Lecture 13 Inequality

1. Lecture 13Inequality Se Yan

2. Income Inequality • The Gini measures for China • 1981 0.28 (like Sweden) • 1990 0.32 (like Canada) • 2001 0.39 (like India) • 2006 0.47 (like Mexico)

3. Income Distribution

4. Income Distribution • Over time, China has clearly shown increased inequality. • By Gini coefficient, China is still less unequal than Brazil and Mexico. • China still has more people under the poverty line than Brazil and Mexico.

5. What the Data Show • Chinese official poverty line: • 1978 250 million poor rural people • 2004 26 million • World Bank poverty line: • 1982 375 million • 2002 114 million

6. What kind of Inequality? • Cross-country inequality: convergence and divergence • Regional inequality • Inequality among people • Wealth inequality • Income inequality • Consumption inequality • Wage inequality

7. Why do we care about inequality? • We care welfare of all the people • Inequality might matter for economic growth: good or bad?

8. Inequality and Growth • If markets are efficient and property rights are well specified • Then inequality is irrelevant to economic growth • When is inequality bad? • Poor are smart • Need alternative channels to distribute resources • Markets are inefficient and institutions are unequal • Do not provide equal access to all • Solutions • Redistribution (not always efficient) • Public provision of capital (e.g. education)

9. Debates about Inequality • Socialist Critique • Gaps between rich and poor often associated w/ rising capitalism • Loss of ownership over private property and capital • Inequality increases over the course of capitalism • Simon Kuznets • Early stages of development have high inequality • Require heavy investment in physical capital and contribute to increasing inequality • At some critical point inequality begins to decrease • Increasing importance of human capital to economic growth

10. Is equality good for development? • Con • Who saves • Capital deepening • New technology • Pro • More extensive network of markets and commercialization so • Use resources more effectively, invent, build human capital so • Get specialization and economy of scale • Economic growth accelerates with cumulative impact of incremental advances (not single industry or elite)

12. How to understand trends in inequality? • Facts about inequality • Kuznets • Piketty & Saez • Goldin Katz Margo • Lindert Williamson Clarke • Theories about inequality • Technological change vs education • Trade and openness • Labor market and institutional frictions • Shocks

13. Kuznets’s Puzzle • Income inequality seemed to be declining in the twentieth century in advanced industrial economies

14. Kuznets’s Explanation • Concentration of savings offset by policies such as inheritance tax and by the creative destruction that is concomitant of growth • Effect of redistribution of population from countryside to cities will reverse over time as population becomes increasingly urban and urban inequality declines.

15. Wealth: Probate data • Advantages • Go back a very long time in Europe and many European colonies • Evasion is not an issue (because it’s not a private decision) unlike tax records • Problems • Sample selection • Do not necessarily cover the whole population

16. Income: Tax records: Piketty Saez • IRS data • Starts with 1917 • Some prior data but state specific and no long run series • Problem: • Not long enough • Tax evasion

17. Top Wealth Shares in the United States, 1916-2000: Evidence From Estate Tax Returns WojciechKopczuk Emmanuel Saez 2004

18. Unequal English Wealth since 1670 P. Lindert, JPE, 1986

19. I. Introduction and summary • Debate about the trends in income and wealth distribution under capitalism: - polarizing tendency (poor getting poorer, rich getting richer): Marx/Engels, Shaw, socialist literature. - In Britain, gaps between rich and middle narrowed in the late 19th-early 20th century (Porter, Giffen, Marshall). • Problem: No reliable data on wealth before 1911, particularly for non-employee classes. • Based on new data on probated wealth, debt, land-ownership and occupation in England, Lindert is able to “bridge the gap” between 1670 and 1911.

20. Main results: - widening inequality gap in personal wealth (excl. real estate) between the rich and the middle-class during 1740-1875 - average personal wealth and income rose faster for landowners and capitalists than for middle sectors; however, middling classes did gain in real wealth and income - however, non-human net worth did not become more unequal because of decline in land’s share of wealth/income after 1740. - Overall, Kuznetsian pattern in living standards: inegalitarian trend in the Industrial Revolution, followed by greater equality since WW I. All inequality measures before 1914 exceeded those after 1950.

21. II. Empirical results • Lindert divides the analysis of wealth distribution between: - Personal estates - Real estate - Debt

22. II.1 Personal estates (excl. real estate or debts), 1670-1875 • Average values per household head rose moderately (in constant prices) before 1740, and much faster thereafter, due to accelerated industrialization. • Different classes shared very unequally in the national gains in personal estate: merchants (incl. financiers and industrialists) and persons of landed title accumulated much faster than the rest between 1740-1875.

25. Table 2 gives the top quantile shares of personal states. • Main findings: - there was no clear trend in the pre-industrial era (1670-1740) - however, between 1740-1858, the gap between the rich and the rest widened: the top 1% gained enormously, while the share of the bottom 95% dropped. - the ratio of the average personal estate of the top 1% to that of the bottom 95% jumped from 32 in 1740 to 106 in 1875. • To summarize, we see a pattern like the Kuznets curve for income inequality during this period.

27. II.2 Adding Real Estate and Debt • The ownership of realty was more concentrated than the ownership of personality before the 19th century. • Since 1873, real estate ownership diffused greatly, but with differences among components: - home ownership spread from less than 1/6th of all households in 1873 to ½ today - the ownership of land, however, is just as concentrated today as it was in the 19th century

28. Nonetheless, given that land dwindled from almost ½ of household net worth in the late 17th century to less than 5% in the 1970s, its concentration becomes less important.

29. When adding real estate and debt, the results look quite different from those using personal estate alone: • The only general rise in inequality of net worth occurred between 1700-1740, before the Industrial Revolution • Between 1740-1875, the main discernible trend lies within the top 5%: the top 1% gained at the expense of the rest. • Beyond this, there is no widening of the distribution of net worth between 1740-1913. • Pronounced leveling in the 20th century: in the 1970s and 1980s, the distribution is far less unequal than before WW I.

31. Summary: I) Defining social inequity in terms of gaps between class mean levels of net worth would yield a “Marxian tale”: Sharply widening gaps across classes during the Industrial Revolution due to: a) increasing differences in personal estate b) no diffusion of real estate away from the titled and merchants, whose relative indebtedness also did not rise II) Defining social inequity in terms of the shares of nonhuman wealth held by the richest and the poorest gives different results: Inequality after 1740 was confined to a shift of relative wealth into the top percentile from the 2nd-5th percentiles.

32. Results driven by the balancing of two trends: - greater concentration on income and wealth - egalitarian consequences of the diminishing importance of land and of the title-landed class. • It was during the Industrial Revolution that realty fell sharply as a share of private wealth, imparting an egalitarian twist to the trend in wealth distribution. In no other period did the realty make so much difference. • To conclude: for any given share of realty in total non-human assets, wealth inequality and income followed the same path: - neither rose substantially before the middle of 18th century - both rose then until the middle of the 19th century - there were no strong movements between 1870-1913 - both became more equal after 1913 than ever before

33. III. Main conclusions • The inequality of material well-being followed a Kuznetsian pattern since the Industrial Revolution. • Clear net change: no time between 1670-1913 found income or wealth as equally shared as they have been since the 1950s.

34. Atkinson, UK • Income tax is older (first put in around 1800 and again in the 1850s) • But really gets going after 1910. • Same declining trends as in US • Inequality more severe • Decline start earlier, its deeper • And rise starts at about the same time…but do not return to pre 1920 levels

35. Atkinson

41. Income, Wage, and Wealth Inequality in France1904-1998 T. Piketty

42. Background • Establish facts on income, wage, and wealth inequality • Homogenous over time and across countries • Over long periods • Income inequality decomposed into labor and capital income component

43. Results • Constructed fully homogeneous yearly series running from World War I until the late 1990s for both income inequality and wage inequality; as of 2003 this has not been done for any other country • main conclusion • is that the decline in income inequality that took place during the first half of the 20th century was mostly accidental

44. Data sources Tax reform 1914 • Income tax since 1914 (5% of households) • Additional taxes levied separately on each income source • E.g. wage tax - a progressive tax levied on individual wages, three major types of data sources: • data from income tax returns 1915–98, • data from wage tax returns 1919–98, • data from inheritance tax returns 1902–94 • A progressive inheritance tax was enacted in France in 1901

45. Basic facts – decline of income inequality (1930s & 1940s)

46. Is almost entirely due to very high incomes

47. Explanations • Income composition patterns suggest that the decline in income inequality is primarily a capital income phenomenon • For all high fractiles the share of wage income declines while the share of capital income (mostly made by dividends) increases • Whereas the households of fractile P90–95 have very little capital or self-employment income (about 80–90 percent of their income consists of wages), • the households of fractile P99.99–100 rely for the most part on their capital and self-employment income (typically, more than 60 percent of their income consists of capital income, and an extra 20 percent consists of self-employment income).

48. Long-run stability of wage inequality

49. why capital owners never managed to fully recover from the shocks of the 1914–45? • The shocks to capital holdings took three • main forms: • Inflation - CPI was multiplied by a factor of more than 100 between 1914-50 • Bankruptcies - Real GDP declined by 50% 1929-1945 • Destructions- one-third of the capital stock was destroyed during WW I and about two-thirds during WWII. • Progressive taxation

50. The Evolution of Income Concentration in Japan Moriguchi - Saez