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Inequality update

Claude Fischer, professor of sociology | June 4, 2013

Inequality has become the new hot topic over the last several years – in the media and in the research community. This post briefly reports several recent studies of inequality that tell us what’s been happening, why, and to what effect. (It’s not a cheery story.) Before that, notice how rapidly public attention – if not action – has recently turned to inequality.

Income inequality started widening about 1970, expanded quickly in the 1980s and 1990s (when colleagues and I wrote Inequality by Design), and grew much more slowly since.[1] Media and academic interest in the topic seems to have taken off about 25 years after the big jump. The number of stories in the New York Times that mentioned inequality rose from about 90 a year in the 1990s to 840 a year in the 2000s and to about 2,700 a year since the start of 2010. About 250 economics articles a year touched on inequality in the 1990s – much fewer than in sociology, by the way – 850 in the 2000s and over 3,500 per year in the 2010s.[2] Better late than never.

graph

Piketty & Saez (via source)

What are some of things we are learning from this 30-fold increase in media attention and 14-fold growth in economic research? What follows is not a systematic overview – that would be a Herculean task and there are many books that attempt it – but an introduction to several studies that drifted across my (virtual) desktop recently. Some give us the long view, some a view of how the Great Recession accentuated inequality.

What’s happened

From 1970 to about 2000, the standard Gini index of overall income inequality rose about 17%; the rise leveled off in the 2000s at an inequality comparable to that of a century ago.[3] Emmanuel Saez has shown that income inequality at the very top of the income distribution grew especially fast. Between 1970 and 2007, the share of national, pretax income taken by the top one percent of households went from about 9% to about 24% of the total. The stock market collapse deflated their share for a moment, but by 2011 the One Percent were back up to receiving 20% of all income.[4]

Our attention to income inequality sometimes leads us to miss the deeper trends regarding wealth inequality. Inequality in households’ net worth – which is about double the degree of inequality in income – grew slowly after 1962 (about 4%), Edward Wolff reports, but it jumped during the recession by about 4% in three years. If we set aside homeowners’ equity in their houses – the bulk of wealth for most Americans – wealth inequality is yet higher and grew yet faster, by 11% over the last 40 years. More strikingly, the One Percent reaped 38% of the growth in the nation’s wealth between 1983 and 2010, while the bottom Sixty Percent of households actually lost wealth.[5]

Two recent studies show how inequality is increasingly separating people residentially. One, by Kendra Bischoff and Sean Reardon, I reported earlier here.  They show how American neighborhoods have gotten increasingly segregated – the rich here and the others there – over the last 40 years. More recently, Ann Owens and Rob Sampson showed that the Great Recession exacerbated those trends. Unemployment and other indicators of distress grew most in already disadvantaged neighborhoods, accentuating the spatial inequality of America.[6; see also [7]]

Why has this happened?

The long-raging debate in response to this question roughly divides those who see widening inequality as “natural” and largely uncontrollable – the result of increasingly technical jobs requiring increasingly skilled employees, computers replacing routine work, globalization of labor, international competition, etc. – from those (count me in) who see such factors as neither inexorable nor uncontrollable, but facilitated by political decisions – undermining of unions, new rules for running corporations, lower taxes on wealth and higher tax expenditures for companies, disinvestment in public goods, and the like. Fully exploring the empirical literature would be like parachuting into a rain-forest with neither map nor compass because everything is entangled with everything else. Here, instead, are a few recent additions to the discussion.

Tali Kristal addresses the notable differences in inequality and inequality trends between American industries. She finds that how much of an industry’s income went to workers versus how much to investors and how much more pay went to better-educated versus less-educated workers depended a lot on how strong unions were in the industry. Weaker unions, especially in industries that had once been highly unionized, meant a growing wage gap among employees and more of the gains going to the employers.[8]

Ken-Hou Lin and Donald Tomaskovic-Devey add another factor: the rise of “financialization.” The term refers not only to banking and Wall Street becoming larger chunks of the American economy, but also to many manufacturing companies that used to make things turning to financial operations for more of their profits. General Electric, for example, used to be about making electrical appliances; now GE is about lending money. The more that an industry turned to finance after 1970, the greater the share of its income that owners, top management, and top workers got, and the less that average workers got. People who pushed paper in business offices got paid more and people who pushed pallets on factory floors got less.[9]

Yujia Liu and David Grusky analyze the widening wage differentials between occupations, differentials which have driven much of the growth in inequality. They link the kinds of skills needed in about 500 non-manual occupations to the wages for those occupations. Over the last 30 years, jobs calling for computer or quantitative skills did not (other things being equal) see an especially notable rise in wages, as some have suggested, nor did jobs requiring creativity, as others have suggested. Wages rose notably for jobs requiring managerial and nurturing skills and rose especially rapidly for jobs requiring “analytical” skills – reasoning, synthesizing, assessing ideas (for example, scientists, engineers, CEOs, and doctors).

Too much attention has focused, Liu and Grusky argue, on computerization as the driver of inequality, when institutional changes in the economy are more important – a point consistent with the findings about financialization. Some institutional changes may even have arisen outside the labor market itself, for example, in the way major universities parcel out elite credentials and in the desire of young women to explore careers besides those such as nursing and counseling.[10]

To what effect?

The Great Recession has, except for the temporary collapse of stock values, exacerbated inequality trends. In an earlier paper, Michael Hout showed that the gap between how the well-off and poorly-off reported their morale, including even their satisfaction with family life, widened between 1970 and 2000.[11] In a recent paper, Hout and Pat Hastings follow a set of  General Social Survey respondents from 2006 to 2008 and 2010, right through the economic collapse. Hout and Hastings show how experiencing  job loss or financial loss (which, again, hit the worse-off harder) strongly depressed respondents’ feelings of happiness. [12]

S. Philip Morgan and his colleagues have identified an interestingly complex effect of the Great Recession. The higher the unemployment rate grew nationally and the higher the unemployment rate in a state, the fewer babies women had – perhaps 4 million fewer by 2009. The birth control effect of unemployment rates was stronger in “red” states than in “blue” states. Morgan et al. argue that, after Obama’s election in 2008, Republicans became more pessimistic about the economic future while Democrats remained more optimistic; that optimism or pessimism influenced decisions to have children – to the advantage of blue states.[13]

Many have argued that the growing inequality of income and wealth is also promoting greater inequality in political clout. Could be, but that is a big topic of its own, to be visited in a future blog post.

Finally, it is historically interesting to note some of the things that are not happening: mass demonstrations, large government work projects, millions of unemployed moving about the country, public repudiation of the ‘70s-‘80s deregulation regime, and crime waves. (See earlier post.)

Cross-posted from Claude Fischer’s blog, Made in America: Notes on American life from American history.

………………………………………………

Notes

[1] Source: pdf.
[2] For stats nerds. I counted the number of New York Times articles in which the word inequality occurs using the Times’s search function. I counted the number of abstracts in which the word appeared in the EconLit database. In sociology, BTW, it was 420, 1050, and 1270, suggesting that sociologists were ahead of the curve on this topic.
[3] See [1].
[4] Fig. 2 in Saez, “Striking it Richer,” pdf. See also this pdf.
[5] Wolff, “Asset Price,” table 2 and 4, pdf.
[6] Owens and Sampson, “Community,” Pathways, 2013 (pdf).
[7] Fischer et al., “Distinguishing the Geographic,” Demography, 2004   (pdf, gated)
[8] Kristal, “Capitalist Machine,” Amer. Soc. Rev., 2013 (gated).
[9] Lin and Tomaskovic-Devey, “Financialization,” Am. J. Sociology, 2013 (gated).
[10] Liu and Grusky, “Third Industrial,” Am. J. Sociology, 2013 (gated).
[11] Hout, “Money and Morale,” Russell Sage Foundation (here).
[12] Hout and Hastings, “Recession,” (pdf).
[13] Morgan et al, “Fertility,” in Grusky et al (eds.), The Great Recession, hereDaniel Schneider’s later work confirms a recession effect on births.

Comments to “Inequality update

  1. What you enjoy is what you will pursue and practice. Thus skills develop from our interests and passions. Clearly no two people are interested in the same things. Some are interested in mechanical things. Others are motivated by power and hierarchy, and crave the attention of crowds. Still others desires to follow orders from superiors, and shy away from attention. These differentials in interests lead to different skills, which are unequally valued by corporations. Unequal interests (passions, desires) lead to unequal wealth.

    Like bees, we are specialized actors, with an innate distribution of traits. We evolved by group selection to fill specialized roles and niches, otherwise society would not scale. You can’t teach interests and passions and desires. They come from within (innate).

  2. Unfortunately, Piketty and Saez are wrong in the interpretation of their figure. they confuse the change in income distribution and the change in the share of income, GPI, in total GDP. The figure you have borrowed should be presented together with the evolution of GPI/GDP ratio. The increase of income received by top 10% is fully taken from the corporate’s (and proprietor’s) portion of the gross domestic income, which does belong to the top 10% or even less. In other words, the increase in the top 10% income is just the redistribution between two pockets of the rich, not the robbery of the poor – http://mechonomic.blogspot.co.at/2013/07/the-rich-rob-poor.html. This is a methodological error so common for economists. The portion of income not associated with the redistribution of the rich-men-money between their pockets is constant, as the BLS data show.

  3. One thing I feel is left out of the income/wealth inequality debate is the disconnect between the domestic corporation and the domestic consumer. Flashback to the early 1900s and the genius of Henry Ford is revealed as he realizes that in order to grow his company one primary thing needs to happen, his consumer base needs to expand. The two major ways he finds to accomplish this are:
    1) Reduce production cost (Assembly lines, efficiency, etc)
    2) Increase the wealth of the average citizen.

    The true genius lies in the way he accomplished #2. He raised the pay of his workers and on top of that he shared 10M in profits with workers, leading to an arms race competition for workers and causing other companies to also increase wages. Suddenly the percentage of the population he could sell cars to increased dramatically.

    Flash forward to present times. Domestic corporations are no longer looking at the US consumer as the primary engine of growth, they are looking at the nearly 7B untapped global consumers. The engine of growth now uses the following model:
    1) Reduce the cost of production, not via efficiency gains but via reduction in labor costs either by outsourcing or squeezing domestic wages & compensation.
    2) Volume sales to international consumers.

    The tie between the health of the domestic corporation and the domestic consumer has been lost.

    If we want to reverse this trend we need to regain this bond. Corporations need to share profits (domestic and international profits) with domestic workers. Taxes can be used as an incentive to make this happen. Create an inverse relationship between corporate taxation and the percentage of profit shared with domestic workers, tax luxury incomes, reduce the distinction in taxation between types of income, and reduce the double taxation on dividends. Those will go a long way towards solving the problem.

  4. Prof. Fischer, a fact of life is that until women have job, political, social, scientific, religious, ethnic and academic equality, we shall never make enough progress to guarantee an acceptable quality of life into the long term future for the human race.

    Prof. Joyce’s post “For women in science, it’s still chilly out there” and daily news reports prove the never-ending and totally unacceptable consequences of inequality in America and around the world.

    Do you and your social sciences colleagues have solutions that are feasible to implement today, before time runs out?

  5. I have a new model that seeks to explain the economic effects of low labor share. The model is for Effective demand based on labor share. The equations coming out of the model show that low labor share affect the effectiveness of monetary policy, growth potential, natural rates of unemployment, and more.
    And labor share is falling from Japan, the US to Europe. Low labor share is forcing upon the advanced economies the economic dynamics of Latin American countries.
    This issue of labor income will grow in understanding. My work shows how little is understood about the importance of labor share. Even Keynes’ concept of effective demand has been poorly developed. Here is a link to the Effective demand blog with many posts available.
    http://effectivedemand.typepad.com

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