Friday, November 11, 2011

A post about inequalities

Raghuram Rajan has a piece on Project Syndicate where he echoes David Brooks's column explaining that the inequality we should worry about is the inequality in education, and concludes that
the broken educational and skills-building system is responsible for much of the growing inequality that ordinary people experience
As he says, this relies on this observation:
the single biggest difference between those at or above the top tenth percentile of the income distribution and those below the 50th percentile is that the former have a degree or two while the latter, typically, do not.

For now, let us forget about the affordability of education in the US in particular, which could explain the consequences of income inequality on education inequality(see Mike Konczal for some graphs on the rising importance of student debt, the rise of student loans v. auto loans or mortgages in the last 10 years). The fact is, the inequalities fought by the 99% movement and the ones Rajan is talking about are...not the same thing. Autor, Katz and Kearney show that the rise in income inequalities has been a constant trend since the sixties, and its movement was sometimes uncorrelated with the college premium(especially in the seventies):

This might seem trivial, but they conclude that

These divergent patterns suggest that the growth of inequality is unlikely to be adequately explained by any single factor
Paul Krugman shows that the magnitude is also quite different .  There also has not been a significant college premium compared to high school in the last 30 years(though the previously mentioned paper by Autor et al.. seemed to show a higher change than the graph below)

It is also clear that the very top of the distribution has done far better than the rest. The relative income share of the top-thousandth has increased dramatically compared to the other fellow members of the top 1% club:

I was lucky to attend the INET conference which looked among others to trends in inequalities. What striked me with the explanation of rising inequalities by skill-biased technological change(SBTC) is that it cannot explain a lot of the movement in the income share of the top 0.1% in anglo-saxon countries. Institutions must play a role. Courtesy of Emmanuel Saez, how can you explain the difference in movements between those two graphs via a technological explanation?

It is interesting that at the conference, Arin Dube made the point that the main issue we do not understand is really what is going on at the top 1%(he mostly stressed compensations in the financial sector, but as we'll see below, it is not clear to me that this should be the main point of interest given the job composition of the top thousandth).

In his piece, Rajan also makes the point that
[M]any of the truly rich are entrepreneurs.[M]any of the wealthy are sports stars and entertainers, and(...) their ranks include professionals such as doctors, lawyers, consultants, and even some of our favorite progressive economists. In other words, the rich today are more likely to be working than idle. 
I sympathize with that, looking at the distribution of the top 0.1% in the US, via this awesome paper(pdf) by Bakija, Cole and Heim

However, the US has not a good record on income mobility, measured by, for example, the correlation between a parent's income and her children's.

(This TED talk made the joke: if an American wants to leave the american dream, he should go to Denmark).

The bottom line is that I don't think we can discard income inequalities, and that we can say that most inequalities come from differences in education: not only this is not true, but education reform might not change anything if the problem of income mobility is not tackled in parallel. Finally, Institutions (with a big I because that makes the word vague so I don't have to commit) clearly have an impact.

As a final point, this is not to say that SBTC does not matter. As the FT series on the international middle class squeeze shows, there clearly is a worrying dearth of middle income jobs in OECD countries, leading to median income stagnation and growing inequalities between highest paid and lowest paid jobs.

The fact that different explanations stand for different parts of the income distribution seems to be where research is converging. Dube made the point that

  • Minimum wage and institutional factor are important to explain the divergence in the bottom half of the distribution, say the 10th percentile
  • The problems at the median are better explained by institutional factors such as de-unionization(I am a bit confused that this can explain the changes internationally though. Globalization seems more reasonable, as Autor mentions here about the US job polarization: "Key contributors to job polarization are the automation of routine work and the international integration of labor markets").  

So reforming the education system and job-training programs should definitely be an objective. However, the income inequality at the top of the income scale seems like a big, and easily solvable problem, compared to the huge issue of adapting skills to technology and globalization.

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