The Distribution of Income and Wealth
Economic inequality has been a prominent and perennial concern in economics and public policy. The rise in inequality that occurred during the 1970s and early 1980s stimulated interest in the study of its causes and consequences. Experience from the 1990s suggests that economic growth and prosperity no longer dramatically reduce economic inequality. The persistent inequalities within nations and across nations raise several key issues that demand scholarship and innovative policies to aid in their resolution.
Recognizing this, the Levy Institute has maintained, since its inception, an active research program on the distribution of earnings, income, and wealth. Research in this area includes studies on the economic well-being of the elderly, public and private pensions, well-being over the life course, the role of assets in economic well-being, and the determinants of the accumulation of wealth.
It is widely recognized that existing official measures of economic well-being need to be improved in order to generate accurate cross-sectional and intertemporal comparisons. The picture of economic well-being can vary significantly depending on the measure used. Alternative measures are also crucially important for the formulation and evaluation of a wide variety of social and economic policies. The Levy Institute Measure of Economic Well-Being and related research is aimed at bridging this gap.
Working Paper No. 835 | March 2015
In recent years, Bolivia has experienced a series of economic and political transformations that have directly affected the labor markets, particularly the salaried urban sector. Real wages have shown strong increases across the distribution, while also presenting a decrease in inequality. Using an intertemporal decomposition approach, we find evidence that changes in demographic and labor market characteristics can explain only a small portion of the observed inequality decline. Instead, the results indicate that the decline in wage inequality was driven by the faster wage growth of usually low-paid jobs, and wage stagnation of jobs that require higher education or are in traditionally highly paid fields. While the evidence shows that the reduction in inequality is significant, we suggest that such an improvement might not be sustainable in the long run, since structural factors associated with productivity, such as workers’ level of education, explain only a small portion of these wage changes.Download:Associated Program:Author(s):Gustavo Canavire-Bacarreza Fernando Rios-AvilaRelated Topic(s):
Policy Note 2015/3 | March 2015
From Bad to WorseIn a recent policy note (A Decade of Flat Wages?) we examined wage trends since 1994, and found that while wages grew between 1994 and 2002, average real wages stagnated or declined after 2002–03. Our latest study provides a more detailed analysis of wage trends for wage-level, age, and education groups, with emphasis on the periods following the 2001 and 2007–09 recessions. There was a more or less cohesive evolution of wages among different groups until 2002–03. However, after controlling for structural changes in the labor force, wages diverged sharply in the years that followed for different age, education, and wage groups, with the majority of workers experiencing real declines in their wages. This was not a short-term decline among a few numerically insignificant groups. Nearly two-thirds of all full-time wage earners have less than a four-year college degree and saw their wages decline compared to peak wages in 2002. Workers aged 44 and younger, representing slightly more than 38 million full-time wage earners or 71.4 percent of all full-time wage earners in the United States, also experienced a large reduction in cumulative wage growth after 2002. In terms of wage groups, the bottom 75 percent of full-time workers saw a decline in real wages, while those at the top of the wage distribution saw their wages rise—clear evidence of increasing wage inequality. Given the downward trend in real wages for the majority of full-time wage earners since 2009, it should come as no surprise that recovery from the Great Recession has been weak. In the absence of an employer-of-last-resort policy, federal and state policy must focus its efforts on increasing wages through measures such as progressive tax policy, raising the minimum wage, ensuring overtime pay laws are enforced, and creating opportunities for the most vulnerable workers.Download:Associated Program:Author(s):Related Topic(s):
Working Paper No. 830 | January 2015
This paper describes the quality of the statistical match between the Current Population Survey (CPS) March 2011 supplement and the Consumer Expenditure Survey (CEX) 2011, which are used for the integrated inequality assessment model for the United States. In the first part of this paper, the alignment of the datasets is examined. In the second, various aspects of the match quality are described. The results show appropriate balance across different characteristics, with some imbalances within narrow characteristics.Download:Associated Program:Author(s):Related Topic(s):
Working Paper No. 826 | January 2015
Following a methodology proposed by Jantzen and Volpert (2012), we use IRS Adjusted Gross Income (AGI) data for the United States (1921–2012) to estimate two Gini-like indices representing inequality at the bottom and the top of the income distribution. We also calculate the overall Gini index as a function of the parameters underlying the two indices. Our findings can be summarized as follows. First, we find that the increase in the Gini index from the mid 1940s to the late 1970s seems to be mostly explained by an increase in inequality at the bottom of the income distribution, which more than offsets the decrease in inequality at the top. The implication is that middle incomes gained relative to high incomes, but especially relative to low incomes. Conversely, it is rising inequality at the top that appears to drive the rise in the Gini index since 1981. Second, inequality at the top of the income distribution follows a U-shaped trajectory over time, similar to the pattern of the share of top incomes documented by Piketty and Saez (2003, 2006) and Atkinson, Piketty, and Saez (2011). Third, the welfare effects of the different forces behind an increasing Gini index can be evaluated in light of the Lorenz-dominance criterion proposed by Atkinson (1970): both top-driven and bottom-driven increases in the index appear not to imply strict Lorenz dominance by previous income distributions, and therefore are not associated with lower welfare in an absolute sense. In a relative sense, however, once average growth rates over the two periods are taken into account, the top-driven increase in inequality since 1981 appears to have been welfare reducing.Download:Associated Program:Author(s):Markus P.A. Schneider Daniele TavaniRelated Topic(s):
Working Paper No. 814 | September 2014
The paper examines the long-run fluctuations in growth and distribution through the prism of wage-and profit-led growth. We argue that the relation between distribution of income and growth changes over time. We propose an endogenous mechanism that leads to fluctuations between wage- and profit-led periods. Our model is a linear version of Goodwin’s predator–prey model, but with a reversal of the roles for predator and prey: the growth rate acts as the predator and the distribution of income as the prey. These fluctuations need to be taken into account when someone estimates empirically the effect of a change in distribution on utilization and growth. We also examine our argument in relation to the double movement of Karl Polanyi, the Kuznets curve, and the theories of long swings proposed by Albert Hirschman and Michal Kalecki.Download:Associated Program:Author(s):Related Topic(s):
Research Project Reports | August 2014
The Levy Institute Measure of Time and Income PovertyThis report presents findings from a joint project of the Levy Economics Institute and the Korea Employment Information Service, with the central objective of developing a measure of time and income poverty for Korea that takes into account household production (unpaid work) requirements. Standard measurements of poverty assume that all households have enough time to adequately attend to the needs of household members—including, for example, caring for children. But this assumption is false. For numerous reasons, some households may not have sufficient time, and they thus experience “time deficits.” If a household officially classified as nonpoor has such a time deficit and cannot afford to cover it by buying market substitutes (e.g., hiring a care provider), that household will encounter hardships not reflected in the official poverty measure. To get a more accurate calculus of poverty, we developed the Levy Institute Measure of Time and Income Poverty (LIMTIP), a two-dimensional measure that takes into account both the necessary income and the household production time needed to achieve a minimum living standard. In the case of Korea, our estimates for 2008 (the last year for which data are available) show that the LIMTIP poverty rate of employed households was almost three times higher than the official poverty rate (7.5 percent versus 2.6 percent). The gap between the official and LIMTIP poverty rates was notably higher for “nonemployed male head with employed spouse,” “single female-headed” and “dual-earner” households. Our estimates of the size of the hidden poor—roughly two million individuals—suggest that ignoring time deficits in household production resulted in a serious undercount of the working poor, which has profound consequences for the formulation of policy. In addition, the stark gender disparity in the incidence of time poverty among the employed, even after controlling for hours of employment, suggests that the source of the gender difference in time poverty lies in the greater share of the household production activities that women undertake. Overall, current policies to promote gender equality and economic well-being in Korea need to be reconsidered, based on a deeper understanding of the linkages between the functioning of labor markets, unpaid household production activities, and existing arrangements of social provisioning—including social care provisioning.Download:Associated Program(s):The Distribution of Income and Wealth Gender Equality and the Economy The Levy Institute Measure of Time and Income PovertyAuthor(s):Related Topic(s):
Public Policy Brief No. 136 | August 2014
Assessing the Korean Experience Using the Levy Institute Measure of Time and Income PovertyIn partnership with the Korea Employment Information Service, Senior Scholar Ajit Zacharias and Research Scholars Thomas Masterson and Kijong Kim investigate the complex issues of gender, changing labor market conditions, and the public provisioning of child care in Korea using the Levy Institute Measure of Time and Income Poverty (LIMTIP), an alternative measure that factors in both time and income deficits in the assessment of poverty. Since the 1997 Asian financial crisis, lifetime employment and single-breadwinner households have given way to increased job insecurity, flexible work arrangements, and rapid growth in dual-earner households in Korea. Add to these factors rising labor force participation by women but little change in the highly unequal division of household production, and many women effectively face a double shift each day: paid employment followed by a second shift of household production. Recognizing the implications of the heavy burden of care work for women’s well-being and employment, Korea introduced public child-care provisioning, via a voucher system for low-income families, in 1992 (the program became universal in 2013). This study analyzes the impact of the voucher program on reducing time and income poverty, and reassesses the overall level of poverty in Korea. While it reveals a much higher level of poverty than official estimates indicate—7.9 percent versus 2.6 percent—due to time deficits, the outsourcing of child-care services reduced the LIMTIP rate from 7.9 percent to 7.5 percent and the number of “hidden poor” individuals from two million to 1.8 million. While these results show that the problem of time poverty in Korea extends beyond child-care needs, the impact of public provisioning through the voucher program clearly has had a positive impact on families with children. The main findings and policy recommendations resulting from this study are presented in detail in the research project report The Measurement of Time and Income Poverty in Korea: The Levy Institute Measure of Time and Income Poverty.Download:Associated Program(s):The Distribution of Income and Wealth Gender Equality and the Economy The Levy Institute Measure of Time and Income PovertyAuthor(s):Related Topic(s):
Policy Note 2014/4 | June 2014In the late 1990s low unemployment rates, increases in the minimum wage, and improvements in labor productivity contributed to a boost in wages, which translated into 12.4 percent cumulative growth in real wages from the late ‘90s until 2002. Real wages then stagnated despite continued growth in labor productivity. This period between 2002 and 2013 has become known as the decade of flat wages. However, over the same period there were significant changes in the composition of the labor market. In particular, the labor force has aged and become more educated. Increases in age, experience, and education could in fact be propping up observed real wages—meaning that wages of workers with a specific age and education profile may have actually declined over the decade. This is exactly what we uncover in this policy note: what appears to have been a decade of flat real wages was actually a decade of declining real wages within age/education worker profiles.Download:Associated Program:Author(s):Fernando Rios-Avila Julie L. HotchkissRelated Topic(s):
Press Releases | May 2014
Download:Associated Program(s):Author(s):Mark Primoff
In the Media | May 2014
By Martin SosnoffForbes, May 19, 2014. All Rights Reserved.
At the Sotheby’s May evening auction, Steve Wynn was the successful bidder for Jeff Koons’s life-sized Popeye sculpture, knocked down at a disappointing $28,115,000, and destined for one of Steve’s casino properties. Within this lot is some cautionary metaphor about conspicuous consumption reigning, again. The Koons piece is an immaculate, but exaggerated life sized presence in colorful, shiny sheet steel.
When Wynn took control of the Golden Nugget Casino in Las Vegas some 40 years ago, I sold him my block of stock, a reportable position. He deserved all his successes, a great operator who made Vegas a family destination resort while competition still ran grind joints.
I accept that there are hundreds of art buyers who easily qualify for spending $50 million or more on “name brand” work. Whether this is driven by connoisseurship, emotionality or trading savvy is another story. These big hitters are equivalent to whales at gaming casinos: Alice Walton (the Warhol Coca-Cola), Elaine Wynn (the Bacon) and corporate types like Russian oligarchs and Malaysian honchos, dealers – investors like the Mugrabi family, the jewelry purveyor Graff, even a handful of hedge fund operators.
The economics of taste suggests, long term, elevated art prices don’t hold up, excepting masterpieces. More critical, overindulgence ultimately is divisive for the country by calling attention to how the top 0.1% conduct themselves. Eventually, a public outcry congeals. Congressmen begin to speak out on income inequality. Unions get their raucous voice back.
Our middle-class holds minimal free capital for equity investment. A market rising 32% makes Buffett and his ilk billions richer, year-over-year. For the family with $50,000 in stocks, if that, we are talking chump change. Individual pension fund assets carry a discounted value based upon when they can be withdrawn.
Republicans and major multinational corporations call for tax breaks on the repatriation of offshore earnings, but the facts suggest just the opposite is called for. Corporate income tax rates rest much lower than during the sixties and seventies. Wage earners gain no leverage when the unemployment rate is elevated. Take home pay rises at a measly 2% rate, unless you work for Twitter or other dot com operators and are richly vested in zero cost equity.
Twitter’s insiders disgorged hundreds of millions of shares once their lockup ended. Employees drove Twitter down 17%, overnight. Such action is indicative of a middle class as yet capital starved. Not just machinists, even young computer code writers.
If I were Dan Loeb, instead of coveting Sotheby’s, an overpriced piece of paper that just broke below $40, I’d be driving a Buick and seeking naming opportunities at hospitals and graduate business schools. Buffett and Bill Gates are great role models here, and as far as I know disinterested in $100 million Bacon canvases.
The problem with conspicuous consumption is it can take decades, even centuries before it ends. Never happily. The French Revolution was preceded by bread riots but their political system for centuries exempted the nobility from taxation.
When I compare our present Gilded Age with the past, I see major differentiation. End of 19th century, Robber Barons mainly were industrialists with controlling positions in oil (Rockefeller), steel (Carnegie), railroads (Vanderbilt), the Guggenheims (minerals), Rosenwalds and Hartfords (retailing). Yes – there was J.P. Morgan and Jules Bache and a few Russians, but no Chinese, Japanese and Malaysians throwing their money around in the art world.
Land based wealth existed but yielded minimal returns in rents and farm income. There’s no material book value in Twitter and Facebook excepting cash and intellectual property. We have come a long way from when wealth rested in hard assets – minerals and chemicals, now in serious oversupply.
Art world players mainly are linked to stock market wealth. They include a couple of dozen hedge fund operators. Likewise, private capital operators at KKR, Blackstone, Carlyle and Leon Black. Throw in a dozen VC’s and Internet founders. Although establishment corporate management has learned how to milk their income statements, only a handful walk away billionaires. Unconventionally designed yachts belong to Russians and headman owners like Larry Ellison at Oracle.
If our S&P 500 Index puts together another year like 2013 in the next couple of years, the art market, surely goes through the roof. Deal proliferation would break out all over, too. Analysts would disremember how to punish tech houses with big disparity between GAAP and non-GAAP earnings.
The stock market is capitalized currently at 16 times earnings, not 10 or 11, vulnerable to any sign of a decelerating economy. I don’t know where hedge fund capital comes out in a bearish setting. After all, most of them weren’t bullish enough last year and badly trailed the market.
Obama doesn’t even have an inclination or the power to tax the carried interest of private capital operators at standard rates. Don’t expect any substantive tax reform that redistributes income downward to the poor and lower middle class categories. It could take decades. Infrastructure spending, what the country needs desperately to create jobs, is a stalled initiative for years to come.
The Levy Economics Institute at Bard College rightly underscores that rising income inequality weighs down the economic setting. GDP momentum, absent positive numbers on exports, must depend on rising private borrowing. But, a high debt to income ratio is unsustainable unless the stock market shows late foot.
The distribution of income over three decades flows to the top 1%. They control most of the assets in equities but are themselves vulnerable to a stock market bubble as denouement.
In the sixties and seventies, from my ski chalet in Franconia, New Hampshire I’d zip out in zero degrees early mornings with my band of brown baggers. We sharpened our own skis at home, and ate tons of spaghetti together. My next door neighbor, a dermatologist who was coining money, even in New Hampshire, asked me if it was okay with the group if he bought a new Caddy.
I told him to drop down one price point. The group might frown on such conspicuous consumption. Les did just that. Those days are gone but not forgotten.Associated Program: