Addison Wesley Longman, Inc. © 2000 Chapter 14 Inequality in Earnings

Addison Wesley Longman, Inc. © 2000

Chapter 14

Inequality in Earnings


Earnings Distribution with Perfect EqualityFigure 14.1


Distributions of Earnings with Different Degrees of DispersionFigure 14.2


Fairness

• Wages and salary represent 60% of household income• Income for property – profits, interest, dividends and

inheritance• Income from government is from transfers • Why are wages different?

– Inborn skills– Acquired skills and effort– Compensating differentials– Multiples household incomes– Unemployment

• What is fair?







What is the Current Distribution?TOTAL WAGES PROPERTY TRANSFERS

• 1/5 6 5.7 1.0 27.6• 2/5 9.1 11.9 4.0 26.1• 3/5 14.7 19.9 8.4 18.7• 4/5 23.6 27.3 16.4 13.9• 5/5 46.6 35.2 70.2 13.7• 1% 10 3.2 29.7 1.5


Wealth vs. Income

• What if we consider wealth and not income? • What happens to income distribution?

top 20% have 46% of total income top 10% have 72.5% of wealth

• Why?• Focus here on income differences• 1998: top 20% - $127,529 bottom 20% - $9,223• Remove government transfers, include cap gains,

health benefits:– top 20% - 54% of total bottom 20% - 1% of total


Source of Wage Differences

• Technology– technology rewards skilled workers– Technology is a substitute for unskilled labor

and a complement for skilled labor• Generational Movement

– Father in lowest 5% in earnings, son has 75% chance of being in lowest half

– Father in highest 5%, son has 75% chance of being in upper half

– 41% of families in lowest 1/5 in 1969 remain there in 1994

– 6% of those families made it to the top 1/5


The Transmission of Inequality Across GenerationsExample 14.2



Comparisons• International comparisons

– Ratio of earnings of the 80th% to the 20th%• US ratio for men is 4• Highest discrepancy in developed world• Canada, UK, France are over 3• Sweden, Australia under 2.25

• Comparisons over time– 1997: ratio was 3.43– 1975: ratio was 2.58– (lower income group lost income in real dollars)

• Comparisons by gender– 1997: ratio was 4.4– 1975: ratio was 4.41– (both groups improved in real dollars)


Explanations• Ratio of college to high school earnings has

risen

• Are high earners working more hours? – A little. Low earners have been made part-time,

but the difference in hour changes is small.

• Theory offers some explanations– Supply– Demand– Market changes


Changes in Supply As the Dominant Cause of Wage ChangesFigure 14.3


Evaluating the Explanations

• Supply changes– Changes in Supply. Is there a shortage of highly skilled

workers? Table 14.6 shows that groups with the greatest wage increases had greatest rise in employment. However, immigration could explain low wages on the low end.

• Demand changes– Inter-industry: demand in service industry rose. These

are educated workers and wages would rise. Demand in manufacturing fell which would depress wages.

– Intra-industry: % of management rose.

• Institutional changes – unions declined


Lorenz Curves for 1980 and 1992 Distributions of Income in the United States

Figure 14A.1


Lorenz Curves That CrossFigure 14A.2

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Addison Wesley Longman, Inc. © 2000 Chapter 14 Inequality in Earnings