last decade, you probably shouldn’t put the minimum wage at the top of your list of causes.

And if you are trying to guess which NYT columnist wrote this, you probably shouldn’t put Paul Krugman on your list of possible authors. Cross off Tyler Cowen, also, although he did link to the column. Continue reading →

P(A|B) != P(B|A)

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Timothy Taylor writes,

those in the top 1% are almost surely paying the top marginal tax rate of about 40% on the top dollar earned. But when all the income taxed at a lower marginal rate is included, together with exemptions, deductions, and credits, this group pays an average of 20.1% of their income in individual income tax.

…The top 1% pays 39% of all income taxes and 24.2% of all federal taxes.

Assume you are in the top 1 percent. For any particular dollar of your income, there is 20.1 percent chance that it winds up with the government. However, for any particular dollar (not necessarily yours) that winds up with the government, there is a 39 percent chance that it came from your income.

Skeptics on Job Polarization

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Lawrence Mishel, Heidi Shierholz, and John Schmitt take on a popular story.

The early version of the “skill-biased technological change” (SBTC) explanation of wage inequality posited a race between technology and education where education levels failed to keep up with technology-driven increases in skill requirements, resulting in relatively higher wages for more educated groups, which in turn fueled wage inequality (Katz and Murphy 1992; Autor, Katz, and Krueger 1998; and Goldin and Katz 2010). However, the scholars associated with this early, and still widely discussed, explanation highlight that it has failed to explain wage trends in the 1990s and 2000s, particularly the stability of the 50/10 wage gap (the wage gap between low- and middle-wage earners) and the deceleration of the growth of the college wage premium since the early 1990s (Autor, Katz, and Kearney 2006; Acemoglu and Autor 2012). This motivated a new technology-based explanation (formally called the “tasks framework”) focused on computerization’s impact on occupational employment trends and the resulting “job polarization”: the claim that occupational employment grew relatively strongly at the top and bottom of the wage scale but eroded in the middle (Autor, Levy, and Murnane 2003; Autor, Katz, and Kearney 2006; Acemoglu and Autor 2012; Autor 2010). We demonstrate that this newer version—the task framework, or job polarization analysis—fails to explain the key wage patterns in the 1990s it intended to explain, and provides no insights into wage patterns in the 2000s. We conclude that there is no currently available technology-based story that can adequately explain the wage trends of the last three decades.

Pointer from Mark Thoma.

Read the whole thing. One of the problems that the authors find with the job polarization story is that a lot of inequality of wages has emerged within occupations rather than between occupations.

Think of the bimodal distribution of starting salaries that has emerged in the market for lawyers. Is that evidence against computer-driven job polarization? Perhaps not. Perhaps with the help of computers paralegals can now do a lot more, driving down the wage of the median lawyer. However, firms that need the most sophisticated legal work will pay up for the top lawyers.

Social Heterogeneity in Real Wages

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From my latest essay.

for middle- and upper-income parents, it is a matter of taste if one chooses to spend a substantial sum to send a child to an elite preschool, or to live in a neighborhood with an elite public school, or to send a child to an elite college. Given the child’s ability, such schooling decisions make relatively little difference at the margin.

The point of the essay is that long-term calculations of “the” real wage assume homogeneity of tastes.

Social Heterogeneity

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Kevin Drum writes,

Via Harrison Jacobs, here’s a recent study showing the trend in income segregation in American neighborhoods. Forty years ago, 65 percent of us lived in middle-income neighborhoods. Today, that number is only 42 percent. The rest of us live either in rich neighborhoods or in poor neighborhoods.

Pointer from Tyler Cowen.

Drum goes on to say,

We increasingly lack a shared culture or shared experiences, and that makes democracy a tough act to pull off. The well-off have less and less interaction with the poor outside of the market economy, and less and less empathy for how they live their lives.

Some comments:

1. The increase in segregation by income over the past forty years is something that one can see and feel, at least if you are as old as I am.

2. My guess is that you could observe similar trends in terms of education. I would bet that today more Harvard students come from the top 20 percent of the income distribution than was the case 40 years ago. I would bet that more students who do not attend college come from the bottom 20 percent of the income distribution. Note that by “more” I do not mean “every.” With “gifted and talented” programs, “magnet schools,” and whatnot, school classrooms are much more segregated by income class than they were forty years ago.

3. Many trends are at work that are reducing social homogeneity. Skills are diverging, tastes are diverging, and cultural habits are diverging.

4. Both liberals and conservatives lament heterogeneity and would like to undertake a project to restore America to some prior era of less diversity. For liberals, economic homogeneity takes precedence. For conservatives, cultural homogeneity takes precedence.

5. Music might be a useful metaphor. In 1970, a lot of people listened to two or three popular radio stations in every city. Probably 3/4 of Americans recognized most of the top ten songs of that year. Even today, my high school students probably would recognize some of those songs. But music is much more fragmented now. Songs are iconic only for particular sub-cultures and only for short periods of time.

6. It could be that the project of returning to some bygone age of cultural and/or economic homogeneity is as unrealistic as expecting everyone to enjoy Simon Garfunkel, the Carpenters, and The Guess Who.

7. The middle of the twentieth century was about masses. Mass consumption. Mass production. Mass warfare. Mass destruction. Mass politics. We are not in the middle of the twentieth century any more.

Joel Kotkin on Average is Over

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in California

The swelling number of billionaires in the state, particularly in Silicon Valley, has enhanced power that is emerging into something like the old aristocratic French second estate. Through public advocacy and philanthropy, the oligarchs have tended to embrace California’s “green” agenda, with a very negative impact on traditional industries such as manufacturing, agriculture, energy, and construction. Like the aristocrats who saw all value in land, and dismissed other commerce as unworthy, they believe all value belongs to those who own the increasingly abstracted information revolution than has made them so fabulously rich.

… In neo-feudalist California, the biggest losers tend to be the old private sector middle class. This includes largely small business owners, professionals, and skilled workers in traditional industries most targeted by regulatory shifts and higher taxes.

If nothing else, the era of Average is Over produces a lot of intense rhetoric. Although, I have to say, Kotkin’s rhetoric is not too far removed from my jobs speech (which has an Average is Over theme to it).