INEQUALITY & DEVELOPMENT
Lawrence Summers
EC1400, ITF225
12th November 2015
Rise of the super-rich
Super-rich income shares 1979 and
2014
20.0
17.9
15.0
10.0
8.0
7.5
5.0
Changes in income share, 1979-2014
3.1
2.2
0.6
0.0
Top 1%
60.0
Top 0.1%
1979
Top 0.01%
2014
50.0
40.0
Most of the rise in US
inequality over recent
decades has been at the
level of the top 1%
30.0
20.0
10.0
0.0
First quintile
Second quintile
Third quintile
1979
Fourth quintile
Top quintile
2014
Source: data from US Census Bureau and World Top Incomes Database
Rise of the super-rich
What it look like if the income distribution had stayed the same
as it was in 1979?
• the top 1 percent would have had about $1 trillion less
• and the bottom 80 percent would have had at least $700 billion more
• or, if you work it out per household:
HOW MUCH RICHER WOULD HOUSEHOLDS BE IF THE INCOME DISTRIBUTION WAS SAME AS 1979?
I N D O L L AR S
% O F H O U S E H O LD I N C O M E
$9,467
$10,000
35%
32%
$9,000
30%
$7,574
$8,000
$7,000
24%
25%
$6,000
$5,302
20%
18%
$5,000
$4,000
$3,787
15%
$3,000
10%
$2,000
6%
5%
$1,000
0%
$0
First quintile
Second quintile
Third quintile
Fourth quintile
First quintile
Source: data from US Census Bureau and World Top Incomes Database
Second quintile
Third quintile
Fourth quintile
Rising non-employment among men
% of Men aged 25-64 not working the entire year
1960:
2009:
83% of men
worked full time
66% of men
worked full time
6% of men did
not work at all
18% of men did
not work at all
Source: Greenstone and Looney 2011
Income inequality persists across
generations
• Education
• Children whose father did not graduate high school are 8x more
likely not to graduate high school (Soltas)
• One-year old infants have similar cognitive abilities across
incomes. Four-year olds in the highest income quintile score twice
as highly on literacy tests as those in the lowest income quintile.
(Waldfogel and Washbrook)
•  Employment opportunities
• Half of all jobs are found through family, friends or acquaintances
(Loury)
•  Income/Wealth
• 50% in variation of wealth can be explained by variation in parents’
wealth (McGintis and Bowles)
50
60
Mean Child Percentile Rank vs. Parent Percentile Rank
30
40
Complete social
mobility
Rank-Rank Slope (U.S) = 0.341
Rank-Rank Slope (Denmark) = 0.180
With complete social immobility, Rank-Rank Slope =1
20
Mean Child Income Rank
70
Income inequality persists across generations
0
10
20
30
40
50
60
70
Parent Income Rank
Source: Chetty et al 2014
80
90
100
Degree of mobility has not changed over
time – but effects of mobility have
Chance of moving from bottom to top fifth of income distribution no lower for
children entering labor market today than in the 1970s
But because income distribution has become more unequal, consequences
of the “birth lottery” – the parents to whom a child is born – are larger today
than in the past
Source: Chetty et al 2014
Mobility is strongly affected by race
Low social mobility and high income
inequality are correlated
Is education the answer?
• When might better education be the answer to rising
income inequality?
• Skill-biased technological change: higher-skilled workers benefit,
lower-skilled workers lose.
• Globalization: scarce factor loses (lower-skilled labor in developed
countries)
Is education the answer?
Simulation: what would happen if one out of every ten men
aged 25–64 who did not have a bachelor’s degree were to
instantly obtain one?
Year
% of men with
bachelor’s degree
Bottom-half
inequality (50/25
earnings ratio)
Overall inequality
(Gini coefficient)
1979
23%
2.6
0.43
2013
32%
5.6
0.57
Source: Summers, Kearney and Hershbein 2015
Is education the answer?
Simulation: what would happen if one out of every ten men
aged 25–64 who did not have a bachelor’s degree were to
instantly obtain one?
Year
% of men with
bachelor’s degree
Bottom-half
inequality (50/25
earnings ratio)
Overall inequality
(Gini coefficient)
1979
23%
2.6
0.43
2013
32%
5.6
0.57
2013 counterfactual
39%
4.3
0.55
• Inequality in bottom half of income distribution falls
• But little effect on aggregate inequality, which has mostly been
driven by top incomes.
Source: Summers, Kearney and Hershbein 2015
What about raising taxes?
• Simulation: what would happen if US top tax rate was
raised to 50% and the proceeds were redistributed to
the bottom 20% of households?
Gini coefficient
Before-tax income
0.610
After-tax income: current law
0.574
Source: Gale, Kearney and Orszag 2015
What about raising taxes?
• Simulation: what would happen if US top tax rate was
raised to 50% and the proceeds were redistributed to
the bottom 20% of households?
Gini coefficient
Before-tax income
0.610
After-tax income: current law
0.574
After-tax income: top rate to 50%
0.560
“This analysis, coupled with the previous one, in turn leaves us with the open and
important question: if neither a substantial expansion in education nor a big increase in
the top marginal tax rate would significantly affect measured income inequality, what
would? ”
Source: Gale, Kearney and Orszag 2015
Policy implications: globalization matters for
institutions that redistribute income
• Unions bargaining:
• What matters for unions’ power to bargain is how elastic is demand for labor –
depends on firms’ alternatives for workers. Globalization could reduce union
power: If they demand higher wages, firms could go abroad or firms could be
less competitive.
• State has role in redistributing income and providing benefits for those who
are poor and insurance for all (old age, unemployment)
• Tax and Transfer Redistribution:
• In a world where capital is immobile, you can tax it; capital has nowhere else
to go. So you can tax profits, But in a world where firms can move, or they
can shift where they report their profits, much harder to tax them.
• Welfare state, gives benefits. If people can enter freely, they get benefits
without having paid. Not a coincidence that now less migration than in early
period.
Tax shares do not reflect profit shares.
Though corporate taxes fairly
constant share of GDP
More profits earned abroad and
lower rates paid at home
Types of inequality, explanations – and
solutions?
Globalization
Technological
change
Institutions &
politics
Wage disparities
Redistribution?
Education
Unionization,
increasing worker
bargaining power
Rise of 1%
Redistribution?
Redistribution?
Improving corporate
governance, raising tax
rates, reducing money
in politics
Capital vs. labor
Global capital tax?
Shared ownership
?
Unionization,
increasing worker
bargaining power,
shared ownership