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Income Inequality and Inequality Reduction What Difference Does Policy Make?. Marcia K. Meyers University of Washington West Coast Poverty Center For presentation to House Labor & Workforce Development Committee Work Session on Inequality January 10, 2010 . TAKE AWAY POINTS .

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income inequality and inequality reduction what difference does policy make

Income Inequality and Inequality ReductionWhat Difference Does Policy Make?

Marcia K. Meyers

University of Washington

West Coast Poverty Center

For presentation to

House Labor & Workforce Development Committee

Work Session on Inequality

January 10, 2010

slide2

TAKE AWAY POINTS

  • Market income inequality in US has increased steadily since the early 1980s and sharply since 2002.
  • Returns from economic growth during this period have gone disproportionately to highest income households
  • Policy matters: Government tax and transfer policies reduce inequalities in market incomes
  • The inequality reducing effectiveness has declined of some of these policies, particularly for the populations most affected by increasing inequality in wages and earnings
slide4

General agreement about direction of change. Some debate about magnitude of these changes, depending on income measures, data source and other methodological issues.

  • Wages became much more unequal by education and skill level. Total earnings and total household incomes did not diverge as dramatically due to increases in work hours, particularly among women with children.
  • Most analyses use data that underestimate market incomeof highest income households
  • Analyses often miss returns from capital, for example capital income from interest & dividends and capital gains
  • Income from transfers is typically underreported and effect of taxes is estimated rather than observed
why has inequality in market income grown so dramatically
Why has inequality in market income grown so dramatically?
  • Factors putting downward pressure on wages for less skilled/educated workers
  • Factors limiting employment opportunities and hours for adults in low income households
  • Factors increasing wages and market earnings in the most highly compensated jobs
  • Factors increasing returns to capital investments and ownership among most affluent households
  • Factors that appear to have only small effect: immigrant competition for low skilled jobs; changes in household composition
slide6
Public policies make a difference for overall income inequality through tax & transfer policies that redistribute market income.
  • “Household income packages” :

Market income

+ Centralized, national, social insurance

+ Decentralized, safety net programs

-- Federal payroll and income taxes (with credits)

-- State income taxes (with credits)

Question: How do components of this income package reduce inequalities in market income?

data for analyses
Data for analyses

Project to analyze sources of inequality reduction over time and across states using CPS data

Household income packages

Measures of income inequality

Investigators: Marcia K. Meyers, University of Washington; Sarah Bruch, University of Wisconsin; Laura Peck, University of Arizona; Janet Gornick, CUNY

slide8

Average market income by quintile

Mid 2000s, all US households

Source: Meyers et al. 2011

slide9

Average household income package by quintile,

Adjusted for taxes, social insurance & transfers

Source: Meyers et al. 2011

slide10

Average adjustments to household income by quintile,

for taxes, social insurance & transfers

Source: Meyers et al. 2011

slide11

Taxes and transfers through social insurance and safety net programs reduce inequality in market incomes.

This equalization has become less effective in recent years, particularly for working age households.

Measuring changes in income inequality: Gini Index

Measure of the distribution of income across population

Perfect equality = 0

Perfect inequality =1

*Reduction in Gini coefficient reflects decrease in inequality

slide12

Equalizing effects of US tax, social insurance & transfers Reduction in Gini Index

Mid 2000s,all US households

Source: Meyers et al. 2011

slide13

Equalizing effects of US tax, social insurance & transfers Reduction in Gini Index by household type

Source: Meyers et al. 2011

slide14

Equalizing effects of US tax, social insurance & transfers Reduction in Gini Index for families with children, selected years

Increasing inequality in market income

Source: Meyers et al. 2011

slide15

State variation in equalizing effects of tax, social insurance and transfersGini index for market income X Gini index for post tax & transfer income

Source: Meyers et al. 2011

slide16

Equalizing effects of US tax, social insurance & transfers Reduction in Gini Index for families with children, selected states

Source: Meyers et al. 2011