Category Archives: income distribution-wealth-poverty

Should we miss the working class?

Posted on by

Brink Lindsey writes,

people are not machines, and they don’t like being treated as such. By inducing millions of people to take up factory work and creating a social order in which those millions’ physical survival depended upon their doing such work for most of their waking hours, industrial capitalism created a state of affairs deeply inconsistent with the requirements of human flourishing—and, not unrelatedly, a highly unstable one at that.

…In pursuing the technical efficiency of mass production regardless of its human costs, the class system created by industrial capitalism divided people along very stark lines: those who work with their brains and those who work with their bodies; those who command and those who obey; those who are treated as full-fledged human beings and those who are treated as something less.

I spent two summers working in a plant that produced speakers for sound systems for buildings (think of the music piped in at shopping malls). A lot of the work was with materials that probably were dangerous to one’s lungs, including jute and fiberglass. Maybe my chronic cough comes from that. Otherwise, the work was not as rote as Lindsey depicts, and even when it was rote the time would pass reasonably well. On the plus side, there was no office politics, no ambitious co-workers stabbing you in the back or trying to steal credit for your ideas. But on net, I would tend to agree with Lindsey that we should be happy to see old-fashioned manufacturing production work phase out.

The last time I looked, which was a few years ago, the share of manufacturing production workers (as opposed to managers and supervisors) in the labor force was down to just over 5 percent. Fifty years ago, I believe it was more than 20 percent.

The erstwhile working class has moved in two directions. One direction is white-collar work. However, the other direction is non-employment. To address the latter, Lindsey offers this:

A more humane economy, and a more inclusive prosperity, is possible. For example, new technologies hold out the possibility of a radical reduction in the average size of economic enterprises, creating the possibility of work that is more creative and collaborative at a scale convivial to family, community, and polis. All that hold us back are inertia and a failure of imagination—and perhaps a fear of what we have not yet experienced. There is a land of milk and honey beyond this wilderness, if we have the vision and resolve to reach it.

To me, this sounds like the sort of utopian hope that we held for the Internet twenty years ago. As I pointed out in several posts a week ago, the reality has recently seemed to differ.

Is trickle-down mostly local?

Posted on by

Sam Wetherell writes,

the fifty largest metropolitan areas house just 7 percent of the world’s population but generate 40 percent of its growth. These “superstar” cities are becoming gated communities, their vibrancy replaced with deracinated streets full of Airbnbs and empty summer homes.

The high concentration of wealth in a few metro areas is a surprising phenomenon, given that the Internet was supposed to herald the death of distance. Possible explanations:

1. Talent tends to concentrate. So productivity is higher in the superstar cities than elsewhere.

2. Consumption externalities and network effects are powerful. So people who earn high incomes flock to cities that have what they enjoy.

Here is another possibility. Perhaps it is not the cities per se that are attracting wealth. Perhaps it is just the case that wealth is so concentrated that if you happen to have a city with a handful of the wealthiest people living in it, wealth will trickle down locally. The super-rich will put some of their wealth into the non-profit sector, and they will put significant chunks of their donations into local institutions. This raises incomes in the area.

I would put this possibility of local wealth trickle-down as one possible factor, probably a small one, as we attempt to explain the tendency for high incomes to be concentrated in a few cities.

Bobos and their children

Posted on by

David Brooks writes,

The educated class has built an ever more intricate net to cradle us in and ease everyone else out. It’s not really the prices that ensure 80 percent of your co-shoppers at Whole Foods are, comfortingly, also college grads; it’s the cultural codes.

Status rules are partly about collusion, about attracting educated people to your circle, tightening the bonds between you and erecting shields against everybody else. We in the educated class have created barriers to mobility that are more devastating for being invisible. The rest of America can’t name them, can’t understand them. They just know they’re there.

And part of the cultural code is Progressivism.

Timothy Taylor writes,

In a society with a high degree of social and economic mobility, grandparents should not have much or any effect on the social and economic position that children attain as adults. Thus, on average you should expect your five grandchildren to be evenly distributed across the socioeconomic spectrum. More specifically, if the levels of income are ranked and then divided into five groups with equal numbers of people, or quintiles, or educational attainment is divided up into five quintiles, you should expect that one of your five grand children will end up in each of the five quintiles–from top to bottom.

Some grandparents in America would be delighted beyond words if they had a reasonable expectation of this outcome: that is, they would be thrilled if three of their five grandchildren were in the middle quintile or above. Other grandparents in America would be appalled by this outcome: that is, they would be dismayed and even horrified if three of their five grandchildren were in the middle quintile or below.

The upper-class Americans that Brooks labeled the Bobos behave as if they would be appalled to see their children or grandchildren experienced relative downward mobility.

An interesting question will be how well the Bobo signals correlate with skills going forward. As long as the correlation is high, the status equilibrium may be robust. If the correlation is low, then the status equilibrium may be more fragile.

Four Forces Watch

Posted on by

Richard Reeves says,

What’s been driving the kind of economic separation has been a combination of two main factors: One, well-established earnings inequality and higher returns to higher education at the top. And then actually you see this stunningly unromantic term, assortative mating — i.e. college graduates marrying other college graduates, which means they double down on that income. And then they’re able to put that into housing which gets them access to a good school and so on. Then you take all the tax subsidies that are available. So, I’ve got a new paper on 529 but there’s also mortgage interest deduction which ends up in a way subsidizing this kind of separation.

He is explaining the increased separation between the top 5th and the rest of the population in terms of income.

There is an interesting discussion of the notion that in order to have upward mobility you have to have downward mobility. Actually, that is not necessarily the case. Suppose that the bottom of the income distribution is populated largely by young workers and immigrants. As they move up the ladder, instead of replacing them with once-rich families on the way down, you replace them with a new generation of young workers and with new immigrants. This is not merely hypothetical.

Patrick Watson on grocery store divergence

Posted on by

He writes,

The Protected class’s increasing separation from mainstream society is a trend that we increasingly see reflected in retailing. Stores that cater to either the top or bottom extremes – luxury retailers and dollar stores – are doing well. Those that cater to the middle are struggling.

Now that trend is reaching the grocery segment. . .

…we will probably lose one more of the common experiences that keep society stable and help us value each other’s humanity. The Protected-Unprotected divide will widen even further, and people will cross it less frequently.

I have tried to imagine scenarios where this divergence ends well. I haven’t come up with any.

This sounds very Cowen-esque: average is over, and this is worrisome

Ed Glaeser on employment policy

Posted on by

He writes,

Why, since 1970, has each new downturn added to the ranks of the permanently unemployed? Social science has not fully answered this question, but the best guess involves a combination of a generous social safety net, deindustrialization, and social change.

Read the whole essay. He takes a supply-side, incentives-oriented approach to dealing with the employment problem. For example,

We also need to make hiring workers less costly for employers. Temporarily cutting the payroll tax was one of the most constructive policies adopted during the Great Recession. We could enact a permanent payroll-tax reduction. The tax could be gradually phased in for workers once their hourly earnings went beyond a certain threshold. The payroll tax could be eliminated for workers who had been unemployed, at least for an initial period. The costs of reducing the payroll tax could be offset by raising the minimum retirement age for employees who hadn’t paid these taxes for enough years. Reducing mandated benefits, like health care, that employers must provide lower-income earners would help encourage work, too. Ideally, the reform of our health-care system will ensure that workers have health-care options that don’t unduly burden employers.

Pointer from John Cochrane, who comments,

Reforming the incentives of social programs could be a bipartisan effort (if anything can be a bipartisan effort these days). We spend less, we help people more.

But our social programs are based on normative sociology, not economics. That is, they have found that the cause of poverty is that rich people are mean to poor people, and the solution is redistribution (although in practice, most of the redistribution is taking money from some non-rich and giving it to other non-rich).

The outlook for today’s young adults

Posted on by

Joel Kotkin and Wendell Cox write,

They have entered an economy where the most rapid job growth for their generation has been in generally low-paying professions, such as leisure/hospitality and healthcare, while jobs in higher-paying fields such as information, finance, manufacturing and construction have declined for them. More than 20 percent of people 18 to 34 live in poverty, up from 14 percent in 1980.

The main point of the article is that California housing regulations are harmful to young adults. You can regard the consequent high house prices as a wealth transfer from the younger generation to their parents’ generation.

The Labor Share Story

Posted on by

Noah Smith writes,

There are, by my count, now four main potential explanations for the mysterious slide in labor’s share. These are: 1) China, 2) robots, 3) monopolies and 4) landlords.

Pointer from Mark Thoma. Smith’s essay is a useful summary. However, note that he writes this:

Matt Rognlie found that national income accounts showed an increasing amount flowing to owners of land. More recently, economist Dietrich Vollrath examined a paper by Simcha Barkai about rising profits, and found that profits from owner-occupied housing also rose sharply.

The national income accounts include a category called “imputed income from owner-occupied housing.” The term “imputed” is a fancy way of saying “made up.”

It is possible that the made-up numbers on income from owner-occupied housing make as much sense as anything else in the national income accounts. In that case, there might really be something going on that has increased the share of income accruing to land and reducing the share accruing to labor. But keep in mind that land is not homogeneous, and neither is labor. And keep in mind that if the ratio of house prices to income falls back to what Robert Shiller thinks is the normal level, these land-owners all of a sudden are not going to feel so rich.

Interfirm Inequality

Posted on by

Timothy Taylor writes,

a rise in between-firm inequality suggests that the US and other leading economies are becoming a more economically segregated, in the sense that those with high pay and those with lower pay are becoming less likely to have the same employer. It means that the classic “American dream” success story, of someone being hired in the mailroom or as a secretary or janitor, and then getting promoted up the company ladder, is less likely to occur. Nowadays, those jobs in the mailroom or the secretarial pool or the janitorial work are more likely to involve working for an outside contractor. In that sense, some of the rungs on the bottom of the ladder of success have been sawed off.

My thoughts:

1. Perhaps there has been an increase in specialization and a decline in substitutability in labor. In the 1950s, there were a lot of good jobs around that anyone could be trained to do. Today, most of the good jobs require that you have a strong mix of training and credentials to get started. George Romney (Mitt’s father) rose through the ranks at a large automobile company. Today, his lack of formal training would make that impossible.

Note that if there has not been a decline in substitutability, then one is probably going to have a very difficult time explaining this “segregation” phenomenon using strictly economic analysis.

2. Perhaps the phenomenon can be explained in part by Tyler Cowen’s “matching” story. Even among people with equal levels of formal training, perhaps the strongest firms have gotten better at finding the workers with the greatest intangible strengths. Perhaps the ability to match in that way is what makes the strongest firms strong and what enables workers with great intangible strengths to get rewarded.

3. Perhaps what is needed and rewarded in today’s workplace is the ability to work adaptively in teams. That makes organizational culture a key determinant of success. A firm with a better organizational culture can maintain a large advantage over other firms. Such a firm can hire better workers and also reward them better.

4. Speaking of “culture matters,” I recommend Scott Sumner’s post on two Michigan cities.

Jonathan Parker Discusses Financial Behavior

Posted on by

In an interview format with Aaron Steelman. Pointer from Timothy Taylor. Interesting throughout. A few tidbits:

people don’t spend the money the week before it shows up — they spend it the week it shows up. And it seems like you’re going to have a lot of difficulty quantitatively fitting that little foresight into a life cycle model unless people are often literally liquidity constrained, absolutely at their debt limits.

…

What equilibrium supports high-fee mutual funds, index funds, and so on, and how does that change the flow of funds between the corporate and household sector and the pricing of risk?

a high propensity to consume correlates with low liquidity, which is useful for theorizing but also presents a little bit of a chicken-and-egg problem. Is it different preferences, objectives, or behavioral constraints that are causing both the low liquidity and the propensity to spend, or is it the low liquidity that is causing the lack of planning and high spending responses? So for many purposes, what I take my findings to mean is that the buffer-stock model is a quite reasonable model with one critical ingredient. The critical difference relative to the way I modeled households in the 2002 paper with Gourinchas is that I think there’s much more heterogeneity in preferences across households. While in that paper we looked at differences in preferences across occupation and industry, I think there’s just much more persistence in heterogeneity in behavior, consistent in the buffer-stock model with differences in impatience.

There is a significant portion of the population with above-median income and close to zero saving. I think it is hard to tell a story that explains that in terms of rational behavior. Remember, we are talking about a lot of people, not just a few random exceptions.