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June 30, 2014

The Implications of Flat or Declining Real Wages for Inequality

A recent Policy Note published by the Levy Economics Institute of Bard College shows that what we thought had been a decade of essentially flat real wages (since 2002) has actually been a decade of declining real wages. Replicating the second figure in that Policy Note, Chart 1 shows that holding experience (i.e., age) and education fixed at their levels in 1994, real wages per hour are at levels not seen since 1997. In other words, growth in experience and education within the workforce during the past decade has propped up wages.

Chart 1: Actual and Fixed Real Wages, 1994-2013

The implication for inequality of this growth in education and experience was only touched on in the Policy Note that Levy published. In this post, we investigate more fully what contribution growth in educational attainment has made to the growth in wage inequality since 1994.

The Gini coefficient is a common statistic used to measure the degree of inequality in income or wages within a population. The Gini ranges between 0 and 100, with a value of zero reflecting perfect equality and a value of 100 reflecting perfect inequality. The Gini is preferred to other, simpler indices, like the 90/10 ratio, which is simply the income in the 90th percentile divided by the income in the 10th percentile, because the Gini captures information along the entire distribution rather than merely information in the tails.

Chart 2 plots the Gini coefficient calculated for the actual real hourly wage distribution in the United States in each year between 1994 and 2013 and for the counterfactual wage distribution, holding education and/or age fixed at their 1994 levels in order to assess how much changes in age and education over the same period account for growth in wage inequality. In 2013, the Gini coefficient for the actual real wage distribution is roughly 33, meaning that if two people were drawn at random from the wage distribution, the expected difference in their wages is equal to 66 percent of the average wage in the distribution. (You can read more about interpreting the Gini coefficient.) A higher Gini implies that, first, the expected wage gap between two people has increased, holding the average wage of the distribution constant; or, second, the average wage of the distribution has decreased, holding the expected wage gap constant; or, third, some combination of these two events.

Chart 2: Wage Distribution Gini Coefficients over Time

The first message from Chart 2 is that—as has been documented numerous other places (here and here, for example)—inequality has been growing in the United States, which can be seen by the rising value of the Gini coefficient over time. The Gini coefficient’s 1.27-point rise means that between 1994 and 2013 the expected gap in wages between two randomly drawn workers has gotten two and a half (2 times 1.27, or 2.54) percentage points larger relative to the average wage in the distribution. Since the average real wage is higher in 2013 than in 1994, the implication is that the expected wage gap between two randomly drawn workers grew faster than the overall average wage grew. In other words, the tide rose, but not the same for all workers.

The second message from Chart 2 is that the aging of the workforce has contributed hardly anything to the growth in inequality over time: the Gini coefficient since 2009 for the wage distribution that holds age constant is essentially identical to the Gini coefficient for the actual wage distribution. However, the growth in education is another story.

In the absence of the growth in education during the same period, inequality would not have grown as much. The Gini coefficient for the actual real wage distribution in 2013 is 1.27 points higher than it was in 1994, whereas it's only 0.49 points higher for the wage distribution, holding education fixed. The implication is that growth in education has accounted for about 61 percent of the growth in inequality (as measured by the Gini coefficient) during this period.

Chart 3 shows the growth in education producing this result. The chart makes apparent the declines in the share of the workforce with less than a high school degree and the share with a high school degree, as is the increase in the shares of the workforce with college and graduate degrees.

Chart 3: Distribution of the Workforce across Educational Status

There is little debate about whether income inequality has been rising in the United States for some time, and more dramatically recently. The degree to which education has exacerbated inequality or has the potential to reduce inequality, however, offers a more robust debate. We intend this post to add to the evidence that growing educational attainment has contributed to rising inequality. This assertion is not meant to imply that education has been the only source of the rise in inequality or that educational attainment is undesirable. The message is that growth in educational attainment is clearly associated with growing inequality, and understanding that association will be central to the understanding the overall growth in inequality in the United States.

Photo of Jessica DillBy Julie L. Hotchkiss, a research economist and senior policy adviser at the Atlanta Fed, and

Fernando Rios-Avila, a research scholar at the Levy Economics Institute of Bard College


June 30, 2014 in Education, Employment, Inequality, Labor Markets | Permalink

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Thanks for an interesting post. I have been tracking wage inequality in Washington state over the past 20 years, but haven't had access (yet) to age and education dimensions, and these are important considerations.

I think you muddy the waters a bit by sometimes talking about inequality without qualifying it as wage inequality. I believe that increasing inequality in non-wage income and wealth are much bigger issues than wage inequality.

Posted by: Scott Bailey | June 30, 2014 at 10:42 PM

One characteristic that is not discussed or difficult to discuss is the co-relation of nature of job to the educational status. The distribution of workforce across educational status does not really say whether they can do what they are doing, only if they are 'educated' so and so!

Posted by: Raghuraman R | July 01, 2014 at 12:30 AM

Wealthy parents can afford to send children to college explains more this dynamic than the "high return on education"...especially at the median not the mean.

Posted by: gman | July 01, 2014 at 02:06 PM

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August 21, 2008

The “What’s Fair” contest

At Café Hayek, George Mason’s Russell Roberts opens up a brand new “Inequality Chart Contest.” The chart in question is based on work by Thomas Piketty (professor, Paris School of Economics) and Emmanuel Saez (professor, University of California Berkeley), the essence of which is that the rich have gotten richer and everyone else not so much. (You can find a link to the Piketty-Saez paper, as well as updated data and executive summaries, on Emmanuel Saez’ homepage. Russell links to more information from the Center on Budget and Policy Priorities.)

Here’s the picture…

Figure 2

… and the contest is to construct “ONE sentence explaining ONE thing that is wrong with concluding that these numbers are evidence that the U.S. economy has become more tilted toward the rich at the expense of the poor.”

In the spirit of prompting reflection on issues of inequality and fairness, I invite you to think about the following three pictures, generated from Internal Revenue Service (IRS) tax data through 2006:

Avg Tax Rates by Income Percentile

Avg Tax Rates by Income Percentile

Avg Tax Rates by Income Percentile

Let’s focus on the 1 percent of income-earners (by IRS defined Adjusted Gross Income, or AGI). If you look at the average federal tax rate paid by this group—that is, taxes paid divided by AGI—it did fall substantially over the period from 2000–2006. The average tax rates for other income groups fell as well, but not as dramatically.

If you instead prefer to look at taxes paid, the share the top 1 percent forked over to the federal government rose from 37.4 percent in 2000 to 39.9 percent in 2006. The share paid by the next highest 4 percent rose only slightly over this period, and the share paid by all other groups actually fell or stayed roughly the same.

On the other hand, concentrating on the share of taxes paid relative to the share of income earned by each group would lead you to the conclusion that not much had changed between the year 2000 and 2006.

So here’s the contest: Explain in one sentence which one of those pictures tells us whether the federal income-tax system has become more or less “fair.”

August 21, 2008 in Inequality, Taxes | Permalink

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The top 1% earns 350,000+

The top 0.1% earns 1.6 million+

The top 0.01% earns 5.5 million+

The disparity _among_ the top 1% dwarfs that between them and the remaining 99%.

Any study that does not go further into the top 1% is essentially dishonest

It’s like Bill Gates walks into a bar and average income of the patrons is into millions..

This has been well-documented, but still everyone screams about the top 1% is paying a lot.

But among that 1%, who pays?

Those earning more than $10 million a year now pay a lesser share of their income in these taxes than those making $100,000 to $200,000.

Tax rates increase with income, *except* for the top 0.1% - yes that’s 0.1 - thats only 145,000 households.

And that is just reported income on tax returns, leaving aside all the legal and illegal shelters that this 0.1% use.

This grand con - shifting the taxes onto the working “rich”, by the hyper-rich is the hallmark of the plutocratic conservatives

Posted by: bumble | August 21, 2008 at 06:03 PM

The 'fairness' just depends on the average tax rate. The ranking for each group should be the same in graphs one and three - I'm not sure what is added by dividing the average tax rate for each group by the average tax rate for the economy, as is done in the third graph.
Fair for who? The top 2% to 5% have not gotten the breaks that the rest seem to have enjoyed.

Posted by: don | August 21, 2008 at 07:05 PM

Changes in average tax rates have been limited but the income and therefore the tax share of the top 1% has grown greatly over the last 20 years, largely at the expense of the top 6-25%, though the tax share relative to income share has changed little. One does wonder whether their entire growth in income since 2000 was simply compounding of their tax cuts. With their rates at a low, it wouldn't be a surprise to see them rise.

Posted by: Lord | August 21, 2008 at 09:10 PM

I am not sure the question should be 'what is fair' so much as 'what is desirable'. I am not sure the disappearance of the middle class is.

Posted by: Lord | August 21, 2008 at 09:18 PM

"Fair" is not a capitalist concept.

Posted by: Ken | August 21, 2008 at 10:31 PM

Figure 2 clearly demonstrates our tax regimen is less fair than it used to be.

Posted by: Gegner | August 22, 2008 at 03:30 AM

If a rapidly increasing income is multiplied by a decreasing tax rate, does the resulting increase in the product mean that the wealthy are contributing more in taxes, or that the wealthy are sharing a smaller piece of a larger pie?

Posted by: pmorrisonfl | August 22, 2008 at 01:22 PM

Error: These charts and the words around them imply that the wealthy and the high income earners are the same people.

It is possible to be extremely wealthy with little income.

Bill Gates did not get rich by drawing huge paychecks. He got rich through appreciation of assets he owned (MSFT stock).

High income tax inhibits high income and keeps the richest on top.

If I'm winning a race I'm all in favor of adopting strict speed limits as soon as possible.

Posted by: Name | August 22, 2008 at 02:49 PM

Figure 1, by itself, demonstrates nothing about equity, unless you believe in equality of result rather than equality of opportunity. It would need to be accompanied by some explanation for the divergence in growth. For example, if the result shown comes largely from international trade or illegal immigration, is that 'fair'?

Posted by: don | August 22, 2008 at 04:57 PM

Didn't the best "improvement" in income disparity occur during the Great Depression?

Posted by: Empircal Conservative | August 22, 2008 at 05:43 PM

How did you control for the changes in the way AGI is calculated over these years?

Posted by: Patrick R. Sullivan | August 22, 2008 at 06:57 PM

Since about 25% have bachelor's degrees and most are likely in the top 25%, it does rather severely undercut the argument the disparity is due to education, other than graduate and professional education. It now looks like a substantial group of college educated will not profit from it, at least anytime soon.

Posted by: Lord | August 22, 2008 at 07:01 PM

All 3 charts show that the American tax system is unfair: although we are supposedly all equal, some of us are paying more than others, in both absolute and relative terms, for public goods and services -- a situation that would not be tolerated for non-public goods and services.

Posted by: TSowell Fan | August 22, 2008 at 07:16 PM

Unless I missed something, none of these pictures (graphs?) show how valuable paying customers/bosses found each individual person being measured.

Posted by: SteveO | August 23, 2008 at 12:46 AM

None of these graphs tells us about the fairness of the current tax structure.

The fairness is measured in the debt burden we are passing on for future generations to pay off.


That graph is here; http://zfacts.com/p/318.html

As far as inequality two major factors spurring that have been the Bush tax cuts and the Feds cheap credit policy combined with unregulated financial wizardry of Wall Street paper pushers using ponzi schemes and the backing of the US Treasury to steal wealth from the people who actually do things and make things for a living.

Posted by: muirgeo | August 23, 2008 at 01:28 AM

Ken's comment, "'Fair' is not a capitalist concept" is absolutely correct under the form of capitalism that we practice to varying degrees throughout the capitalist world.

Those who have acquired wealth by birthright or by government favor frequently oppose pure capitalism as it lets in the riff-raff or fosters competition that might shift wealth from the old guard to the innovator.

On the other hand, the bourgeois often view capitalism with suspicion as it appears to them that the hurdles to be crossed to achieve business success are insurmountable. Unfortunately those hurdles are not limited to competition provided by more capable competitors but, rather, a regulatory structure crafted and lobbied for by such competitors. Such chicanery exists as a component of the government's management of capitalism.

Posted by: sot | August 23, 2008 at 09:59 AM

Fairness is an issue only when special treatment by the government depends on defining a group. (If the definition is by race, creed, sex, etc. the issue transcends fairness and becomes unconstitutional.)

"Rich" as a group definition appeals to the human foible of envy, and seduces us into thinking it's only fair. Most other group definitions do not enjoy that political advantage.

Unfair group definitions are always arbitrary. In the case of progressive taxation, it's worse. The IRS changes the group definitions every year, when it updates the tax code's income brackets.

That is a dead giveaway. But we don't notice, because envy makes us believe it's only fair.

Posted by: John Mason | August 23, 2008 at 12:11 PM

Inequality is not the result of tax policy. It is the result of monetary policy. We have designed a system that goes to any measure to keep wages (i.e., inflation) low and asset values high. As a result only those who own assets get wealthy. Even now, with inequality known to be a problem, we have the Fed doing everything possible to keep rates low and add liquidity. These measures will flow directly into asset values and not into wages. Things got so bad that the average person felt there was no way to get ahead over the past decade other than by participating in a housing bubble.

Posted by: mlb | August 23, 2008 at 07:33 PM

Based on the figure plotting tax shares by income percentile - "The tax policies have been fair over the past two decades as the contribution to the tax pie by the top 1% has kept pace with the (albeit unfair) increase in their income."

Posted by: Venkatesh | August 24, 2008 at 11:55 PM

Fair is where grown men go to play games. A taxation system should not be judged based on fairness – a term so loaded it lacks a definition - but upon its efficacy to raise revenue.

Posted by: septagon49 | August 25, 2008 at 08:33 PM

The standard exemption is $5-10k. Does anyone think this represents a realistic estimate of the expenses of generating those incomes? I don't know of anyone that could even pay the rent with that. The income tax only appears progressive.

Posted by: Lord | August 26, 2008 at 04:13 PM

A taxation system should not be judged based upon its efficacy to raise revenue but upon its tendency to encourage growth in productivity. The less revenue the better, I'd say.

Wealthy people are statesmen entitled to organize resources through the market rather than our biannual plebiscites, and the market is a far more democratic process. Growing income of the wealthy is not the problem as much as a growing entitlement to consume the income, as opposed to reinvesting it.

We need a progressive consumption tax that would reverse a growing entitlement to organize many resources for the exclusive benefit of a few, both by limiting the personal consumption (as opposed to investment) of the very wealthy and by limiting the incredibly excessive consumption of the state sector.

Posted by: Martin Brock | August 28, 2008 at 05:37 AM

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February 13, 2007

Poverty In The Suburbs

I'm a little slow in noticing, but Garth Brazelton at Reviving Economics was all over this story at the MSNBC/Newsweek website:

Once prized as a leafy haven from the social ills of urban life, the suburbs are now grappling with a new outbreak of an old problem: poverty. Currently, 38 million Americans live below the poverty line, which the federal government defines as an annual income of $20,000 or less for a family of four. But for the first time in history, more of America's poor are living in the suburbs than the cities—1.2 million more, according to a 2005 survey. "The suburbs have reached a tipping point," says Brookings Institution analyst Alan Berube, who compiled the data.

Cleveland, as it turns out, is chosen as the poster city for suburban poverty:

Six years ago, Brian Lavelle moved out of the city of Cleveland to the nearby suburb of Lakewood for what he thought would be a better life... Then, three years ago, the steel mill closed and Lavelle found that the life he dreamed of was just that, a dream. The suburbs, he quickly learned, are a tough place to live if you're poor.

... five years ago, a Hunger Network food pantry in Bedford Heights, a struggling suburb of Cleveland, served 50 families a month. Now more than 700 families depend on it for food.

Howard and Jane Pettry, of Middleburg Heights, Ohio [another Cleveland suburb], see themselves as working-class—just facing hard times. In December, Jane was laid off from her job at a local supermarket, and a week later Howard had a heart attack and missed a month of work from his job at a grain mill. Now Jane's collecting unemployment and they're staring at the poverty line as they struggle to pay the mortgage and the bills.

Is it really the case that the suburbs are increasingly poverty-ridden?  I'm suspicious.  Not too long ago, my colleagues Mark Schweitzer and Brian Rudick examined the case of Cleveland specifically:

Cleveland is the poorest big city in the United States, according to the Census Bureau, with nearly a third of the city’s residents living in poverty. The city’s poverty rate also rose since it was last measured. These numbers have received a lot of attention since they were released, but unfortunately, they are easily misinterpreted.

The numbers tell us that Cleveland has many poor people. But the numbers don’t tell us that Clevelanders have become worse off, that the region’s economy has deteriorated, or even that there are more poor people in the city than before.

A closer look at the American Community Survey results suggests that Cleveland’s poverty rate reflects the fact that the region’s poor are concentrated in the central city, while the wealthier live in the suburbs. The rate may have risen because people are moving out of the city, and those that leave are disproportionately better-off than those that stay behind. Neither of these facts on its own says anything about the economic health of the region, but they do say something about the relative desirability of living in the city versus its outskirts.

The definition of the Cleveland MSA has recently changed to exclude Ashtabula County, but under either the old or new definition, poverty is far lower outside the city than inside it.

... Looking at the poverty rate of the MSA [metropolitan statistical area] reveals that Cleveland (officially the Cleveland-Lorain-Elyria MSA) is not too different from other U.S. cities. The poverty rate of the Cleveland MSA is just a little above the average for all metropolitan areas in the United States. And like other cities in the country, Cleveland’s suburbs have far lower poverty than the city itself.

...the 2005 rise in metro area poverty figures seen in this figure is almost entirely accounted for by the increase in the number of poor people in the city of Cleveland, rather than in the suburbs. In the 2004-2005 shift that boosted the poverty rate for the MSA, for example, the number of poor people in the MSA grew by 43,540, but 36,991 of that increase occurred in the city.

It is true that the number of poor people in the suburbs is larger than the number of poor people in the city -- according to Schweitzer and Rudick "about two-thirds of the metro area’s poor live outside the city of Cleveland" -- but this is simply a function of the fact that the population of the MSA is heavily concentrated outside of the city.  In terms of poverty trends, there just isn't that much happening in the suburbs:

   

Cleveland_poverty

   

If one wants to use Cleveland to tell a story about poverty -- especially concentrated poverty -- the action is still in the central city.

February 13, 2007 in Inequality | Permalink

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I hate to be cynical about these types of stories. My heart goes out to people that truly need help. However, I am reminded about something Milton Friedman said. If you offer something for free, people will take it and use more of it than is available. He was talking about welfare. He also said, "There is no free lunch."

I am worried about the compunction of the people that are receiving the free stuff. Do they really need it? Or are they just taking it because it is free?

Like I said, I hate to be a cynic, but there is so much to be cynical about, it is too bad that we have to ask the question.

Posted by: jeff | February 14, 2007 at 04:22 PM

Jeff. That wasn't cynical, this excerpt from a 2/07/07 Mish post is cynical. (Dave, excuse the length but I, a true cynic, loved it.)
Thursday, February 08, 2007 Mike Shedlock Counterfeiting Money - Crime or Good Economics?
Did you ever think that a counterfeiting money could be good for the economy and that the counterfeiter could be considered an economic genius or even a national hero? I received an Email from Nic Corsetti, a friend of mine, describing exactly how that might happen. Here goes from Nic:
Let’s say that I invent a printing press that allows me to produce counterfeit money (let’s say US dollars) by the trillions – these dollars look EXACTLY like real ones, so no one can tell the difference, not even the government or the bank. So I start off the first year by counterfeiting $3 trillion dollars.
I use $1 trillion to buy stocks (jump starting the bull market)
I use $1 Trillion to buy U.S. Treasury bonds (thus driving bond prices higher and interest rates lower)
I use $1 Trillion to go around to every neighborhood in every major city of the U.S. and start buying houses for 10% higher than the listed price
Obviously, this is a lot of work, so I hire a whole network of employees and consultants to help me achieve those lofty goals in a reasonable time period. The apparent benefits would be huge.
Benefits
This will create jobs, since lots of employees and consultants will be needed to spend $3 trillion.
The stock market indices will soar. Everyone's 401(k) and day-trading portfolios will increase in value.
Home prices will increase by 10% overnight.
Interest rates will fall which will make it even cheaper for everyone to borrow money to buy new cars, upgrade into a bigger homes, and buy new gas plasma TVs every year hoping against hope of getting to watch the CUBs someday play in the World Series.
The lifeblood of America, vastly underpaid Real Estate Agents, will get a much needed and well deserved infusion of cash.
The economy will be humming so fine that no one will care about the loss of jobs to India and China.
Cheap goods will continue to pour into the US and the CPI will show only a modest 2% rise in the price of goods.
Additional Printing Presses
This is such a good plan, I decide to let some of my best friends in on the action. So I pick twelve of my closest cronies and give them identical printing presses, and instruct each of them to buy stocks, bonds and real estate with their counterfeit money. I tell them to loan the money to anyone who asks. Now we are really getting somewhere.
The stock market will rise 30%-50% every couple years
By buying massive amounts of treasuries, interest rates will stay at historic lows
Everyone's net worth will double every few years if they just buy more real estate
There will be no reason to save money, because assets will just keep skyrocketing in value.
Wave after wave of immigration proves adequate enough to supply the homebuilding industry with enough manpower to get the job done.
So much money is made in the stock market that $50 billion in bonuses can be distributed.
Home prices start rising so fast that people start buying two or even three of them. It's a "can't lose" venture.
There is so much money floating around that credit standards drop and everyone who wants a home gets one.
So many homes are being bought that massive numbers of jobs are created in the mortgage industry, home builders, architects, real estate agents, title insurance, property insurance, home decoration, lumber, copper, cement, truck manufacturers, granite miners, brick layers, roofing, repairmen, industry analysts, home flippers, internet bloggers, internet site maintenance, newspaper ads, Wall Street specialists(to create RMBS, CDO, CDS, Index swaps), hedge fund employees (someone has to trade all these securities, and accountants and lawyers to keep track of all of the above.
There are additional profits to be made on Wall Street by investing in IPOs, private equity LBOs, M&A, trading, mutual funds, and hedge funds.
There is job growth in investment advisers, investment analysts, day-traders, media cheerleaders, SEC regulators, state regulators, New York D.A. office, and accountants and lawyers to keep track of everything.
Government jobs explode. State and local governments get all sorts of funding for projects of all types – big and small. This creates still more jobs.
Everyone needs a place to spend their money. Shopping malls, strip malls, big box stores, specialty stores, boutiques and nail salons spring up everywhere.
People are so busy shopping they do not have time to cook. This creates a need for more restaurants or coffee shops on every corner.
Even with all of that there is STILL NO INFLATION!
http://globaleconomicanalysis.blogspot.com/

Posted by: bailey | February 14, 2007 at 06:54 PM

Rising poverty in the suburbs would not be surprising given the revitilization of many central cities around the country. I think Cleveland may be a bad comparison of city versus suburb. If one looks around to other cities where baby boomers have migrated downtown and away from their suburban life for a higher quality of life in the city. Cities are the lifeblood, creativity and growth engines of the 21st century. While suburbs offer a quieter lifestyle, they also offer less in terms in new economic opportunity, entrepreneurialism, culture, diversity and personal growth than the city. These are the traits that give rise to a stronger, differentiated America for the 21st century global economy. Globalization will force more poverty into the suburbs as this is where most that work at globalized corporations tend to live. A service oriented economy will be the economy of the future, giving rise to localization as a means for economic growth.

Posted by: Casual Suburbanite | February 18, 2007 at 12:36 PM

I have a question for Bailey, about the long post about spending $3 trillion. How does he figure that there would be no inflation? First of all, if he buys things at 10% above price, wouldn't this translate to 10% inflation? Secondly, with that immediate influx of cash, people will be willing to pay more money for the same number of items- meaning prices will rise. I am student and have only taken one very basic economics class, but I am imagining the Supply-Demand diagram from Econ 101; if the supply curve remains unchanged and the demand curve moves up, doesn't this mean prices will rise?

Posted by: Kevin | February 21, 2007 at 10:12 PM

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November 22, 2006

Inequality: Not Just Made In The USA

From the Financial Times:

China’s poor grew poorer at a time when the country was growing substantially wealthier, an analysis by World Bank economists has found.

The real income of the poorest 10 per cent of China’s 1.3bn people fell by 2.4 per cent in the two years to 2003, the analysis showed, a period when the economy was growing by nearly 10 per cent a year. Over the same period, the income of China’s richest 10 per cent rose by more than 16 per cent...

China, which had relatively even income distribution in 1980 when it embarked on market reforms, is now “less equal” than the US and Russia, using the Gini co-efficient, a standard measure of income disparities.

The Wall Street Journal has more (on page A4 of today's print edition):

The reason for the income decline at the bottom isn't clear. The World Bank hasn't completed its analysis and its conclusions haven't been published. Even so, the data call into question an economic model that economists have held up as an example for other developing nations.

"This finding is very important. If true, it sheds doubt on the argument that a rising tide lifts all boats," said Bert Hofman, the World Bank's chief economist in China...

Many observers place part of the blame on the way China dismantled its social-welfare system as it phased out state control of the economy -- without building up much to replace it. Health care has become a point of particular concern, as costs shoot up without any widespread system of medical insurance to cover them.

Here is an important piece of information:

The World Bank's Mr. Hofman says the bank's analysis shows the majority of China's poorest 10% appear to be only temporarily poor, thrown down by some setback like sudden illness, the loss of a job or the confiscation of land. That suggests that a basic social safety net, like medical insurance or unemployment benefits, could help move them back out of poverty. Only about 20% to 30% of the poorest appear to be long-term poor, and even they have some savings.

... the survey compares snapshots of the lowest tier of Chinese society at two different points, rather than tracking the same of group of households over time. So, it doesn't necessarily mean that the people who were in the poorest 10% of society in 2001 were all 2.5% worse off in 2003.

Temporary bouts of economic hardship are clearly a much different thing than persistent poverty traps.  And if, in fact, poverty is predominantly transitory, we should perhaps be more circumspect about declaring that a rising tide fails to raise all boats.  Rising inequality -- here and elsewhere -- may be very well be a problem.  But policymakers would be well advised to understand what problem it is, before the surgery begins.

November 22, 2006 in Asia, Inequality | Permalink

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nice little summary of the wall street journal
there definately has something to be done about the poor chinese

Posted by: Otto | November 22, 2006 at 06:52 AM

Well, I guess the World Bank chief economist ought to read up on Kuznets. Also, there must be some kind of reason (and not just BW2) why China wants to make welfare a priority in coming years.

Posted by: 4degreesnorth | November 23, 2006 at 05:47 AM

I wonder if there is a correlation between educational achievement and poverty in China. The linkage in the United States is clear.

Posted by: jeff | November 24, 2006 at 10:08 AM

One place to look may be labor market rigidity. Not the kind we tend to think of in G10 countries. Labor mobility is limited in China by a social/legal system that is arranged to maintain stability. Those who are from the countryside have very limited right to work elsewhere. (Those from anywhere have a limited right to work elsewhere.) One consequence is that they can be paid less and treated worse in industrialized areas than those from the industrial region. That makes insecure, non-local workers preferable to factory managers. Those with employment rights have a harder time getting work, while those who get work have limited bargaining power. Locals from industrialized areas become transients if they go in search of work beyond their own region, adding to downward pressure on low-skilled factory wages. This system also puts pressure on incomes in farm areas, because it discourages farm workers from moving to industrial areas.

I would also point out what looks like over-eagerness on the part of our host to warn against jumping to conclusions when the conclusion is that classical assumptions don't work. Evidence shows up questioning a rising tide lifting all boats? Oh, we must wait before acting. Hint that one's priors are confirm don't seem to require equal caution. Doesn't objectivity imply equal scepticism in both directions?

Posted by: kharris | November 24, 2006 at 11:27 AM

kharris -- Sorry if I was unclear. I don't dispute the evidence that growth alone does not seem to have reliable effects on poverty numbers. But I am not convinced that we really know how to think about poverty statistics when we see it, nor do I think all proverty is created equal. We know for example that the labor force particpation rates of young people have fell sharply in the last recession, and have not recovered. That is likely to increase poverty numbers, but is it something to worry about? I'm not so sure -- you have to tell me why the participation rate fell. If it is because of delayed entry into the labor market to build human capital, then I am not worried at all.

I'm not saying that is the answer, least not for all of the incidence of poverty we observe. But neither am I willing to accept knee-jerk reactions to poverty numbers that offered without any thought about what the numbers really reflect.

Posted by: Dave Altig | November 28, 2006 at 07:32 AM

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August 30, 2006

Progress?

There is a little something for everyone -- that is to say, things to cheer about, things to frown about -- in the Census Bureau's report on Income, Poverty, and Health Insurance Coverage for 2005.  MarketWatch summarizes:

Real U.S. median household income rose 1.1% in 2005, climbing for the first increase since 1999, but inflation-adjusted incomes still have not recovered fully from the 2001 recession, the Census Bureau reported Tuesday.

Real median incomes for 2005 rose 1.1% to $46,326 but were down 0.5% from 2001's $46,569. Median income means half of the 114.4 million U.S. households earned less, half earned more. The figures have been adjusted for inflation.

Income inequality continued to increase, with the top 20% of families accounting for a record 50.4% of all household income, just the third time since the mid-1960s that they've taken more than half. For the top 20%, the median income rose by $3,592, or 2.2%, to $166,000.

Meanwhile, the bottom 20% captured just 3.4% of income, matching their lowest share since the mid-1960s. Median incomes for the bottom 20% increased by $17, or 0.2%, to $11,288...

The poverty rate declined for the first time since 2000, nosing down to 12.6% from 12.7%, but this amounted to a statistically insignificant change, the government said. The poverty rate was 1.3 percentage points higher than 2001's 11.3% but was lower than the 13.8% average in the 1990s.

A couple of things I found interesting in details.  A few facts: About 27 percent of people 25 years of age or older had incomes less than twice the poverty level.  For prime working-age folks -- those between 25 and 65 -- with at least 4 years of college, your chance of having income that low was, in 2005, between 8 and 12 percent (depending on your exact age group).  Among those with high-school degrees only, the chance of being in the low income group ranged from 25 to 39 percent.  And without a high-school degree?  Your chance of having an income less than twice the poverty rate was in excess of 50 percent.
 
When thinking about income inequality -- especially among those away from the extremely high and extremely low levels of income -- there is just no escaping this picture:

   

Education_premium_real_dollars   
 
   
The second thing I found interesting was the reasons that people who were not employed gave for not working:
   
Poverty_2a   
Poverty_2b
   
Conclusion?  If you are poor and not working -- which is the most common circumstance for those under the poverty line -- the reasons are not obviously related to the state of the labor market.
UPDATE: The comment by kharris below made me realize that that last sentence is pretty silly. It is clear that choosing retirement rather than work, work at home rather than work in the market, and choosing educational investment over employment are inherently related to conditions in the labor market.  I was thinking in terms of conditions related to unemployment, and so the phrase probably should have read:
If you are poor and not working -- which is the most common circumstance for those under the poverty line -- the reasons are not obviously associated with a lack of jobs for those who choose to remain in the labor force.
Stated that way, it is clear that judging this to be a good or bad thing is pretty tricky.  Those who are retired or have decided to stay home to attend to family may simply be discouraged by the lack of opportunity.  And we might lament that the return to working is so low that poverty is associated with separation from the labor force.  On the other hand, we might be encouraged that such a large fraction of those under the poverty line appear to be making a deliberate choice to acauire human capital.  This is one of those cases where each of theose reactions is probably justified.
BLOGLAND UPDATE: Mark Thoma has an extensive round-up, the dominant theme being that this is a bad report.  Daniel Gross is not so impressed either.  John Irons declares the increase in the number of Americans without health insurance "bleak." 

August 30, 2006 in Health Care, Inequality, Labor Markets, This, That, and the Other | Permalink

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» Are Conditions Getting Worse for the Poor in the U.S.? from EclectEcon
There has been quite a bit of discussion in the media and around the blogosphere during the past couple of days about labour income and about conditions for the U.S. poor. Here's more from ... [Read More]

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See Thoma, http://economistsview.typepad.com/economistsview/2006/08/disappointing_n.html#more
for all the bad news. Entry college graduate salaries continue to fall. Rising incomes are only among immigrants and the elderly

Posted by: Lord | August 30, 2006 at 02:33 AM

"If you are poor and not working -- which is the most common circumstance for those under the poverty line -- the reasons are not obviously related to the state of the labor market."

Huh? We have no way of knowing how the people below the poverty line are distributed across categories in the reasons-for-not-working pie charts. One could just as easily assert, based on the pie charts, that reasons for poverty are not obviously unrelated to the state of the labor market.

Posted by: kharris | August 30, 2006 at 03:46 PM

kharris -- The pie chart applies only to people below the pverty line, so I'm not entirely sure what you mean. However, see my comment above, because there is a sense in which my statement was poorly crafted.

Posted by: Dave Altig | August 30, 2006 at 09:26 PM

Globalization will continue to keep a lid on wage inflation here in the US... JMHO.

Posted by: muckdog | September 02, 2006 at 02:21 AM

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July 22, 2006

Odds And Ends -- July 22 Edition

A rainy morning in Cleveland, and an opportunity to do some quality blog-surfing.

The confluence of Chairman Bernanke's Congressional testimony and the release of the June FOMC meeting minutes got lots of people thinking about what is next for U.S. monetary policy. Brad Delong is "surprised that there hasn't been a pause yet" and thinks that we haven't seen one because "the Fed is scared of the 'soft on inflation' headlines that a pause would generate."  The Capital Spectator offers a terrific round-up of the week's economic news, and claims that "In theory, a slowing economy makes it easier for the Federal Reserve to cease and desist with its current round of interest rate hikes. In practice, life's more difficult, thanks to the worrisome rise in core CPI in June..."  Tim Duy also thinks that "although the Bernanke sounded soothing relative to expectations, the incoming data argue for another rate hike in August."  Toni Straka believes the "rate trend will stay the same and probably accelerate." At Hypothetical Bias, the opinion is "Once more and done (for a bit, at least)". William Polley is leaning that way tooBarry Ritholtz reiterates: The Bernanke bounce in the stock market is a "sucker bet".

Speaking of the Chairman -- more specifically his ideas about the global savings and investment and their relationship with interest rates -- Mark Thoma has a legitimate beef with the use of the word "glut."

Other summaries of, and commentary on, the week's economic news: From Dr. John John Rutledge (here and here). Calculated Risk provides a nice graphical look at where housing inventories are building, replicated from the Wall Street Journal. The Nattering Naybob Chronicles has its usual rundown of the week in bond and equity markets. MacroMouse contemplates the end of quantitative easing in Japan, and sees lessons for U.S. policymakers.  Tim Iacono has plenty of this and that, as does The Skeptical Speculator.

On my exchange with Nouriel Roubini on Chinese currency reform, Kash agrees "it does not feel like we're getting closer to some sort of crisis" but wonders "what should we expect it to feel like?"  Paul at Truck and Barter gets right to the substance of our exchange, while Brad Setser adds his own, ever insightful, thoughts at RGE Monitor. The Skeptical Speculator notes that "China has taken additional steps to cool its economy." Though not about the Chinese case specifically, Daniel Gross addresses a related and really important question: Is the end of American dominance in capital markets done?

Russell Roberts echoes an argument made this week by Ben Bernanke: In dealing with low-wage workers, an earned-income credit is preferable to a minimum wage.  He also takes on Paul Krugman's position on both the minimum wage and the inequality statistics that Krugman argues support a minimum wage policy.

Brad DeLong highlights an interesting column by Hal Varian on luck and taxation.  (Bottom line: If luck -- as opposed to hard work and risk-taking -- is a big part of being rich  progressive taxation makes good economic sense.  The intuition would be that luck is not sensitive to prices, and so won't be diminished by relatively high taxes.) 

Mark Thoma noticed the Varian piece too, and has several links to others opining on the inequality debate more generally. I'd also check out Greg Mankiw's ruminations, Tom McGuire's recent "Stalking Points", and, if you have the time, everything in the Cafe Hayek archive on inequality.

Taking a more global perspective on poverty and inequality, J.S. at Environmental Economics shares some thoughts on "Rethinking Development Aid For The 21st Century" (thoughts which sound pretty darn sensible to me).  Also, NEI Nuclear Notes asks "Should Developing Nations Embrace Nuclear Energy?"  In the category of excellent advice, The New Economist quite rightly commends your attention to the Private Sector Development Blog. (So do I.)

A colorful picture of who gets what from oil revenues across the G7 is available at Contango.

John Irons documents the continuing, and puzzling, mix of profits versus labor compensation in overall income.  As I've noted before, however, there may be more to this story than meets the eye.

Hat tip to Captain Capitalism for the link to this article about a county in Oregon that is running its own monetary systemMark Thoma comments intelligently on a proposal to implement a commodity-based monetary system backed by "local renewable energy" (whatever that might mean).

Daniel Drezner links to an interesting article in the Economist on the value (or lack thereof?) of large quantitative trade models.

July 22, 2006 in Asia, Economic Growth and Development, Energy, Exchange Rates and the Dollar, Federal Reserve and Monetary Policy, Housing, Inequality, Saving, Capital, and Investment, This, That, and the Other | Permalink

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These posts of yours are great Dave ...

Cheers

Claus

Posted by: claus vistesen | July 22, 2006 at 07:25 PM

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