Income inequality and American business Christopher Jencks Harvard - - PowerPoint PPT Presentation

Income inequality and American business

Christopher Jencks

Harvard Kennedy School HBS Discussion on 2/13/2014

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Sources: Economic Report of the President, 2013; Census Bureau, Current Population Reports, P-60,-245, Table A-2.

Growth of median household income and per capita personal income: 1969 to 2012 (1969 = 100)

104 111 121 120 110 128 159 189 223 223 80 100 120 140 160 180 200 220 240 1969 1979 1989 1999 2009 2007 2012

Adjusting for inflation, mean personal income per capita more than doubled between 1967 and 2007, while median family income rose 20%

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Median income was lower in 2012 than in 1989

$48,520 $51,681 $56,080 $55,627 $46,449 $51,071

$0 $20,000 $40,000 $60,000 $80,000 $100,000

1969 1979 1989 1999 2009

Median income at business cycle peaks:1969 to 2007

Annual increase: 1969-2007 = 0.48% 1969-2012 = 0.22% (in 2012 CPI-U=RS dollars)

(2012)

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Is our problem inequality or poverty? Lately, both.

Two measures of bottom quintile's mean income: Purchasing power and ratio to population mean (both shown as percent of 1967 level)

50 60 70 80 90 100 110 120 130 140 150

1967 1972 1977 1982 1987 1992 1997 2002 2007 2012

1967 = 100

142

119 108 80

1974-76

Purchasing power

(1967 = 100)

Ratio to overall mean

(1967 = 100)

1999

1967 mean = $9,419. Share of total personal income = 4.0%. Source: CPS, Series P-60-167, Table B-2 .

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Household income is more unequal than hourly wages 90/50 ratio 50/10 ratio 1973 All households 2.08 2.85 M&F Wages 1.91 1.91 2007 All households 2.49 3.43 M&F Wages 2.33 1.94

Wage data from Economic Policy Institute

Household inequality from 40,000 feet

CPS Gini coefficients for US households' pretax money income: 1967 to 2012

Gini = (0.0015)x(Year) - 2.6241 r = 0.979

0.00 0.10 0.20 0.30 0.40 0.50 1967 1972 1977 1982 1987 1992 1997 2002 2007 2012 Gini coefficient 0.416 0.477 Measurement changes Published for 1967-92 Adjusted to match post-1993 series* Published for 1993-2012

* Neither CBO nor IRS data suggest that inequality rose between 1992 and 1993, so the 4.8% increase in the CPS Gini between 1992 and 1993 is probably all spurious. The adjusted estimates inflated all pe-1993 Ginis by 4.8%.

Trend in 90/50 ratio: Rising skill premiums?

90/50 income ratios for households, by age: 1967 to 2012 1.0 1.2 1.4 1.6 1.8 2.0 2.2 2.4 2.6 2.8 3.0

1967 1972 1977 1982 1987 1992 1997 2002 2007 2012

Ratio 90/50 ratio: Age 18 and over 90/50 ratio: Children under 18 2.68 2.54 2.06 1.89

Measurement changes

Ratios are based on percentiles of total household income, adjusted for household size by dividing total household income by tgher square root of household size. Household income is converted into 2012 dollars using the Implicit Price Deflator for Personal Consumption Expenditure from the National Income and Product Accounts. Source: Tabulations by Anny Fenton using the March Current Population Survey. File=Fenton CPS ratios with Jan 2014 AF edits (65+ head of HH incl) 011014 FINAL.

50/10 ratio: Less marriage? Lower male wages?

50/10 household income ratios for individuals, by age: 1967 to 2012 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5

1967 1972 1977 1982 1987 1992 1997 2002 2007 2012

Ratio Children under 18 Adults 18 and over 3.44 4.11 2.93 2.66

Measurement changes

4.38 3.26

Ratios are based on percentiles of total household income. Incomes are adjusted for household size by dividing total household income by tgher square root of household size. Household income is converted into 2012 dollars using the Implicit Price Deflator for Personal Consumption Expenditure from the National Income and Product Accounts. Source: Tabulations by Anny Fenton using the March Current Population Survey.

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The return of the super-rich: Globalization? Computers? Tax cuts?

Deregulation? Insider trading? A culture of risk-taking? And greed??

10 20 30 40 50 60 70 80 90

1920 1930 1940 1950 1960 1970 1980 1990 2000 2010

Ratio to mean for all households

Top 0.1 percent Next 0.9 percent

Source: Paris Top Incomes Database. Paris detailed percentiles for US (HBS Fig 3)

12.7 6.5 11.7

Ratio of pretax personal income means within the top one percent to the mean for all households, excluding capital gains: 1923-2012

55 19 1973 88 82 1928 2012

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5 5 5 3 21 17 14 8 7 6 27

Spain Italy France Great Britain Germany Sweden Australia United States Norway Canada Netherlands

Ratio of those who agree or agree strongly to those who disagree or disagree strongly that "income differences in this country are too large."

How do ordinary citizens feel about all this?

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Market Gini Disposable Gini Percent reduction Sweden 2000 0.375 0.238 36.5 Finland 2000 0.352 0.233 33.8 Denmark 1997 0.345 0.237 31.3 Norway 2000 0.337 0.236 30.0 Germany 2000 0.360 0.254 29.4 Australia 1994 0.396 0.293 26.0 Great Britain 1999 0.450 0.341 24.2 Canada 2000 0.380 0.300 21.1 United States 2000 0.436 0.363 16.7 Switzerland 1992 0.332 0.297 10.5 MEAN 0.376 0.290 23.0

How have legislators responded? Reduction in market income inequality among working-age households due to taxes and transfers in ten rich democracies

Source: Kenworthy and Pontusson (2006)

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Effects of rising inequality in rich democracies

 Economic growth

Short-term: small but positive. Long-term: unclear

 Employment

Haven’t found (or done) any research

 Life expectancy

Small but negative cross-nationally in LIS Effects limited to infants and males 35-59?

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Effects of rising inequality in rich democracies

 Disparities in children’s economic prospects.

Strong theoretical reasons to expect less mobility when parents resources are more unequal. But no good evidence of such effects so far. Maybe too soon to say.

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Effects of rising inequality in rich democracies

 Disparities in children’s test scores

Wider in more unequal countries, but effect

• f within-country changes is unclear.

Widened a lot in US for post-1980 cohorts. Mostly due to rising absolute effect of parental income, not to change in parental income dispersion. Macro versus micro effects of inequality

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Effects of rising inequality in rich democracies

 Disparities in political influence

Meltzer-Richard theorem predicts that demand for redistributive government spending will rise as the fraction of voters with incomes below the mean rises, but

• 1. Rising inequality allows the very rich to exert more

influence on the political views of the less affluent (Fox News) and politicians (K Street).

• 2. Rising inequality may lower turnout more among

the less affluent. Passivity, vote suppression, disenfranchisement of felons, no path to citizenship.

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Political effects of high inequality in the past If there are men in this country big enough to own the government of the United States, they are going to own it.

Woodrow Wilson (1913:286)

We must make our choice. We can have democracy in this country, or we can have great wealth concentrated in the hands of a few, but we cannot have both.

Louis Brandeis, quoted in Dillard (1941)

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An agenda for the private sector

1.

It is unreasonable to expect most businesses not to pursue profits or to give away a larger share of profits than the law or the market requires to either workers

• r good causes.

2.

However, a democratic government’s job is not to maximize business profits but to protect the public

• interest. That inevitably means making rules that limit

what business can do by regulating wages, hours, safety, labor unions, and other business practices.

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An agenda for the private sector

3.

If business does not like being seen as a predatory enterprise, it needs to accept such rules as a legitimate feature of democracy.

4.

It also needs to refrain from trying to undermine

• r change such rules covertly.

5.

Business should not be expected to do good, but it should be expected to abide by both the law and community norms, and to do no harm.

6.

A good rule of thumb is that business should not be doing anything that it wants or needs to hide from public view or from public officials.

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The End

2 4 6 8 10 12 14 16 18 20 1913 1923 1933 1943 1953 1963 1973 1983 1993 2003 2013 Percent of personal income

Top 1%

19.6% 8.2% 1928

Top 0.1%

19.3% 8.8% 1964 2.0% 8.0% 1986 2.9% 9.1%

Pretax income shares of top 1% and 0.1%, excluding capital gains: 1913-2012

The 100 year overview

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Percent of pretax income going to families in the top decile, excluding capital gains: United States, 1923-2012

1 11 21 31 41 51 61 71 81 91 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 Ratio to mean household income

Top 0.1 percent 99th to 99.9th 95th to 99th 90th to 95th

Source: Paris Top Incomes Database. Paris detailed percentiles for US (HBS Fig 3)

The return of the super-rich: Globalization? Computers? Tax Cuts? Deregulation? Cultural Change?

The 50 year overview: The top 1% is different

Income shares of top 1%, next 4%, and next 5% of US families:, before taxes and excluding capital gains: 1960 to 2012

5 10 15 20 25 30 35 40 45 50 1962 1967 1972 1977 1982 1987 1992 1997 2002 2007 2012 Percent of total personal income

8.3%

Top 1% Next 4% Next 5%

12.7% 11.1% 9.1% 13.5% 12.0% 19.3% 16.4% 12.4% 1986 2012 share 1962 share 1986 share

Wages are not as unequal as household incomes

1.00 1.25 1.50 1.75 2.00 2.25 2.50 1972 1977 1982 1987 1992 1997 2002 2007

Ratio of estimated hourly wages at the 90th, 50th, and 10th percentiles

• f the combined US distribution for men and women: 1973 to 2007

1.91 2.33 1.94 50/10 ratio 90/50 ratio 1.91 2.07 2.03