Maurizio Franzini and Mario Planta

Transcription

1 Maurizio Franzini and Mario Planta

2 2 premises: 1. Inequality is a burning issue for economic, ethical and political reasons (Sen, Stiglitz, Piketty, Milanovic) 2. Inequality is today a more complex phenomenon than in the past (society distinctly divided in classes) 3 major objectives: 1. Describe inequalities through different measures and indicators 2. Show differences in trends (in time and space) 3. Provide some general explanations and interpretations

3 The unconcerned: Inequality is a necessary condition for more market efficiency, more competitiveness and more growth who cares about inequality if we have more growth? Less inequality, less growth. The concerned but powerless: inequality depends on globalization + the growth of finance + multinational firms there is little we can do about it The concerned but unable to grasp complexity. The struggle against inequality is very difficult today It has multiple and overlapping dimensions: income, wealth, gender, ethnical, access to education, etc. role of finance and international production segmentation of labor markets and the loss of class identities

4 1. What is relevant is «Disposable Income». D.I. depends on: taxes (income, assets, inheritance) transfer payments (pensions, unemployment subsidies etc. non markets activities (public services, education, health) changes in policy Inequalities must be measured after all these adjustments

5 2. Inequalities depend on the rise top incomes (finance + real estate wealth) or the collapse of bottom incomes, or the disappearance of a large middle class 3. Inequality can be measured through: changes in the reward of productive factors (a greater share going to capital at the expense of labor). changes in disposable income or in wealth (financial and real assets)

6 Today the labour share ranges: 55 to 63% vs 59 and 67% in the 90s General decline started in the 1980s: rise of financial rents + profits share. The downward trend inverted during the recession (2008-9) but a new fall after 2010 Falling labour share is not caused by shifts in the sectoral composition of the economy (from L intensive to K intensive) but of greater profits in financial industries and high-tech

7 Long term rise of the K share from 1975 to 2010 From 15 to 25% in 1975; to 25 to 30% in 2010 Most rapid increase in the 1980s particularly in F., G., UK Recessions provoke a decline in the capial share, and so it happened in Interpretations 1. wages did not rise with productivity increases (see next) 2.strong bargaining power of capital in a context of great capital mobility (low taxes)

8 1. Widespread trend toward the decline of the labor income share 2. Widespread trend toward the rise of the capital income share Notable exception: the recession 3. Main reasons why: - Strong bargaining power of capital in times of perfect capital mobility (low taxes) - Wage rises lagged behind productivity rises: GDP/worker increased more than wages.

9 Increase in inequalities depends on decline of wages Broadening gap between productivity (gdp per worker) and wages; Why did wages lag behind? Several explanations 1. Weakening of unions; 2. Decentralization of national contracts 3. International delocalization; 4. Labour saving tech. 5. Role of finance

10 Between 2006 and 2010 Spain + US had the largest increase in the P90/P10 ratio (very rich-very poor) P90 is the Y above which we find the richest 10%; P10 is the Y below which we find the poorest 10%. In Spain, it went from 4.4 to 5.7 times; in the US it went from 9.6 to 10.6 times. This inequality depended on changes in the number of jobs and in the structure of wages (decline for the poor, increase for the rich). Diverging LT trends between Europe and the US

11 Sharp differences between Europe and the US 1900: US more equal than Europe where rapid industrialization fuelled inequality Great crash + WW2 reduced inequalities: widespread poverty Values were stable in the boom (50-70 and still declining in Europe. Europe: LT trend twd equality, 1910s-1970s. Things change in the 80s. US: top 10% share in 2000 is over the 1930s level and almost at 50%. Rise of the very rich was not stopped by the crisis

12 According to Picketty, the separation between top managers earnings and the wages of the rest of the population is a ajor cause. This is due to different productivity or to different power in det. the structure of wages? 1980 Reagan 2000/8 Bush jr Only the UK follows the same trend, which is less marked for other countries What about emerging countries? The picture is markedly different

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14 Share of wealth for top-10% Y is rising between 1500 and 1900 After 1350 the effects of the black plague reduced inequalities According to Picketty, in % of the population owned 82% of the stock of wealth The record high was reached at the eve of WWI (90%)

15 Ultra rich (1%) account for 50% of the share of the very rich (10%). Y share of ultra rich varies widely. Us and UK about 20% and increasing; G.: 12% increasing; F. and NLD 6-8% and stable; I and S. 6-8% increasing. From ultra rich to the incredibly rich (0,1%). They control 9% of total Y in the US and 6% in the Uk (4 times than the 1970s). Rise of oligarch capitalism

16 According to Oxfam International (2016), today some 85 people own the same aggregate wealth owned by 3,5bn people; According to Credit Suisse (2015), less than 1% of the world population owns about 45% of global wealth; According to Piketty (2014) disequality in advanced and emerging countries is increasing and returning to the same level recorded for the 1920s

17 Overall Y ineq (Gini index: green line) decreases until 1950s, sharply down until 1980s, and then increases Poverty rates (red), top Y shares and W inequality show a rising trend since the 1980s

18 In the past incredible incomes came from rents and also from capital (Piketty and Atkinson) Today they come from capital and labour (about 50% with +20pts from the 70s). Extreme salaries to top-managers According to the Economic Policy Institute (Washington) in 1965 CEO compensation was 24 times greater than that of the typical worker In 1978 it was 35 : 1 In 2006 (no recession) in was 277 : 1 In 2011 (after the recession) it was 243 : 1

19 Earnings structure depends on wages + «compensation scheme» CS include bonus payments + other rewards that vary according to performance, as a means to incentivate workers toward achieving specific goals. However, most of the Y of the ultra-rich comes from stock-based pay whose value is driven by finance, insider knowledge and asymmetric information rather than LT firm s performance or labor productivity. W St. executives, traders etc. earn obscene salaries

20 W St. executives, traders etc. earn obscene salaries. We have 2 problems here: 1. The absolute amount of M involved ethics and equality 2. The structure of the executive pay: the compensation scheme 1 is relevant (maybe also for soccer stars, golf players, etc.) but 2 turns out to be much more relevant 2 creates perverse incentives to take excessive risks with OPM (other peoples money). Why? Try this game: HEAD --- you become richer than Croesus TAIL --- you receive a high salary or a «golden parachute» This is a 1-way gamble: you put all on HEAD always Lawyers who design CS represent the interests of managers not of shareholders. Politics tried to change this but unsuccessfully

21 It is the most used measure of inequality If G=0 perfect equality (all values are the same, everyone has the same income) If G=1 max inequality (all Y goes to only 1 person) Household inequalities in terms of 1. nominal Y; 2. disposable Y; 3. disp. Y adjust. public services

22 According to Oxfam International there are two main drivers, one economic, one political Market fundamentalism with a minimum (welfare) state and a great concentration of wealth Political capture from economic élites (extractive institutions) that tend to lower intergenerational mobility.

23 IEE measures how much the Y of one person is influenced by the Y of one s parents In more equal societies (DK, S, N, SF) just about 15-20% of an individual s Y is determined by the Y capacities of their parents In Perù, Brazil etc. about 2/3 Correlation between IEE- Gini

24 From individual Y to family Y Gini coefficient ranges from 0 (perfectly equal distribution) to 1 (all Y in one household) We compare inequalities emerging from nominal Y (7), after taxes and transfers (8) and public services (9) Inequalities in advanced countries have increased everywhere with the exception of NLD Highest increase was , except G. UK, F, I, US rank as the most unequal. DK + S have a lower inequality, though increasing afte 1980

25 Significant redistributive impact of public action especially in Europe; Inequality is lower after taxes and transfers The same pattern of rising inequalities is evident after 1985 Even equal societies, like DK and S, have become less equal after 1995 In the last period I+NLD have experienced a decline in the Gini coefficient. The reasons are an increase in female participation rates due to gender measures; Italy s increase in 1995 was mainly due to fiscal emergency measures

26 Difficult value of non market public services Education and health are the most important components (75% of total) Monetary services det. an increase of 40% in DK + S 76% rise for the poorest and 14% for the richest Fig. shows a general reduction of inequalities in all countries Higher fall for S, DK, F, UK Us is the most unequal Uk reaches Italy and Germany DK + S are the most equal with a Gini Index below 20%. Compared to 2000 all countries fare worse

27 Wage disparities have increased within different types of jobs and are a key determinant of inequality. Such a rise depends on the rise in non standard forms of employment Why? Growing inequality depends on the increasing skill premium for high skilled workers. Differences in human capital may explain wage inequality. Therefore, investment in education is recommended as the best policy for reducing inequality This conclusion is disputed: human capital variables explain 10-20% of the variance in wages Residual of inequality has different explanations (within group inequality).

28 Very low % explained by educational gaps (10% approx, only 3% in S.); Around 90% of the wage gap is linked to within group inequality (not related to education) Share of inequality due to educational has fallen since 1992 Other determinants are: reduced union power, precarious employment, segmented labour force, decentralised wage setting)

29 What has happened to the other groups? (middle class)? Increasing divergence between 90th wage percentile (office managers) and 50th wage percentile Not the first time: 1929 and 2008 were preceded by a sharp increase in Income and Wealth inequality One reason for this: increasing importance of capital with respect to production in determining national wealth Rate of return on capital (r) is higher than the rate of growth of wages and the economy (g). In this case the «inherited wealth» overcomes «labor generated wealth» in one s lifetime

30 In the US top 10%/P50 is 2.4 times and increasing steadily; Similar trends occurred in UK, G. and NLD, although at lower levels France has a very high ratio (compared to Europe) but stable I. and S. have the lowest gap and kept it stable in the last 30 years The very rich have increased their distance not only from the very poor but also from the middle class Another culprit: global markets

31 Globalization has been a driving force behind the growth miracle in emerging markets, lifting millions of people out of poverty over the past few decades. How was the increasing global income pie divided? The elephant graph (B. Milanovic) details which segments of the global population saw a rise in their real incomes from 1988 to 2008 Who were the non-winners from globalization? Extreme poor, the middle class people in the Western World

32 The graph shows how different deciles fared in % of income gains in the last decade before the crisis Point 1 corresponds to those who have gained the most from the recent globalizing wave A global middle class that is emerging all around the world with 9/10 living in China and India Point 2 corresponds to people who belong approxim. to the 80th percentile of global income distribution and that have gained 0 from globalization The vast majority is the middle class in historically rich countries of the Western world + Australia and Japan Point 3 corresponds to the global 1%: global rich (everywhere)

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34 The biggest losers (other than the very poorest) were those between 75 th /90th percentiles of the global Y distribution whose real income gains were essentially nil. The s.c. global upper-middle class that includes citizens of rich countries whose incomes stagnated. Moral of the graph: middle and working classes in developed countries languished.

35 So far: annual flows of income. But what about the stock of wealth? Piketty s book. Wealth is made of real (houses) + financial (shares, bonds, deposits) assets - private debts. Recent surveys show that (mean values x quintile) bottom 20% have a new wealth of 0; 2 quintile: 30,000; 3 112,000; 4 235,000; 5 780,000. The last quintile own 70% of total wealth; the top 5% owns 40% Significant variations across countries: Italy and Spain are on top Real assets account for 85%, financial assets for 15%; Things worsened in the past decades: clear trend to > inequality between 1970 and 2010 in all countries. US, DK, S, NLD in 2011 have a 0,8 Gini Coefficient; 0,75 in Italy and the UK;

36 Shares of the wealthiest 10% and 1%; European aristocracy in 1900 had an almost total control of W; top 1% had almost 70% of total W The US started at lower figures The brought about a steep fall in both areas Since 1940s US stabilised and Europe continued to fall until 1970s (welfare state and redistributive policies) Disparities rose after 70s US have returned to the 30s

37 W ineaquality is high and growing fast. In the US the concentration of W is striking, similar to that recorded in the 1930s In Europe absolute levels are lower but still at unprecedented levels since the 1960s Differences between the US and Eu are related to the W structure: Europe 2/3 of assets are real (houses) and 1/3 is financial (business and financial assets). Increase in house prices has reduced inequality US proportions are reversed: financial capital accounts for 60% of assets. The rise of finance is a real engine of inequality Concentration of W raises problems in terms of its intergenerational transmission through inheritance.

38 Studies show that inequalities reduce the level of happiness and increase social problems Child wellbeing (health, education, security) Civicness (social and political participation, NGOs, trust etc.) Human capital (school performance, dropouts, social mobility, teenage violence/pregnancies etc.) Health problems (anxiety, excessive consumption of food, drugs, alcohol etc.)

39 Six dimensions of child well being 1. Material WB 2. Health and Safety 3. Educational WB 4. Family and peer relationships 5. Behaviours and risks 6. Subjective WB

40 Civic participation: involvement in (and membership of) organizations and activities that constitute the «civil society». Inequality depresses CP because - Status differences (no common goals, threats, anxiety) - Less micro and macro resoruces enhancing CP

41 For several years, the World Economic Forum included Y-W inequalities among the 10 most dangerous global risks Inequality negatively affects growth and its sustainability entails large social costs threatens social cohesion and political stability distorts incentives: individuals lose confidence in institutions and try to secure protection (corruption, nepotism etc.)

42 Remedies (by Picketty, Oxfam etc.)? Global and progressive tax on capital Global and progressive tax on inheritance. Reform financial markets and compensation schemes Use finance for development and against poverty Rich countries should raise their target for Official Development Assistance to 1 per cent of Gross National Income. Fight extreme poverty, gender discrimination, tax evasion Strong international coordination is required

43 Further references Lancee, B. and Van de Werfhorst, H. G. (2012). Income inequality and participation: A comparison of 24 European countries. Social Science Research, 41(5), Wilkinson & Pickett, Why more equal societies do better, European conference: Investing in People, Sofia, febbraio 2018.