Economics 2 Professor Christina Romer Spring 2020 Professor David - - PDF document

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Economics 2 Professor Christina Romer Spring 2020 Professor David Romer LECTURE 12 RISING INEQUALITY March 3, 2020 I. O VERVIEW OF R ISING I NEQUALITY A. Types of income and rising income inequality B. Reasons that rising income inequality is

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Economics 2 Professor Christina Romer Spring 2020 Professor David Romer LECTURE 12 RISING INEQUALITY March 3, 2020 I. OVERVIEW OF RISING INEQUALITY

  • A. Types of income and rising income inequality
  • B. Reasons that rising income inequality is important

II. SOME FACTS ABOUT TRENDS IN INCOME INEQUALITY OVER TIME

  • A. Piketty and Saez’s question
  • B. Data and approach
  • C. Findings
  • D. Possible concerns
  • III. EXPLAINING RISING LABOR INCOME INEQUALITY
  • A. Framework: The markets for low-skilled and high-skilled workers
  • B. Skill-biased technological change
  • 1. The impact on high-skilled workers
  • 2. The impact on low-skilled workers
  • 3. “The race between education and technology”
  • C. Increased trade (globalization)
  • D. Imperfect labor markets and changes in economic power
  • 1. Declining union membership
  • 2. Declining real minimum wage
  • 3. Changing social norms
  • IV. POSSIBLE REMEDIES FOR RISING INCOME INEQUALITY
  • A. Improved access to high-quality education and job training
  • B. Policies to help workers harmed by technological change and trade
  • C. Policies to raise incomes at the bottom of the income distribution
  • 1. Higher minimum wage
  • 2. Earned income tax credit
  • 3. Income redistribution
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LECTURE 12 Rising Inequality

March 3, 2020

Economics 2 Christina Romer Spring 2020 David Romer

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Announcements

  • We handed out Problem Set 3:
  • It is due next Tuesday (March 10).
  • Problem set work session, Thursday (March

5th), 4–6 p.m. in 648 Evans.

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  • I. OVERVIEW OF RISING INEQUALITY
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Sources of Income

  • Labor Income:
  • Income a person receives from working.
  • Wages or salary.
  • Capital Income:
  • Income a person receives from returns on

capital.

  • Capital refers to holdings of machines, real

estate, stocks, bonds, etc.

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Focus of Today’s Lecture

  • Rising inequality in labor income.
  • Key fact is that income inequality has risen

substantially in the past few decades.

  • What are the sources of rising labor income

inequality and possible remedies?

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Why Might We Care about Rising Labor Income Inequality?

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Source: Case and Deaton, “Mortality and Morbidity in the 21st Century,” Brookings Papers on Economic Activity, 2017.

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  • II. SOME FACTS ABOUT TRENDS IN INCOME

INEQUALITY OVER TIME

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Piketty and Saez’s Data

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… … … …

Sample Entries from the Statistics of Income, 1933

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Piketty and Saez’s Calculation

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“Fractile”

  • A slice of a distribution defined by percentiles.
  • Examples:
  • The 99th percentile and above.
  • Between the 90th and 95th percentiles.
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Source: Piketty and Saez.

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Source: Piketty and Saez, Figure 3 (2019 update).

FIGURE 1 The Top Decile Income Share, 1917-2018

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Source: Piketty and Saez, Figure 3 (2019 update).

FIGURE 2 Decomposing the Top Decile US Income Share into 3 Groups

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Source: Piketty and Saez, Figure 3 (2019 update).

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Source: Piketty and Saez, Figure 9 (2019 update). Figure shows the share of wage income going to various fractiles.

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Key Findings

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Possible Concerns about the Evidence

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Source: Auten and Splinter, “Income Inequality in the United States: Using Tax Data to Measure Long-term Trends,” December 2019.

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  • III. EXPLAINING RISING LABOR INCOME INEQUALITY
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Overview

  • Look at two explanations within the supply and

demand model of a well-functioning labor market.

  • Skill-biased technological change
  • Globalization
  • Also look at some explanations premised on

imperfect labor markets and employer power.

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Income Inequality and Skills

  • Low-skill jobs are those requiring relatively little

education (home healthcare aides, janitors, food- service workers).

  • High-skill jobs are those requiring high levels of

education (doctors, engineers, accountants, computer programmers).

  • Changes in the relative wages of low-skill and

high-skill workers parallel the trends in rising income inequality.

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Source: David Autor, “Skills, Education, and the Rise of Earnings Inequality among the ‘Other 99 Percent’.”

Real Wages of Full-Time Male Workers by Educational Level

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Framework

  • Consider the markets for low- and high-skilled labor.
  • The labor supply curve comes from utility

maximization on the part of households.

  • Its position depends on tastes and on the

number of workers with the relevant skills.

  • The labor demand curve in each case comes from

profit maximization on the part of firms.

  • It is the MRPL curve for a given type of labor.
  • MRPL = MPL · MR (where MR = P for competitive

firms).

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Markets for Workers with Different Skill Levels

Low-Skill High-Skill

LH WH LL WL

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Skill-Biased Technological Change

  • Technological change in recent decades has

tended to favor high-skilled workers.

  • Technologies such as computers make high-skilled

workers more productive, and so shift out the MRPL for high-skilled workers.

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Skill-Biased Technological Change

Low-Skill High-Skill

LH WH LL WL WL1 SL DL1 LH1 SH DH1 LL1 WH1

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Skill-Biased Technological Change (continued)

  • If the technological change is so skill-biased that it

actually replaces some low-skilled workers, it could shift back the labor demand curve in the low-skill sector.

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Low-Skill High-Skill

LH WH LL WL LL1 WL1 SL DL1 WH2 WH1 LH1LH2 SH DH2 DH1

Skill-Biased Technological Change, including Low-Skill-Labor-Saving Technological Change

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Skill-Biased Technological Change and the Wages of the Top 1 Percent

  • Modern technology may increase the rewards to

the very top-skilled people.

  • For example computers and easy mass

communication make it possible for top entertainers, artists, inventors, and entrepreneurs to reap huge rewards.

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The Race between Education and Technology

  • Skill-biased technological change tends to increase

inequality.

  • Increases in education tend to decrease inequality.
  • In the 1950s and 1960s, the two forces roughly

balanced.

  • Starting around 1970, increases in education

slowed, so the effects of skill-biased technological change dominated.

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Source: Economic Report of the President 2010.

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U.S. Exports and Imports (as a share of GDP)

Source: Bureau of Economic Analysis.

5 10 15 20 25 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

Percent

Imports Exports

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Increased Trade (Globalization)

  • The U.S. tends to have a comparative advantage in

goods that use high-skilled labor, and a comparative disadvantage in goods that use low-skilled labor.

  • When we become more open to international trade

(as happened in the past four decades), we tend to specialize (and export) goods that use high-skilled labor and import goods that use low-skilled labor.

  • Movements in prices (price of high-skilled goods

rises; price of low-skilled goods falls), are what brings this specialization about.

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Globalization

Low-Skill High-Skill

LH WH LL WL LL1 SL DL1 LH1 SH DH1 WH1 WL1

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Imperfect Labor Markets and Changes in Economic Power

  • Labor markets may be imperfect.
  • For example, employers may not face lots of

competition in the labor market, and so are able to get away with paying workers less than their MRPL.

  • In this case, changes in factors mitigating these

imperfections can affect income inequality.

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A Lower Negotiated Wage Market for Low-Skilled Workers

D1 L W S1 WN1

L1

D

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Federal Minimum Wage

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A Lower Minimum Wage Market for Low-Skilled Workers

D1 L W S1 W1

L1

D

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Changing Social Norms?

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  • IV. POSSIBLE REMEDIES FOR RISING INCOME

INEQUALITY

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Education and Job Training

  • Education can be a great equalizer.
  • It is not just higher education; preschool, K-12,

and job training are all very important.

  • Education tends to equalize income slowly.
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Rates of Return on Human Capital Investment

Source: James Heckman, “Skill Formation and the Economics of Investing in Disadvantaged Children.”

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Increased Education

Low-Skill High-Skill

LH WH LL WL LL1 WL1 SL1 DL1 WH1 LH1 SH1 DH1

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Policies to Help Displaced Workers

  • Trade Adjustment Assistance
  • Program to help workers who lose their jobs

because of trade.

  • Job training, help with job search, extra

unemployment benefits, wage subsidy for a while after reemployment.

  • Place-Based Policies
  • Tax benefits, subsidies, and other incentives for

employers to come into a troubled locality.

  • Funds to develop job training programs

appropriate to the local employers.

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Policies to Raise Incomes Directly

  • Policies like a higher minimum wage to try to raise

wages directly.

  • Increases in the Earned Income Tax Credit.
  • Direct redistribution (such as a universal basic

income).

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Effect of Raising the Minimum Wage Market for Low-Skill Workers

D1 L W S1 W1

L1

D

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Effect of an Earned-Income Tax Credit Market for Low-Income Workers

D1 L W S1 W1 L1