Week6 - Inequality & Wage Distribution

• how do productivity differences affect the wage distribution

  the higher the productivity differences the more unequal the wage distribution
• how does the rate of return to skills differences affect wage distribution

  greater rewards cause a greater wage gap between skilled and unskilled labour, leading to a more unequal wage gap
• how is the wage distribution skewed and what does this mean

  positively skewed - long right tail

  
  

  means that a small percentage of workers earn disproportionately large shares of the rewards from work
• what are the two reasons why wage differentials exist

  i. human capital investments that vary from worker to worker

  
  

  ii. age differences - young workers are still accumulating human capital while older workers are collecting their rewards from earlier investments
• what is the correlation between high ability workers and how much they earn for each level of human capital in comparison to low ability workers

  high ability workers earn more than low ability workers for each unit of human capital accumulated - this causes the wage distribution to stretch out
• what does the Lorenz curve do

  divides the population into quantiles, with each quantile getting 20% of aggregate income across the population
• what correlation does the Gino coefficient have with inequality

  it increases as inequality increases
• what are the drawback of using the Gini coefficient

  i. treated deviations from equality the same regardless where they occur within the distribution - a shift from the bottom quantile to the top quantile will have the same effect on the coefficient as a shift from the third quantile to the top

  
  

  ii. it is so synthetic in the sense that it aggregates information from top decile shares, middle decile shares and bottom decile shares. this means its difficult to understand where it came from and to pinpoint data inconsistencies

  
  

  iii. it is better to use data on decile and percentile shares
• what three key facts are emphasise by Piketty & Saez 2003

  i. U-shaped pattern: high prior to the Great Depression, low and steady between WWII and mid-1970's, rising afterward

  
  

  ii. decline in top inequality in the first half of the 20th century associated with capital income

  
  

  iii. rise in top inequality during the last several decades associated with labour income, particularly if including business income
• what are the possible causes for the increase in wage inequality

  i. supply shift

  
  

  ii. skill-based technological change (SBTC)

  
  

  iii. institutional changes in the US labour market - minimum wages and unions

  
  

  iv. international trade
• explain how supply shifts could be a possible explanation for the widening of the wage gap

  i. is labour supply of killed workers is fixed and the demand for skilled workers increases relatively more than demand increased for unskilled workers then the wage gap increases

  
  

  ii. increased physical capital helped to increase the productivity of skilled workers so demand for skilled workers increases

  
  

  iii. a decrease in the supply of skilled workers or an increase in the demand for skilled workers could cause a widening of the gap

  
  

  iv. diagram: Ls is vertical and moves out. Ds slopes downward and moves out. relative employment of skilled workers increases. relative wage of skilled workers increases
• explain how skill-biased technological change can cause a widening of the wage gap


  i. technological advances are substitutes for unskilled workers and complements for skilled

  
  

  ii. demand for skilled workers increases over time

  
  

  iii. no widely accepted measure of SBTC

  
  

  iv. assuming SBTC increases skilled demand, if the skilled supply if tied, then the relative wage of skilled labour will increase over time.

  
  

  v. the only way to counteract rising wage inequality is the rise in skilled supply through increased education investment
• what is the main determinant of labour income inequality in the long run


  education vs technology
• how does the decline of importance of unions in the US labour market cause wage gap increase

  there's less protection and lower wages for low skilled workers who are traditionally protected by unions

  
  

  this implies that skilled demand rises, increasing the wage gap
• explain the hold-up problem


  relevant in the presence of firm-specific skill investment:

  
  

  in terms of incentives for skill acquisition, it can be better for both employers and employees (via unions) to commit in advance to salary scales and long run labor contracts.
• how does international trade increase the wage gap


  i. assume in the US there's an increase in trade with less-developed countries

  
  

  ii. workers in importing industries are less educated than workers in exporting industries

  
  

  iii. therefore the internationalisation has an impact on inequality as skilled demand increases

  
  

  iv. foreign consumers increase demand for goods produced by US skilled workers

  
  

  v. US consumers increase demand for goods produced by foreign unskilled workers so unskilled demand falls
• explain why the recent rise in inequality is so concentrated within the very top earners and why it occurred in some countries and not others

  a model with imperfect competition and CEO bargaining

  
  

  CEO bargaining: CEO's can sometimes extract some of their marginal product, and they do so more intensely when top tax rates are lower

  
  

  this can explain why top income shares increases more in countries with the largest decile in top tax rates since 1970's - US and UK rather than Japan or Germany
• what is the superstar phenomenon


  a few persons in some professions earn very high salaries and seem to dominate their field

  
  

  does not occur in every occupation

  
  

  this occurs because workers are not perfect substitutes and there is technology of mass production only in certain industries
• explain inequality across generations


  i. large part of human capital investment can come from an agents parents

  
  

  ii. high income parents often invest more in the education of their children, creating a positive correlation between the socio-economic level of children and parens (rate of social mobility)

  
  

  iii. the slope of the regression line between child and parental earnings is called the intergenerational correlation

  
  

  iv. slope = 1: the parents earning wage gap persists entirely into the next generation

  
  

  slope = 0: wage of children and parents is independent

  
  

  v. income differences across families converge to the mean income of the population - parents don't invest all their wealth and they encounter diminishing returns when investing in their children
• what does Piketty state about capital in the 21st century


  i. when the rate of return on capital (r) exceeds economic growth rate (g) then wealth :

  
  

  tends to accumulate more quickly from the rate of return rather than from labour

  
  

  tends to accumulate more among the top decile and gentile, increasing inequality