Rising Income Inequality

Transcription

1 Rising Income Inequality Prof. Lutz Hendricks Econ520 February 21, / 37

2 The issues Income inequality has been rising for the past 35 years. Why has this happened? What could be done about it? We start with the rising return to schooling 2 / 37

3 Rising return to schooling Changes in real wage levels of full-time U.S. workers by sex and educa Real weekly earnings relative to 1963 (men) A Real weekly earnings rela > Bachelor's degree Bachelor's degree High drop Source: Autor (2014) Fig. 6. Change in real wage levels of full-time workers by education, (A) Maleworkers,(B) as in Fig. 3. Remarkable: No wage gains for high school grads since 1970 SCIENCE sciencemag.org 3 / 37

4 Rising return to schooling: women orkers by sex and education, Real weekly earnings relative to 1963 (women) 2.0 Some college B Downloaded fro High school dropout High school graduate , (A) Maleworkers,(B) femaleworkers.dataandsampleconstructionare 4 / 37

5 The Value of a College Degree Source: Autor (2014) 5 / 37

6 Why Did the College Premium Rise? Surprise: The premium rose even as the relative supply of college grads rose. Soure: Autor (2014) 6 / 37

7 Skill biased technical change Demand for college labor rises faster than supply 7 / 37

8 A Simple Model of SBTC Aggregate production function: Y t = F (µ t H t,l t ) (1) H: college grads, L: others Wages = marginal products of labor F w H,t = µ t µh (2) SBTC: µ grows at a constant rate over time How well does this model fit the data? Take labor supplies from the data (hours worked) Fit a constant growth trend for µ 8 / 37

9 Model Fit 9 / 37

10 Model Implications For a long time, the demand for skilled labor has been rising in many countries at a constant rate For a long time, the rising supply of skilled labor prevented the rise of the college premium. Around 1980, the rise in U.S. college attendance slowed down. Since then, demand outstrips supply and the college premium rises. 10 / 37

11 Skill biased technical change SBTC is widely viewed as a main contributor to rising wage inequality. Demand for skilled / managerial occupations rose over time. Potential causes: computers international trade Polarization: Routine jobs (typically middle income) are automated or outsourced. 11 / 37

12 Polarization Figure 3 Change in Occupational Employment Shares in Low, Middle, and High-Wage Occupations in 16 EU Countries, % 12% 9% Low paying Middle paying High paying 6% 3% 0% 3% Ireland Belgium Luxembourg Finland Greece Sweden France Netherlands Norway Germany Portugal 6% 9% 12% 12.1% 12.0% United Kingdom Spain Denmark Austria Italy 10.9% 10.8% 10.7% 10.6% 10.6% 10.4% 10.3% 9.6% 8.6% 8.5% 7.6% 6.7% 4.9% 15% 14.9% 18% Source: Goos, Manning, and Salomons (2014, table 2). Notes: High-paying occupations are corporate managers; physical, mathematical, and engineering professionals; life science and health professionals; other professionals; managers of small enterprises; physical, mathematical, and engineering associate professionals; other associate professionals; life science Source: Autor (2015) 12 / 37

13 Policy Implications What could governments do to reduce wage inequality? (A good topic for your term paper!) 13 / 37

14 Inequality at the top

15 The Top 1% Pull Ahead Figure 3: Selected Percentiles of Labor Earnings Distribution over Time 350,000 Selected Percentiles of the Wage Income Distribution 300, , , , ,000 50,000 P10 P25 P50 P75 P90 P95 P Year of individuals Source: inguvenen the sample et al. does2012 not follow population growth (black line marked with diamonds) one-for-one, given that it also requires participating in the labor market in a given year (hence the slowdown in sample growth in the 2000s and the fall during the 15 / 37

16 The top 0.1% Pull Ahead Figure 2 Income Share and Composition for the Top 0.1 Percent, % 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% Wage Income Business Income Capital Income Capital Gains Notes: The figure displays the income share of the top 0.1 percent of tax units, and how the top 0.1 percent of incomes are divided into four income components: wages and salaries (including exercised stock options), business income (S-corporation profits, partnership profits, sole proprietorship profits), capital income (dividends, interest, and rents), and realized capital gains. Imputed corporate Source: Piketty and Saez (2007) 16 / 37

17 know ealth Long-run Perspective cene der the a long n the ealth mited ts topuren this ecent de in mber longealth tries. interr the e disn the ts (1). ished series Income inequality in Europe and the United States, Share of top income decile in total pretax income 50 percent Top 10% income share: Europe Top 10% income share: U.S Source: Piketty and Saez (2014) Fig. 1. Income inequality in Europe and the United States, 1900 to The share of total income accruing to top decile income holders was higher in Europe than in the United States from 1900 to 1910; it was substantially parisschoolofecono aresearchresourc analysis. Historical top wea ries have also been co similar methods, albe number of countries s alongertimeframe ing on previous attem historical national b (22), long-run series tion of aggregate w ratios in the eighth oped economies wer some of them going 18th century (23). This Review draw on this body of histo on income and wea on a recently publis tive synthesis (24). presenting three ba emerge from this gram (Figs. 1 to 3), a to interpretations. Three Facts Abou in the Long Run 17 / 37

18 Why Did Top Incomes Rise?

19 The tax system becomes less progressive Percent 60 Figure 5-8 Evolution of Average Tax Rates 50 Over $2 million (top 0.1 percent) Over $250, Middle20 percent Notes: Average tax rates calculated each year for a sample of 2005 taxpayers after adjusting for average wage growth. Dollar figures in 2009 dollars. Sources: Department of the Treasury, Internal Revenue Service, Statistics of Income Public Use File 2005; National Bureau of Economic Research TAXSIM (Feenburg and Coutts 1993); CEA calculations. Source: ERP 2010 would have fared under the tax rates that applied historically and how the tax rates that applied to different income groups have changed over time. This analysis suggests that the effective tax rates that applied to high-income taxpayers reached their lowest levels in at least half a century in 19 / 37

20 12 Journal of Economic Perspectives Federal taxes are getting less progressive. Figure 1 Federal Tax Rates in the United States in 2004 and % 70% 60% 50% 40% 30% 20% 10% 0% A. Tax rates in 2004 B. Tax rates in 1960 Individual Tax Payroll Tax Corporate Tax Estate Tax P20-40 P40-60 P60-80 P80-90 P90-95 P95-99 P P P P % 70% 60% 50% 40% 30% 20% 10% 0% Individual Tax Payroll Tax Corporate Tax Estate Tax P20-40 P40-60 P60-80 P80-90 P90-95 P95-99 P P P P Notes: Figures display the tax rate for each of the four federal taxes for various groups of the income distribution in 2004 (based on 2000 incomes adjusted for economic growth) and in Tax rates are stacked. Source: Piketty and Saez (2007) striking, as shown in Figure 1. In 1960, the federal tax system imposed higher 20 / 37

21 Tax progressivity and top income shares Panel A. Top 1 percent income shares and Top MTR Top 1% income shares (%) Top 1 percent share Top MTR Top 1 percent (excl. KG) MTR K gains Year Marginal tax rates (%) Panel B. Top 1 percent and bottom 99 percent income growth Source: Piketty et al. (2014) / 37

22 Fun Fact In 2004, the top 1% of households paid 28% of all federal taxes. The top 0.1% paid 11% of federal taxes. Source: Economist, / 37

23 International Data Change in top 1 percent income share (points) UK US Elasticity = 0.47 (0.11) Ireland Norway Portugal Canada Italy Australia NZ Spain Japan Sweden Denmark France Germany Finland Switzerland Netherlands Change in top marginal tax rate (points) Source: Piketty et al. (2014) 23 / 37

24 Fun Fact In 2005 the French payroll tax rate is 67%. This is one reason why French taxes are essentially flat. 24 / 37

25 Summary Top income shares have increased in many countries, especially in the U.S. At the same time top marginal tax rates have declined. Countries with higher tax rates have less inequality. All of the evidence suggests that taxes account for a share of the rising inequality. 25 / 37

26 Other Explanations Superstars: The incomes of athletes and entertainers have risen much faster than the incomes of workers. CEO pay: A unique U.S. phenomenon: The average pay of CEOs rose from 27 times average worker pay to 300 times ( ). Rising corporate profits: not consistent with the data (constant profit share) 26 / 37

27 Is inequality bad?

28 Inequality Earnings andinequality Mobility and economic mobility: cross-national re Generational earnings elasticity (higher values imply lower mobility) France Italy United Kingdom United States A Generationa (higher valu It Sweden Finland Norway Denmark Germany New Zealand Australia Canada Income inequality (more inequality ) New Z 0.3 Sw 0.2 N C Source: Autor (2014) Fig. 5. Earnings inequality and economic mobility: Cross-national relationships. Reproduced from Corak [(44), figs. 1 and 4] with permission of mobility. In th using a 28 Gini / 37

29 Inequality and Mobility High inequality is associated with strong earnings persistence across generations (low intergenerational mobility) One possible reason: When the return to schooling is high, rich parents invest in their kids. But: Mobility does not seem to have declined over time (in the U.S.) 29 / 37

30 How costly is redistribution? What are the effects of higher (marginal) taxes? Reduced work effort / work hours Less investment? Misallocation of consumption anything that can be called a business expense is tax deductible e.g., meals, company cars, first class flights, / 37

31 Top Marginal Tax Rates 100% Top Individual Income Marginal Tax Rates % 80% 70% 60% 50% 40% U.S. 30% U.K. 20% France 10% Germany 0% Source: Piketty (2011), fig 1 31 / 37

32 How Costly is Redistribution? US Top Marginal Tax Rate (Federal Individual Income Tax) 100% 90% Top MTR (Federal Individual Income Tax) 80% 70% 60% 50% 40% 30% 20% 10% 0% Source: statistics computed by the author Given this data, it is hard to imagine that tax rates have large effects on growth. 32 / 37

33 How Costly is Redistribution? ( ) Panel B. Growth (adjusted for initial 1960 GDP) 4 GDP per capita real annual growth (percent) US UK Norway Ireland Japan Netherlands Canada Australia Italy France NZ Finland Germany Sweden Denmark Spain Portugal Switzerland Change in top marginal tax rate (points) Figure 4. Top Marginal Tax Rates and Growth from to Source: Piketty et al. (2014) Notes: The figure depicts the average real GDP per capita annual growth rate from to against the change in top marginal tax rate. Panel A considers the raw growth rate 33 / 37

34 Summary High marginal tax rates distort choices: work effort, entrepreneurship, saving,... Strong evidence that high taxes reduce hours worked Little evidence that high taxes reduce economic growth A tricky question: What is the optimal top marginal tax rate? 34 / 37

35 Reading Autor (2014) on the race between education and technology. Piketty and Saez (2007) Mankiw (2013): a thoughtful defense of a more conservative view on redistribution. 35 / 37

36 Advanced Reading Gordon, Robert J.; Dew-Becker, Ian (2007). Selected Issues in the Rise of Income Inequality. Brookings Papers on Economic Activity, 2007, 2, pp DOI: /eca Dew-Becker, Ian. Gordon, Robert J. (2005). Where Did the Productivity Growth Go? Inflation Dynamics and the Distribution of Income. Brookings Papers on Economic Activity, 2005, 2, pp DOI: /eca Piketty and Saez (2014) on optimal taxation. 36 / 37

37 References I Autor, D. H. (2014): Skills, education, and the rise of earnings inequality among the" other 99 percent", Science, 344, (2015): Why are there still so many jobs? The history and future of workplace automation, The Journal of Economic Perspectives, 29, Mankiw, N. G. (2013): Defending the One Percent, The Journal of Economic Perspectives, 27, Piketty, T. and E. Saez (2007): How Progressive Is the U.S. Federal Tax System? A Historical and International Perspective, The Journal of Economic Perspectives, 21, (2014): Inequality in the long run, Science, 344, Piketty, T., E. Saez, and S. Stantcheva (2014): Optimal taxation of top labor incomes: A tale of three elasticities, American economic journal: economic policy, 6, / 37