Picture of the Day: Income Inequality Across High Income Countries

This graph comes from Daron Acemoglu and James Robinson.  What is shows in essence is the great democratization of wealth after the concentrations of the industrial revolution and the gilded age followed by, in a couple of countries, a huge move back to incredible concentrations of wealth at the very top. But not all.  So what is it about the US particularly, and to a lesser degree the UK, that causes this?

Picture of the Day: Income Inequality

Emmanuel Saez updates his well-known data on income inequality:

Notice the massive concentration of wealth that occurred during the Gilded Age and then again in the run up the the financial crisis.  Well with the crash, you might be tempted to think that it was a temporary blip - and you'd be wrong, the trend is continuing right on through the recession.

And here is the takeaway, stated beautifully by Saez:

The labor market has been creating much more inequality over the last thirty years, with the very top earners capturing a large fraction of macroeconomic productivity gains. A number of factors may help explain this increase in inequality, not only underlying technological changes but also the retreat of institutions developed during the New Deal and World War II - such as progressive tax policies, powerful unions, corporate provision of health and retirement benefits, and changing social norms regarding pay inequality. We need to decide as a society whether this increase in income inequality is efficient and acceptable and, if not, what mix of institutional and tax reforms should be developed to counter it.

Krueger on Income Inequality and Mobility

Alan Krueger, the current Chairman of the President's Council of Economic Advisors gave a speech at the Center for American Progress recently entitled "The Rise and Consequences of Inequality in the United States."  Krueger, the Princeton economics professor knows a lot about what he speaks having himself done a lot of seminal work in labor economics.  Here is the text of the speech. Here are the charts that go along with the speech.

There are a number of interesting charts - familiar to those who keep tabs on this stuff, but of interest to those who don't - here are two that I thought were particularly instructive.

The first examines the correlation between income inequality and intergenerational earnings mobility and finds that the US is high in terms of inequality and low in terms of mobility (a high elasticity means that incomes are closely related across generations).

The second is the relative inequality (high) and how the US tax code addresses the inequality (less progressive) than a number of other comparison countries.  Germany, for example, has higher pre-tax inequality (blue) than the US, but much lower post-tax inequality (red) than the US.  

Germany's economy, by the way, has been the real superstar of this current economic downturn.

So What Percent Are You?

Leave it to the Wall Street Journal to help you find out:

If you are high enough you could follow Scott Adams' advice and move to the sea - where you will be free of taxation but also of any meaningful law and order. Good luck.

I base my prediction on the fact that the country is out of money, poor people don't have any, rich people do, and the middle class has almost figured out how voting works.

In the old days, every member of the middle class thought he or she had a chance of becoming rich. In that sort of optimistic environment, you don't want to urinate in the pool that you hope to someday swim in. But lately there's more fatalism in the air, thanks to our crushing debt and the hobo militias that I assume are forming all over the country. The middle class will soon trade their unrealistic dreams of wealth for the opportunity to transfer money from total strangers to themselves—a process often referred to as fairness. That's when the rich will get serious about an escape plan, just like the brave little sea creatures billions of years ago.

But where can the rich go? Their choices include nations that have swarms of malaria-infested mosquitoes, bad TV, deadly climates, decapitation issues, French people, bland food and other signs of inhospitableness. When you consider these factors plus wars, pollution, terrorism, floods, droughts, earthquakes and tornadoes, I think you'll agree that most of the surveyed land on Earth is unfit for fancy people.

But wait is this really that fanciful?

Fine 99%-ers, you can have America - I'm going on my own...suckers! Oh wait, I am one of the 99%. S%#t.  And it looked so nice too - I could have started my own international crime ring and called it SPECTRE.  That would have been cool...

Not Just a US Phenomenon: Income Inequality Increasing Everywhere

This new article from the OECD about rising income inequality among member nations is getting a lot of attention in the economics blogs.  Here is the figure everyone is posting:

From the report:

What drives growing earnings and income disparities?

The rise of earnings and income inequality occurred in most countries during periods of sustained economic growth, which raises the question why not everybody benefited from growth in the same way. While it is difficult to assess fully the role of many potential driving forces, the following factors have often been identified as having the most important impacts on widening inequality in OECD countries:

• Globalisation, skill-biased technological progress and institutional and regulatory reforms haveall had an impact on the distribution of earnings;

• Changes in family formation and household structures have had an impact on household earnings and income inequality;

• Tax and benefit systems have changed in the ways they redistribute household incomes.

A forthcoming OECD study assesses the relative roles of these different factors. The study first examines how trends in globalisation, technological change and regulatory and institutional reforms have affected inequalities in wages and earnings. Then, it analyses the extent to which trends in labour earnings inequality have translated into changes in income inequality. Finally, the study examines possible reasons for changes in the redistributive effectiveness of tax/transfer systems over time.

The report then goes on to discuss policy responses:

Which lessons for policies?

Reforming tax and benefit policies is the most direct and powerful instrument to increase redistributive effects. Large and persistent losses of low-income groups following recessions underline the importance of well-targeted income-support policies. Government transfers – both in cash and in-kind – have an important role to play to guarantee that low-income households do not fall further back in the income distribution.

At the other end of the income spectrum, the relative stability of higher incomes – and their longer- term trends – is important to bear in mind in planning reforms of redistribution policies more broadly. It may be necessary to review whether existing tax provisions are still optimal in light of equity considerations and current revenue requirements. This is especially the case where the share of overall tax burdens borne by high-income groups has declined over recent years (e.g., because of non-compliance, cuts in marginal income taxes or because tax expenditures mainly benefit high-income groups).

However, redistribution strategies based on government transfers and taxes alone would be neither effective nor financially sustainable. A key challenge for policy is to facilitate and encourage access to employment for under-represented groups. This requires not only new jobs, but jobs that enable people to avoid and escape poverty. Recent trends towards higher rates of in-work poverty indicate that job quality has become a concern for a growing number of workers. Policy reforms that tackle inequalities in the labour market, such as those between standard and non-standard forms of employment, are needed to reduce income inequality.

Policies that invest in human capital of the workforce are needed. This requires better training and education for the low-skilled. The latter would serve to boost their productivity potential and future earnings. Over the past two decades, the trend to increased education attainment has been one of the most important elements in counteracting the underlying increase in wage inequality in the longer run. Policies that promote the up-skilling of the workforce are therefore key factors to reverse the trend to further growing inequality.

Indeed.

Income Inequality

Wall Street Journal Graphic

You might have thought that the recession has caused income inequality to fall, but you would be wrong: income inequality in the United States is still rising. From the Wall Street Journal:

The inequality, though, hasn’t gone away. Rather, it’s hitting new records. As the economy bottomed out in 2009, the hourly wage of employees in the 90th pay percentile—those whose wage exceeded that of 90% of the working population—stood at $38.50, according to a new study by the Congressional Budget Office. That’s 364% more than the $8.30 an hour earned by those in the 10th percentile. A decade earlier, the difference was 332%, adjusted for inflation. The difference is more pronounced for men than women, at 383% versus 319%.

The growing gap partly reflects the effects of globalization and technological change, which help highly educated workers get more for their skills. But inequality causes a lot of problems: It can contribute to political polarization, and it raises the stakes for less wealthy consumers who want to keep the American dream alive.

Apropos of my post yesterday, it is worth pointing out that unions are one way in which through collective bargaining, workers can get a bigger share of the rents from imperfectly competitive firms. This is the narrative I have in my head of the rise of early unions during the massive industrial expansion of the US where capital intensive oligopolistic firms employed huge work forces. Unions restored balance to labor markets and caused more wealth to flow to them. But the real narrative here, as Goldin and Katz points out is the ever increasing relative returns to skilled workers. Which suggests that neither unions nor time will stop this trend and we, as a society, are going to have to decide how we want address the trend.  One way is through better educational systems, yes, but there will still be an increasing wage gap between the more and less educated.