The Past, Present and Future. of U.S. Income Inequality

Transcription

1 The Past, Present and Future of U.S. Income Inequality By Valerie Ramey OSHER, Oct. 30, 2017

2 Outline 1. Trends in inequality 2. Possible explanations. 3. Possible solutions

3 1. Trends in inequality

4 Income Distribution by Quintiles Splits households into 5 equal categories Perfectly Equal Distribution Actual U.S. Distribution in 2012 Data from the Census, Graphs from Economicpopulist.org

5 U.S. Income Shares of Top 1% and 0.1% of Households % of total income Top 1% Top 0.1% , excludes capital gains Source: Piketty and Saez

6 The Fading American Dream Percent of Children Earning More than their Parents, by Year of Birth 90% 50% Source: Raj Chetty 6

7 The Geography of Upward Mobility in America Children's chances of reaching top 20% of income distribution if parents are in bottom 20% Source: Raj Chetty 7

8 The Importance of Skill for Trends in Income Inequality

9 Wage growth by education level MEN WOMEN A. Men B. Women Autor, 2014

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11 The plight of the less educated in the U.S. If you think the income and wage statistics look bad.

12 From Anne Case and Angus Deaton (2017) 12

13 From Anne Case and Angus Deaton (2017). WHN denotes White Non-Hispanic 13

14 From Anne Case and Angus Deaton (2017). WNH denotes White Non-Hispanic. 14

15 Possible Explanations for the increase in income inequality

16 Immigration? 16

17 Unionization? Source: Wikipedia, data from Union Membership Trends in the United States, Table A-1 Appendix A for 1930 to 2000; Bureau of Labor Statistics for 2005 and 2010.) 17

18 Trade? 18

19 Skill-biased technological change? This is technological change that benefits high skilled workers and replaces low skilled workers. Example: Professor and secretary Consider the automobile industry innovations in the 1920s vs. now: 19

20 Ford assembly line in the 1920s assembly line increased the productivity of the low skilled. 20 F-150 production at today s Ford Dearborn truck plant robots replace the low skilled.

21 The Economics of Superstars? Sherwin Rosen, 1981 o Technology allows the stars to reach a broader market and crowd out the less talented. o e.g. top musical performers. Also known as winner-take-all markets. 21

22 Why the American middle class prospered during the 1950s and 1960s 22

23 Legacy of the 1920s s 1. Massive expansion of education 23

24 Legacy of the 1920s s 2. Innovation soared in the second half of the 1930s and the 1940s and led to several decades of high labor productivity growth. natural log index Labor productivity

25 All educational levels benefited Productivity slowed down starting in Autor (2014)

26 Legacy of the 1920s s 3. New Deal Legislation strengthened unions; membership from 7% of employed workers in 1930 to 27% in

27 Legacy of the 1920s s 4. At the end of WWII, the other economic powers Germany, Great Britain, Japan lay in ruins. As a result, U.S. companies dominated the world in the production of high value items. 27

28 Share of World Motor Vehicle Production 28 By Masaqui - Own work, CC BY-SA 4.0,

29 The Borjas-Ramey (1995) story, expanded and updated

30 Monopoly rents due to market power U.S. business dominates the world - little competition from other companies or workers 1950s and 1960s Bargaining over big rents High wages 30

31 What happened starting in the 1970s? monopoly rents of U.S. companies competition from foreign workers bargaining power of unions Lower wages for U.S. low skilled workers 31

32 The Upside of Globalization Xavier Sala-i-Martin, Maxim Pinkovskiy 32

33 Why did labor productivity growth slow down? It started in the early 1970s and it occurred across the industrialized countries. Many potential explanations but it is still a mystery. natural log index

34 The Present and Future of Inequality and Standards of Living The crucial role of skills

35 The Race between Education and Technology Coined by Dutch economist, Jan Tinbergen. The key idea is that technological changes often increase the demand for more skilled workers, so in order to keep inequality in check you need to have a steady increase in the supply of skilled workers in the economy. If the race is won by technology, inequality tends to increase, if the race is won by education, inequality tends to decrease. 35

36 The U.S. skill distribution relative to other OECD countries. Results from the recent OECD Study on Numeracy and Literacy Skills of Adults By Stijn Broecke, Glenda Quintini and Marieke Vandeweyer 36

37 Average skill levels are low in the U.S Calculations based on Survey of Adult Skills (PIAAC, 2012). Skills refer to proficiency in numeracy and are expressed in score points (1=minimum and 500=maximum).

38 Skills inequality is high in the U.S P90/P10 (Left Axis) P90/P50 (Right Axis) P50/P10 (Right Axis) Slovak Republic Japan Czech Republic Estonia Finland Netherlands Denmark Korea Austria Flanders (B) Sweden Norway Poland Germany Australia Ireland Spain England/N.I. Canada Italy France United States Calculations based on Survey of Adult Skills (PIAAC, 2012). Skills refer to proficiency in numeracy.

39 The returns to skill are very high in the U.S. 25% 20% 15% 10% 5% 0% The figure shows the coefficient on skill from a regression of log hourly wages (including bonuses) for wage and salary earners (in PPP corrected USD) on standardized numeracy scores and a quartic of experience.

40 Thus, a key to reducing inequality is raising skills at the bottom. 40

41 But there are challenges Inequality in test scores. Inequality in home environment. Problems in K-12 education. 41

42 Cognitive scores are linked to maternal education

43 Achievement gaps have increased.

44 Home Environment Low income children are more likely to come from unstable families. Low income parents put less time into their children and their children spend less time studying. As result, low income children enter school with lower cognitive and non-cognitive skills and learn less in school.

45 Weekly hours spent in childcare, Mothers hours per week year college-educated less than college From Ramey and Ramey, 2010

46 Problems in K-12 Ever since international test score comparisons were first conducted in the 1960s, the U.S. has lagged other industrialized countries. Despite many efforts and many experiments, little progress has been made.

47 47 Test score trends

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49 College isn t a panacea According to a new BLS study, only 25% of jobs require a college degree. Many students graduate from high school ill prepared for rigorous colleges. Some go to for-profit, non-selective colleges. Too often, they take on debt and end up not achieving high enough income.

50 Summary Inequality continues to rise. A large part is accounted for by the distribution of skills combined with the high returns to skills. We are unlikely to return to the situation in the 1950s and 1960s when less skilled individuals could still prosper. Efforts to raise skills at the bottom face serious challenges.