Inequality: one mo' time

It does look like this will be inequality day on this blog. As you may have gathered by now, the subject is one of my chief obsessions.

Anyway, I wanted to follow up on one of the points I made yesterday in the "Inequality: how'd that happen?!" post. I argued that the "increasing returns to skill produced by technology and trade" is at best only a partial explanation for the substantial rise in economic inequality we've seen over the past couple of decades. One of the reasons is that although every other advanced industrial country has faced those same trends, only the U.S. and the U.K. have seen large increases in inequality.

After the jump I'll show you two tables that run the numbers for this. Both are from that extraordinary resource, the Handbook of Labor Economics.

Table 9 above classifies 12 countries by the amount that their wage differentials changed according to educational and/or occupational skill. During the 1970s, all countries showed a large degree of narrowing wage differentials by skill -- i.e., increasing equality. But in the 80s, the only country in which there was a large degree of increasing equality was Korea. The other countries showed either no changes or modest changes, except for the U.S. and the U.K., which saw large increases in inequality.

In Table 10 above, we see for each country the log ratio of the 90th percentile male earner to the log ratio of the 10th percentile male earner from 1979 through 1994. Except for Germany and Norway, inequality increased, but the only  really large increases in inequality were in the U.S. and the U.K. It is likely that differences in labor regulations and labor market institutions were the reasons for the widely varying degrees of inequality each country experienced. In other words, the crucial factor determining the magnitude of inequality was probably the politics.

Comments

[lemuel pitkin]

Kathy, is there some particular reason you're looking at wage rather than income inequality? And, not to quibble, but quite a lot has happened in this arena since 1994. I will try to find some stats later but I strongly suspect that over the past decade wage inequality ahs wided in significantly in almost all these coutnries. Income inequality certainly has.

None of which is to disagree with your main point, that politics/institutions rather than technology (or trade, altho this one is not so clear) has been the force increasing inequality.

[mudkitty]

Do people on wages have other incomes? I rather doubt it. So what's the difference between wage and income?

People with "incomes" other than wages, don't need wages, generally speaking.

[lemuel pitkin]

"Do people on wages have other incomes?"

On a given day? Maybe not. (Altho keep in mind that it's household income that matters, not individual income.) But over the course of a year or two, many, many wage earners will also collect unemployment benefits, disability benefits, means-tested benefits of almost all will eventually collect pensions. So in practice, yes, it makes a big difference. In particular, facotrs like the decline of unions, which Kathy rightly points to as one of the most important issues here, will tend to depress important categories of non-wage income, in ways that just looking at wages will miss. This is especially true in those European countries where unemployment and disability benefits systems are administered directly by unions, but it's true to a lesser extent elsewhere too.

[Kathy G.]

Lemuel, the reason why economists tend to focus on wages rather than income is that self-reported wages tend to be a lot more accurate, and wages, in general, are easier to measure than income. And in the U.S. (and, I'm sure, the rest of the world as well) there is even more inequality if you look at income and not wages. See this paper:
http://elsa.berkeley.edu/~saez/pikettyqje.pdf
which is the best study of income inequality. It's been updated here:
http://elsa.berkeley.edu/~saez/piketty-saezOUP04US.pdf

And you're right that it would be helpful to have more recent info, but that was all I had at hand and I didn't have time to look up more recent stats. But once I come across stuff that's more up-to-date I'll post it. The Piketty and Saez papers I'm linking to in this comment say that inequality trends have been far more pronounced in the U.S. than elsewhere.

[lemuel pitkin]

Kathy,

Thanks for the reply. I recall reading Piketty and Saez ing rad school (I'm working on an economics PhD myself, tho it's been on a bit of a hiatus lately.)

[Rick Perlstein]

"Rad school"? You must be getting your econ Ph.D. at the University of Massachusetts (hiiiiilarious econ joke...)

[lemuel pitkin]

Hey Rick. Actually, I am.

[lemuel pitkin]

(Also, you and I were at the U of C together.)

[sherifffriuitfly]

You had me with your decent grasp of the English language.

[John]

Personally, I attribute the change in "social norms" Krugman mentions to the post-WWII restructuring of American society. During that time, all the pent up production and demand from the Great Depression onward was steered into massive expansion of the suburban housing and the consumer society that was all but completely closed to blacks, who were confined to the deteriorating cities to which they were migrating on great numbers. Suburbanization ended up becoming a zero-sum competition among the emerging new communities for industrial and residential development, with aging inner-cities and their remaining residents the ultimate losers.

Industry was the greatest beneficiary of this suburban restructuring. Contrary to the mythology of the suburbs being the spontaneous eruption of the will of its residents, suburbanization was largely driven by massive Federal subsidization and the need for industrial expansion and restructuring. In the resulting suburban land rush, large corporations seeking new locations for offices and factories held powerful leverage over the multiple independent local municipalities competing for their investment. These competing municipalities employed a variety of strategies and exploited what advantages they possesed to attract and retain desired industry. One common strategy was the management and manipulation of tax codes to maintain residential attractiveness and business friendliness. This new level of corporate mobility/independence foreshadowed the massive international corporations that resist regulation and play countries of one another for access to consumer markets and cheap labor. Residents themselves were players in this zero-sum game, as their primary goal became the maintainance and increase of the property values and defense of their individual communities.

All the fundamentals of modern conservativism were laid down during this decades long process: idealization of the free-market (despite the massive subsidies that created the suburbs), low taxes, de facto segregation, and an anti-communist/pro-defense mindset. These fundamentals defined post-war suburbanization and laid the seeds for the modern conservative movement. It's no coincidence that it was from Southern California and the American Southwest that its most prominent players emerged (Goldwater, Nixon, Reagan, Jarvis). Inherent in these policies was an appeal to its participants to abandon any connection or responsibility to the larger society or greater good.

[seabos84]

In the last 20 odd years, with spreadsheets and the internet, we the peee-ons have opportunities which have NEVER existed to identify theft and organize against theft - and we're busy bitching about taxes or brown people or whatever the fascists can keep us focused on.

I can think of 4 ways I don't get a cut of wealth I've contributed to creating:

1. I'm working longer for the same,
2. I'm working longer for less,
3. I'm working the same for less,
4. I didn't get a reasonable cut of the surplus (see #1-3).

I know this is going to be tough for the raised in affluence and raised on Seasame Street 'adults', but, we the peee-ons should NOT be surprised that lying, stealing, cheating fascists lied, stole and cheated. Also, we the peeee-ons shouldn't be surprised that synchophants and wanna-be lackeys of the fascists are so successful - IF they are good at screwing us over, they get paid way better than they'd get paid for looking out for us.

So, what about the people on the side of we the peee-ons? Well, aside from the DC Dem sell outs, incompetents, and mix of the above, we got this professional / mangerial class who can barely use 5th or 9th grade arithmetic and spreadsheets to model the stealing and the cheating of the fascists, but, they can write big words, big sentences, big paragraphs and big tomes

cuz

they're gonna be the next George Kennan shaping the world in the clash of powers, people and ideas.

yawn.

We the peeee-ons and we the disappearing professional / managerial classes gotta learn to model the fucking thieving AS it happens !

How much per hour is coming out of YOUR pay to fund the hookers, yachts and caviar of fucking Halliburton Execs? How much per week, how much per year?

how come people don't know this, OR

any of the other 10,000 annual assaults on their earnings?

ummmm ... lying stealing cheating fascists don't want us to know, so ...

rmm.

[lemuel pitkin]

By the way, Kathy, the reason I raise these issues isn't to be pedantic, but because I think your conclusion that "only the U.S. and the U.K. have seen large increases in inequality" is an artifact of the particular data you're looking at.

If you looked at income -- which is, after all, what actually affects wellbeing, social power, status, and all the other things that make us care about inequality -- and if you don't stop in the mid-1990s, you will find that the trend toward increasing inequality is shared among the vast majority of countries. And some of them have seen polarization as great or greater than in the US, albeit usually from a starting point of greater equality. China, for instance, has seen a staggering increase in inequality over recent decades, even as its growth overall has been an enormous force for greater *equality* at the global level.

Anyway, the bottom line is that an analysis that starts from the assumption we're seeing something unique to the US, is likely to lead you astray.

[Joe S.]

Israel should also be on the list of countries with enormous growing inequalities.

[Mike Meyer]

PUT A DEMOCRATIC WOMAN IN THE WHITEHOUSE. Call Nancy Pelosi @1-202-225-0100 and DEMAND IMPEACHMENT. DC business hours only, call often, and spread it around.

[JJHunsecker]

KG: Rumor has it you are a Maroon, and so am I. One of the reasons for growing inequality is the UofC School of Economics. Not so long ago, Gary Becker gave an interview to the Italian magazine Espresso, in which he extolled inequality. It keeps the peons' nose to the grindstone, neh? Fear of falling as a great motivator (as Barbara Ehrenreich tells us). And if we look at the Italian data, we can see why the divinely anointed Becker would have to give them a talking to. Italy hasn't become unequal enough, despite the attempts by Berlusconi and friends to apply American neocon ideas to the economy and other aspects of life.

Meanwhile, an oddity of the data? What's with Canada?

JJ.