Roadmap Inequality and Occupy What do we mean by inequality? Is inequality bad? How does inequality vary across countries? How has it changed over time? What causes inequality? How does finance fit in? Jerry Davis Ross School of Business February 8, 2012 A measure of income inequality: The Gini coefficient WHAT DO WE MEAN BY INEQUALITY? Measures the extent to which the distribution of income (or consumption) among individuals (or households) deviates from a perfectly equal distribution The percentage of area that lies between the Lorenz curve and a line of perfectly equality Varies between 0 (perfect equality) and 1 (perfect inequality) 4
IS INEQUALITY BAD? 6
Is inequality just the price we pay for prosperity? 60 50 ni Coefficient 40 Gin Cote d'ivoire 30 South Africa Colombia Brazil Panama Honduras Guatemala China Peru Cameroon Philippines Congo Senegal Thailand Ghana Sri Lanka Tunisia Russian Fed Morocco Mali Jordan Vietnam India Algeria Indonesia Egypt Togo Burundi Ukraine Bulgaria Pakistan Serbia Belarus Romania Chile Malaysia Venezuela Mexico Turkey Slovakia Poland Croatia Hungary Uruguay Argentina Czech Republic Opposite: equality generally increases with GDP per capita (and with greater democracy) Portugal New Zealand Greece Slovenia Spain South Korea Israel Italy Australia Belarus Canada France Germany Netherlands Austria Singapore United Kingdom Finland Hong Kong Ireland Sweden Denmark United States Switzerland Iceland Japan Norway HOW DO COUNTRIES DIFFER IN THEIR LEVELS OF INEQUALITY? 20 0 10,000 20,000 30,000 40,000 GDP per capita (constant 2000 US$) 13 Inequality varies among different flavors of capitalism 45 United States 40 Portugal Gi ni Coefficien nt 30 35 Mediterranean Greece Spain South Korea Market Based Italy United Kingdom Canada Ireland Australia Continental ta Europe 25 Asia Japan France Austria Germany Norway Belgium Finland Sweden Netherlands Social Democratic Denmark 0 5 10 15 20 25 Ratio of Top 10 Employers to Labor Force 16
% of the nation s annual income going to the top 1% HOW HAS INEQUALITY CHANGED OVER TIME IN THE US? Income gains in the U.S. since 1979 Q: Hasn t this happened everywhere else (e.g., because of the Internet)? Gini Co oefficient 30 35 40 25 45 A: No. There is 1955 1965 1975 1985 1995 2005 Year no general trend Canada United Kingdom toward greater United States inequality 19
Is it just the decline of unions? Inequality and Union Density, 1950 2006 WHAT CAUSES INEQUALITY? Force s to Total Labor onized Workers Ratio of Unio 10 15 20 25 30 35 1950 1960 1970 1980 1990 2000 2010 Year 48 44 cient 40 Gini Coeffic 36 32 NO: union density has declined every year since 1958 (almost) As of Jan. 2010, most union members are public employees Union Density Income Inequality 22 U.S. income inequality and 10-firm employment concentration, 1950-2008 Income inequality and employment concentration by year, 1950 2006 Ratio of Top 10 Employe ers to Labor Forc rce 0 2 4 6 8 r =-.89 1950 1960 1970 1980 1990 2000 2010 Year 32 36 40 44 48 cient Gini Coeffic 46 2003 2001 2002 1997 2000 1999 1998 1993 1994 1996 1995 44 Gini Coefficient 42 40 38 1989 1992 1990 1991 1987 1988 2004 1986 1985 2005 2006 The 90s: quest for shareholder value induces downsizing, outsourcing 1984 The 80s: bust-up takeovers split conglomerates back into parts; inequality increases 1950 1959 1960 1962 1963 1958 1952 1983 1982 1981 1980 1961 1964 1951 1954 The 60s: Conglomerate mergers increase 1953 1955 concentration; inequality 1965 1957 declines 1956 1966 1979 1978 1977 1976 1975 1967 1972 1971 1973 1970 1974 1969 1968 Employment Concentration Income Inequality 3 3.5 4 4.5 5 %Employedby10LargestFirms 23 24
Around the world, big employers are associated with low inequality Employment concentration: Colombia vs. Denmark 60 Colombia South Africa Brazil Chile Latin Quarter COLOMBIA DENMARK Company Name Industry Class Employees Company Name Industry Class Employees BANCOLOMBIA SA BANK 7,027 ISS AS INDUSTRIAL 273,534 INVERALIMENTICIAS SA INDUSTRIAL 6,798 GROUP 4 FALCK AS INDUSTRIAL 246,366 50 Coefficient 40 Gini 30 20 Peru Argentina Zimbabwe Malaysia Venezuela China Mexico Philippines Cameroon Cote d'ivorie Turkey Thailand Senegal United States Ghana Sri Lanka Russian Federation Tunisia Morocco Portugal India Egypt Indonesia S Korea New Zealand Poland Greece Romania Belarus Hungary Czech Rep Ukraine Asia Alley Italy Algeria Australia Spain Bulgaria Serbia Japan Commie Corner Canada Croatia North North America France Singapore United Kingdom Ireland Austria Slovenia Germany Slovakia Norway Belgium Finland Sweden Old Europe Netherlands Switzerland Nordic Niche 0 5 10 15 20 25 30 35 Ratio of Top 10 Employers to Total Labor Force Denmark Iceland TEXTILES FABRICATO TEJICONDOR INDUSTRIAL 5,744 A.P. MOLLER-MAERSK A/S TRANSPORT. 62,300 BANCO DE BOGOTA SA BANK 4,800 CARLSBERG AS INDUSTRIAL 31,703 OTH SURAMERICANA DE INVERSIONES S. FINANCIAL 4,325 TDC AS UTILITY 20,573 CIA COLOMBIANA DE TEJIDOS - CO INDUSTRIAL 3,435 NOVO NORDISK AS INDUSTRIAL 20,285 ACERIAS PAZ DEL RIO S.A. INDUSTRIAL 2,834 DANFOSS AS INDUSTRIAL 17,543 BAVARIA SA INDUSTRIAL 2,729 DANSKE BANK AS BANK 15,382 COMPANIA DE CEMENTO ARGOS S.A. INDUSTRIAL 1,798 DANISCO AS INDUSTRIAL 10,634 CARTON DE COLOMBIA INDUSTRIAL 1,464 FALCK A/S INDUSTRIAL 10,241 Total 40,954 Total 708,561 Labor Force 22,771,433 Labor Force 2,834,422 Emp Concentration 0.18% Emp Concentration 25.00% 26 HOW DOES FINANCE FIT IN? 1. Finance was responsible for corporate restructuring favoring vertical dis-integration integration Hostile takeovers in the 1980s Downsizing and outsourcing in the 1990s ff. In other words: Wall Street t is turning us from Denmark into Colombia 2. Financiers are disproportionately p represented at the top of the 1% Kaplan and Rauh: The top 25 hedge fund managers in 2004 earned more than all the CEOs of the S&P500 combined more than all the CEOs of the S&P500 combined By 2007, the top five investors likely made more than the combined five hundred executives at publicly-traded companies in the U.S.
Oops make that 101 jobs The path to a comfortable middle-class life To do list BUT DON T PEOPLE MOVE UP IN THE WORLD ALL THE TIME? Go to college so that you can get a corporate job in a growth sector (e.g., high tech) Buy the biggest house you can afford Invest your 401(k) in a low-cost index fund Retire to Boca in financial comfort 32
Jobs in Computer and electronic products manufacturing in the US have declined by 750,000 since 2001 The number of jobs in the U.S. Information service sector has declined by 1 million since 2001 2000.0 1900.00 1800.0 Computer and electronic products 4000 3500 3000 1700.0 2500 Information sector (total) 1600.0 1500.0 1400.00 Computer and electronic products 2000 1500 Publishing (except Internet) Motion picture and sound recording Broadcasting Telecomms Data processing and hosting 1300.0 1000 Other information services 1200.0 1100.0 500 1000.0 0 Source: US Bureau of Labor Statistics Source: US Bureau of Labor Statistics America s most innovative companies do not employ very many people Oops Apple: 60,400 Google: 32,467 Facebook: 3000 Amazon.com: 33,700 Cisco: 71,825 Microsoft: 90,000 000 Kroger: 338,000 Jobs lost in Jan. 2009: 598,000 [That s 200 Facebooks] TOTAL: 291,392
Thankfully, markets always go up eventually S&P500 01/03/2000: $1469.25 Today: $1349.96 The path to a comfortable middle-class life To do list Go to college so that you can get a corporate job in a growth sector (e.g., high tech) Buy the biggest house you can afford Invest your 401(k) in a low-cost index fund Retire to Boca in financial comfort 39