midterm
What does this figure tell us? In particular, can you use it to answer the following two questions? (see [A]) (1) Can we say that most countries experienced rising or falling inequality from 1990 to 2015? Or is the picture more mixed? (2) Do the majority of the world's people live in countries that experienced rising or falling inequality from 1990 to 2015?
(1) Global inequality has fallen, within country inequality has no clear trend. richer countries tended to have increasing inequality. (2) To answer this question, you need to recognize that each country's population is proportional to the size of its "dot" in the scatterplot. Large majority of people live in countries where there is rising inequality
If you wanted to argue that inequality per se matters, what kinds of arguments could you make? In answering this question, you should draw on both the lectures and the Peterson article.
Could argue - Distributive justice concerns ---- inequality in itself may be bad just for existing - Instrumental concerns ---- Inequality has negative consequences like.. Political polarization Inequality makes people angry and think that the system is rigged Political representation Higher income people have more political influence, esp through campaign contributions Economic growth Inequality is bad for it bc inequality may decrease it Social mobility Other stuff
Why might some inequality be a desirable thing?
Incentives to work, study, take risks, innovate, etc - Some inequality results from free choices available to all --- work/leisure trade offs, career choice, savings-consumption choices, etc
What do the following figures tell us? [C]
American prefer an equal distribution of income for various social classes, they agree that income inequality exists (expected value). Americans prefer a more equal distribution of wealth, such as that in other countries like Sweden.
Autor presents many tables and graphs. You should be able to interpret all the tables and graphs presented in the associated lecture. That is, if I present them on the exam, you should be able to tell me what they mean. (check study guide for graphs)
Basically most graphs indicate middle skill workers are being hurt
What do the following figures tell us? [D]
Economic mobility is low at the highest and lowest levels of income groups, meaning the rich don't tend to lose their wealth and the poor don't tend to gain it. The second graphic indicates that income mobility is correlated with lower levels of inequality. The higher the Intergenerational Earnings Elasticity, the higher likelihood wealth will stay the same (decreased mobility.)
What does the following figure (from the Ravallion paper) tell us? [E]
Even though it's raised inequality within countries and also reduced inequality between countries/"globally" Globalization boosted growth in middle-income countries (China, India) average incomes in these countries closer to the rich world, reducing between-country inequality raised incomes of billions of poor people, reducing "global" inequality
Everett and Everett set up a hypothetical perfectly fair society. Why is this society perfectly fair?
Everyone has an "adequate" income, meaning no poverty (perfect standards of living) People who make the same choices get the same rewards Any income differences are because of choices equally available to all All inequality is fair in this society!
In lecture, I said that measurement choices could affect our perception of inequality. Can you give an example of this?
Example: Graph showing long timeline displays inequality as a common trend vs a shorter graph from 1950, making it seem like inequality is skyrocketing Income vs wealth distribution among classes (looking at wealth makes inequality seem higher) pre-tax vs post-tax income (inequality changes)
As Everett and Everett note, we cannot reach moral judgments about inequality without specifying how much of it is fair and how much is unfair. What kinds of empirical data might constitute evidence of unfair inequality?
Gender pay gap Racial differences in income Birth location (countries, zip code) leading to different levels of income
Everett and Everett discuss three types of inequality: gross inequality, fair inequality,and unfair inequality. You should be familiar with these distinctions.
Gross (sum of fair and unfair) Empirically observed inequality (TOTAL) Fair Reflects foreseeable consequences of choices equally available to all U knew what u were doin The lack of men in STEM jobs today Unfair Does NOT reflect such choices (reflect luck) The lack of women in stem over 100 years ago (b/c women suffrage and issues with gender discrimination)
What does Autor mean when he says that labor markets have been "polarized" or "hollowed out"?
He means that that especially in advanced societies, medium and low skill workers have suffered So despite an increased demand for low skill workers, medium skill workers move to low wage jobs. So now there's too many workers looking for low-skill jobs Which prevents wages from rising So high skill workers pull away from medium and low skill workers financially *But if medium skill workers moved to higher skill employment, inequality would decrease!
In what ways have the effects of globalization been similar to those of technological change?
Hollowing out of job market (loss of middle skill jobs, hurts middle and low skill) Increasing skill premium (increasing difference in income between low skill and high skill) bc middle skilled aren't getting educated and technology is growing too fast Higher inequality
In lecture, I said that our unit of analysis could affect our perception of inequality. Can you give an example of this?
If the world is our unit of analysis, inequality is decreasing as a whole But if we look at inequality within individual countries, trends are unclear. However, if we focus on anglo-saxon countries and especially more wealthy countries, inequality is increasing due to different circumstances **This gets more attention from the media and scholars because these countries dominate the discourse, inflating perceptions of global inequality**
What is industry concentration? What are non-compete and no-poaching clauses? Why are these things relevant to inequality?
Industry concentration: when industry become more compact, so smaller firms make up total market Non-compete: employees can't work for competition No-poaching: employers can't steal other company's workers This decentivices employer competition, because of a lack of options for the workers and limits worker bargaining power which leads to less wages. Therefore there is income inequality because not only are employees being paid less than market value, explorers gain more revenue, furthering that inconsistency. Addition, the declining unionization adds to that problem as well.
Why, according to "luck egalitarians", is some inequality undesirable?
Inequality based on luck - people don't have much choice over the circumstances of their lives This results from accidents of birth (happen to be born to richer family, better neighborhood, more opportunities, better connections) Luck is morally arbitrary - there is no reason for life to reward the lucky or punish the unlucky We should accept morally justifiable inequality rather than luck based inequality
In lecture, I noted that technological change and globalization cannot fully explain the recent rise in inequality. Discuss two aspects of recent inequality trends that technology and globalization cannot explain. What kinds of variables are needed to explain these two aspects?
It can't explain The growing income gap between the top one percent and the 95th percentile or The sharp rise in inequality in "Anglo-Saxon" countries relative to continental European countries (how inequality has risen in some rich countries but not all) These two aspects can be explained through variables that (1) vary across countries and (2) have different effects on the rich and merely affluent (to explain richest pulling away from middle rich)
What is the difference between market and disposable income?
Market Pre-tax, pre-benefits and gov programs (transfers) Increased inequality when looking at relative market incomes Disposable Post-tax, post-transfers and benefits Decreased inequality because of social welfare programs aimed at uplifting poor alongside progressive taxation (higher taxes on the richer)
The Economist review of Scheidel's book notes that inequality has historically only declined under extreme and unusual circumstances. What are these circumstances? Why do they reduce inequality?
Mass mobilization warfare (WWI, WWII) - Involves entire society - Wealth destruction, high taxes on the rich to pay for war (decreases ineq) Violent revolutions (Cuba, Russia, China) - Wealth destruction (decreases ineq) State Collapse (Rome) - Lose control over society**? wealth destruction** (b/c of wealth destruction? Leads to?)** Mass plague/epidemics - reduces demand for land because less people to purchase and less workers - This lowers rents to increase demand and get tenants - Reduced supply of labor because less people - This increases wages to recruit workers (decreases ineq)
What is the basic premise of Utilitarianism?
Maximize social utility (good feelings) Maximize pleasure, minimize suffering Most things have "diminishing marginal utility" (pleasure) Meaning, the more money you have, the less additional dollar means to you First $100 earned: satisfies basic needs (food, shelter) Second $100 earned: car Third: iPhone Fourth: Rolex Buying less essential things SO! If the final $100 a rich person gets barely brings utility, it should be redistributed to a poorer person! That way there's a way bigger gain in utility Total utility is maximized when income is equal (in a hypothetical two person society)
What is monopsony power? Why has employers' monopsony power been increasing in recent years? Why and how does this affect inequality? Can anything be done to reverse this trend?
Monopsony power (lower than competitive prices) In a competitive market, wage = each worker's marginal revenue product MRP:the extra revenue an additional hour of labor brings in wages are "fair," in the sense that workers get paid "what they're worth" (which doesn't mean wages are "good") In order to pay more, the company loses money In a monopsonistic market, wage < MRP Wages are low because of neoclassical exploitation Employer power Rising industry concentration World is dominated by large firms for political/economic reasons High tech start ups = b, but less marginal ones Globalization gives them additional support Lenient policies and allows merging (to join forces or dominate another company) # of employees decrease = less firms = less competition Employers can claim a greater share of revenues, labor's share is reduced Declining unionization Non-compete and no-poaching agreements Employees can't work for competitors Can't steal each other's employees Reduce competition between employers and limit worker bargaining power and wages Reversal: Stronger antitrust policy (e.g., stricter rules on mergers and acquisitions) to reduce market concentration Restrictions on non-compete and no-poaching clauses for less-skilled workers
How, according to Neoclassical theory, should globalization affect inequality?
Neoclassical theory: there are 2 factors of production (labor and capital) Factors are either abundant or scarce EX: US is capital-abundant, labor-scarce EX: India is labor-abundant, capital scarce Each factor has a price Labour - wage Capital - rate of return (interest, profits, rent, etc.) Cross-border flows lead to factor price equalization Prices of factors are equalized across countries US would become more labor abundant and India would become more capital abundant Globalization benefits the abundant factor and hurts the scarce factor In rich countries Capital returns RISE and wages fall (hurts workers if poor, helps rich) This is because the # workers are increasing, going from scarce to NOT scarce (now bargaining power is limited!) Yay more capital for rich Increases inequality In poor countries Wages rise and Capital returns fall Now workers are leaving the country, theres some demand for them now! Wages rise and capital returns fall Decreases inequality Capital-abundant countries: capital returns rise, wages fall; increased inequality Labor-abundant countries: wages rise, capital returns fall; reduced inequality Globalization of capital, labor raises inequality in rich countries, reduces inequality in poor countries (central argument) (both countries outsource their demands: US for labor intensive goods, poor for capital)
Why were hunter-gatherer societies relatively equal? Why did the First Agricultural Revolution increase inequality?
No economic surplus (living above subsistence level) - Can't have surplus if you consume everything you need to survive - No accumulation of assets, passing on property/wealth (hoarding!!) - Hoarding is difficult because hunter-gatherers constantly move around' The First Agricultural Revolution increased inequality - It provided both surplus and accumulation Implies inequality is a disease of affluence (prosperity leads to inequality) - Inequality only exists when societies become wealthy enough to provide it
In lecture, I noted that technological change and globalization pose similar challenges and also require similar solutions. What are the two main solutions I discussed? Why might these solutions not completely solve the underlying problem?
Pay people to do nothing Gross income is increasing as a result of trade, it just isn't going to the right people Tax winners (consumers, export industries) And compensate losers (import competing industries, like American steel workers) So rather than impose tariffs to protect steel jobs (waayy more costly) - just pay steelworkers to do nothing Another solution is to implement active labor market policies Rather than free $ for unemployed, they help people get back to work Helps w skill transfer, retraining opportunities to get back into workforce Also relocation assistance! More workers to where there are jobs This preserves the benefits of open trade And also addresses challenges of technological change (unaddressed by protectionism) Pays for itself Popular They might not solve the underlying problem of inequality due to inequality rising in some countries more than others - even when technology and globalization are constant. This is due to tax rates
What is the central point of the Saez and Zucman opinion piece? Why, specifically, does it suggest that a focus on US income tax rates is misleading?
Progressive: rich are taxed more heavily than poor Regressive: poor are taxed more heavily than rich The US tax system seems progressive if you look at federal tax, but all the other taxes don't reflect that. While income taxes affect the rich more than the poor, the consumption (sales, tariffs) and payroll tax (social security, medicare) affect the poor and middle class more than the rich. Adding up these taxes leads to flat, but regressive taxes. Even though currently progressvie taxes are the norm. not progressive, because poorer people spend a higher fraction of their income on consumption and payroll taxes than richer people do
What is occupational licensing? Why is it relevant to inequality? What could be done to ensure that occupational licensing has more positive effects?
Regulating who can do WHAT jobs It is relevant to increasing inequality because it can prevent more people from providing a service, especially in more educated workers Imagine you're in a town where only one lawyer is allowed to be licensed. They can charge obscene amounts for their services because there is no competition Can protect people from having unqualified people perform services But oftentimes this limits people who have the essential knowledge base from performing a service They are barriers to entry, redice competition, raise incomes in licensed sectors Solution: Subject licensing rules to stricter scrutiny, require clear consumer/public safety rationale (Does it help the public?)
What is the difference between relative and absolute inequality? Why might the two measures lead to different conclusions about whether and how much inequality is rising? Can you give an example?
Relative How much one earns in comparison to someone else (ie 1% income divided by the 10%) Absolute Dollar Differences in income for different income classes (rich and poor) Different conclusions If incomes are rising, absolute inequality will rise more than relative inequality (because the same % increase means larger absolute gains for the rich)
Suppose society consists of two people: a "poor" person with one dollar and a "rich" person with five dollars. Also assume that money yields diminishing marginal utility. Why might a Utilitarian recommend income redistribution in this case?
SO! If the final dollars a rich person gets barely brings utility (isnt used for essentials and doesnt bring happiness), it should be redistributed to a poorer person! That way there's a way bigger gain in utility Total utility is maximized when income is equal (in a hypothetical two person society) - so income should be $3 for poor, $3 for rich
Some people argue that we shouldn't care about inequality per se (i.e., relative incomes) but should rather focus on absolute incomes. What is the gist of this argument? (NOTE: be careful not to confuse absolute incomes with absolute inequality.)
Some people feel people need basic standards of living - so in a perfect society where all basic needs are met, inequality itself is not an evil. Poverty is the enemy, not inequality. Inequality does not lead to negative consequences in this perfect society as long as basic needs are met.
41. Saez discusses three possible explanations for the relationship between top tax rates and top income shares. You should be able to answer the following questions: (1) What are these three explanations? (2) What policy prescriptions emerge from each? (3) How does Saez test these explanations against each other? (4) Which explanation seems most consistent with Saez's empirical evidence? (CHECK DOC FOR THIS)
Supply-side scenario High taxes discourage innovation Cuts in tax rate incentivises people to work more Increased inequality b/c top incomes rise disproportionately Helps economic growth (reagan) Cutting taxes is a positive-sum game, helps both rich and poor Tax avoidance/evasion High taxes = people avoid Avoidance: legal deductions, write-offs, credits, etc. Evasion: illegal misreporting of income, hiding income in offshore havens, etc Top taxes lower reported income Cut taxes Rent seeking Tax rates don't affect size of pie, but division High taxes decentivize people to earn more They may seek alternative benefits (e.g., pension plans, stock options, vacation time), or just settle for lower salaries Cuts in top tax rates lead top earners to seek higher salaries If doesn't enlarge pie, higher top salaries come at expense of lower income workers Lowering taxes is a zero-sum game (what CEOs gain, workers lose)
In recent decades, who has faced the most competition from new technologies? Who has benefited most?
Technology helps automate routine tasks (assembly line production, "if-then", data/accounting) These tasks are middle of the skill distribution Bank tellers, travel agents, call-center workers, etc Those who have benefited most: those who perform non-routine tasks Abstract Requires probleolving abilities, intuition, creativity, persuasion Manual Requires situational adaptability, visual/language recognition,personal interaction
Educational achievement (e.g., the percent of people with college degrees) has continued to rise in the U.S. and elsewhere. However, the rising supply of college graduates has not reduced the "skill premium"—in fact, this premium has continued to rise. How does Autor explain this?
Technology is increasing the demand for skilled workers, but education is not keeping up Not enough supply of skilled workers to keep up with demand So skill premium keeps rising Not enough middle skill becoming high skill. So the income difference will continue to be high between low+middle vs high because of the oversaturation of middle skill workers and there's NO middle skill jobs, so they work low skill, low paying jobs Basically too many middle skill workers, not enough middle skill jobs! They need to get more educated but they aren't
What is Everett and Everett's main point? Give some examples to illustrate this point.
That inequality can exist in even a PERFECTLY just society age -based inequality Higher income growth increases inequality (working/retired, young/old) Falling inequality: Higher savings rate reduces inequality bc of higher retirement incomes (non-working old people have more money) Also inequality can reflect choices Household partnerships Educational choices Working conditions (labor/leisure trade offs, difficulty of labor)
What does the "Elephant Graph" (from the Ravallion paper) tell us? Specifically, how does it help us understand trends in global, between-country, and within-country inequality? Put differently, does the Elephant Graph help explain the other two graphs shown below ("It depends how you look at it")? What is the "conventional wisdom" on how globalization has contributed to these trends?
The "head" represents a decline in between-country inequality, while the "trunk" represents an increase in within-country inequality The very poorest are locked out of growth The global middle class are gaining income Helps us understand "Global inequality, Gini coefficient" graph because the recent plateau and decrease in inequality can be attributed to this (avg incomes are catching up to richer world) The "poorer rich" are losing income or not growing at all The global elite is booming Helps us understand recent increases in top 1% income share
You should know what the "skill premium" is.
The difference in income between the skilled (higher education) and unskilled workers (lower education) ⇐ [low and medium]
What does the following figure tell us about trends in absolute and relative incomes? [B]
The figure tells us that income growth was relatively fairly distributed throughout different classes from 1947 to 1979, but in recent years (1979 to now), the lowest income earners have actually lost income while income growth rates appear to get higher with increasing income. (increasing inequality)
What do the following figures tell us? [G, H]
The first graph demonstrates how the pre-tax income of the top 1% is increasing while the top marginal tax rate is decreasing. (because the rich have the incentive to gain higher wages). The small bubble in the middle suggests that high taxes lead to less income. The top 1% income shares of places like Australia, Ireland, Italy are increasing and the marginal tax rate is decreasing, while France, Finland, and Netherlands top 1% income have high marginal taxes and lower income shares. For Spain, the income is increasing while the marginal tax rate stays the same.
Is contemporary inequality "normal" or "abnormal" in a statistical (as opposed to normative) sense?
The low inequality of the mid 1900s is the exception Recent rise is normal
Technology can either substitute for or complement labor. How does the role of technology (substitute or complement) relate to its income effects?
There are winners and losers of technological advancement If technology substitutes your labor Lower wages If complements Higher wages
Ravallion presents a second Elephant Graph that looks quite different from the first: Why does the second graph look so different? How does this relate to our earlier discussion of measurement choices and inequality? [F]
This graph shows the absolute increase in income, making inequality seem more severe because it is not measured relatively. This relates to differing perspectives of equality depending on measurement
How has the Neoclassical prediction about globalization turned out to be wrong?
This theory ended up being Wrong: inequality increased in both rich and poor countries thanks to: Offshoring tasks Involves routine tasks ((manufacturing assembly, call centers, accounting, programming) In rich countries ⇒ medium skilled tasks In poor countries ⇒ higher tasks which increase wages capital- labour bargaining When employees threaten to move overseas and hire workers for cheap labour Decreases workers bargaining power and therefore their wages
How, empirically, have trade and offshoring affected inequality? How can we explain this?
Trade and offshoring have relatively the same effect, when poor countries export & rich countries import medium skilled goods The end result:lower wages for low/medium-skill workers in rich countries, higher wages for higher-skill workers in poor countries also Middle skill jobs end up being outsourced Low skilled ones ended up being outsourced long ago or CANNOT be outsourced
In the lecture, I said we'll focus on two measures of inequality. What are these measures? What are their relative strengths and limitations?
Two measures: - Top income shares and Gini Coefficients Top income share: What % of income goes to each socioeconomic class of wealth (how much to top 1%, top 10%, etc) Strengths: Tells you how different income groups are doing Weaknesses: Doesn't tell you anything about broader income distribution Gini Coefficients Range: 0-1 or 0-100. Higher values = more inequality Strengths: Tells you about broader income distribution Weaknesses: Doesn't tell you how each individual class of wealth is performing
Suppose you want to argue that inequality is falling. What evidence might you present?
You use the world as your unit of analysis (global). Look at gini coefficients over time for the entire world.
Suppose you want to argue that inequality is rising. What evidence might you present?
You would have to look at within country data within rich countries (look at top 1% income share). also look at pre-tax and transfer income to make comparisons
Suppose you want to argue that the overall trend in inequality is unclear. What evidence might you present?
You would look at "within-country" data of all countries. There is variation - some have increasing gini coefficients, some have decreasing.
