The Causes of Wealth Inequality (25): Globalization, Ctd.

globalization, cartoon by Deng Coy Miel, Singapore

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Globalization is the usual suspect when people discuss the causes of contemporary increases in income inequality in many Western nations. As a result of easier transportation, trade and communication, low skilled workers in those nations now face ever tougher competition from cheap workers in developing countries, and this competition drives down wages at the poor end of Western income distributions: workers have to swallow wage reductions under the threat of outsourcing. Increased immigration – another facet of globalization – has the same effect.

At the top end of the income distribution, the reverse is happening: the job of a CEO is now more complicated in our globalized world, and hence his pay is higher. The threat of relocation also has an effect on income inequality through the channel of the welfare state: companies threaten to relocate, not just because of labor costs, but also because of tax rates. Taxes in Western countries tend to be relatively high because social security tends to be relatively generous. The threat of relocation convinces governments to reduce tax rates, but the price to pay is often a less generous welfare state. This as well puts pressure on the income distribution.

All this sounds convincing, but I’m afraid it’s too simple. The effects of globalization on inequality starts to look more complicated when we take consumption into account. Globalization tends to lower the consumption prizes of a lot of goods, and cheaper consumption can counteract downward pressures on wages and social security. If you can buy more and better stuff with your paycheck, your unemployment benefit or your disability check, then perhaos you’re not worse off.

There’s an interesting paper here by Broda and Romalis in which they look at

the compositional differences in the basket of goods consumed by the poor and the rich in America. Using household data on non-durable consumption between 1994 and 2005 we document that much of the rise of income inequality has been offset by a relative decline in the price index of the poor. By relaxing the standard assumptions underlying the representative agent framework we find that inflation for households in the lowest tenth percentile of income has been 6 percentage points smaller than inflation for the upper tenth percentile over this period. The lower inflation at low income levels can be explained by three factors: 1) The poor consume a higher share of non-durable goods —whose prices have fallen relative to services over this period; 2) the prices of the set of non-durable goods consumed by the poor has fallen relative to that of the rich; and 3) a higher proportion of the new goods are purchased by the poor. We examine the role played by Chinese exports in explaining the lower inflation of the poor. Since Chinese exports are concentrated in low-quality non-durable products that are heavily purchased by poorer Americans, we find that about one third of the relative price drops faced by the poor are associated with rising Chinese imports.

When measuring income inequality, we should correct for the different prices of goods and services consumed by people in different income groups. This doesn’t mean that we should be happy about the fact that poor people live on cheap stuff; it simply means that some of the rising income inequality is compensated by cheaper stuff. And we have cheaper stuff because of globalization. Turning globalization into some sort of bogey man is therefore rather too simple. Income inequality has many causes, and it’s not clear that globalization is, everything considered, an important one.

Finally, a word about the supposed wage pressures of increased immigration: they are indeed no more than supposed.

More on income inequality and globalization. More posts in this series.

Lies, Damned Lies, and Statistics (40): The Composition Effect

Take the evolution of the median wage in the US over the last decades. The trend is nearly flat and one would therefore naturally assume that there have been hardly any income gains for the average US citizen. However, some have argued that this conclusion is wrong because it ignores the composition effect. In this example, the composition of the labor force has obviously changed over the last decades, and has changed dramatically. More women and immigrants have entered the workforce and those tend to be lower income groups, especially at the moment of entry. When they enter the labor force, their incomes go up, obviously, but they bring the average and the median down. When, at the same time, the wages of white men go up, the aggregate effect may be close to zero. And yet, paradoxically, all groups have progressed. The conclusion that the average citizen did not progress would only hold if the composition of the population whose wages are compared over time had not changed.

Now, it seems to be the case that in this particular example there is really no large composition effect (see here). However, this effect is always a possibility and one should at least consider it and possibly rule it out before drawing hasty conclusions from historical time series. If you don’t do this, or don’t even try, then you may be “lying with statistics”.

More posts in this series are here.

Migration and Human Rights (42): The Labor Cost Argument Against Open Borders

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I’ve argued many times before against the popular view that increased immigration is detrimental to native employment and income. The simple argument about an increase in supply of cheap labor driving down wages and forcing expensive native workers out of the job market is just that: simple, too simple. There’s even evidence that the opposite is true: immigration increases native wages (because it allows native workers to move up the pay scale). But even if immigration did impose a cost on the host country, that wouldn’t be the final argument against immigration, since such a cost could be seen as a form of global redistribution and global justice: improving the lot of the poorest of the world surely justifies imposing a burden on those who have more wealth and who had the good fortune of being born in the “right” part of the world. True, this burden shouldn’t fall on the poorest members of the “right” countries, but if it does that can be corrected by national redistribution.

Still, let’s return to the labor cost argument against immigration. Here’s another piece of evidence that tips the scales yet a bit further against the view that the extremely low cost of immigrant labor results in displacement of low-level native labor. The evidence I want to cite is about internal migration in China, but it’s perfectly possible to use it against arguments favoring restrictions on international migration:

Hundreds of millions of rural migrants have moved into Chinese cities since the early 1990s contributing greatly to economic growth, yet, they are often blamed for reducing urban ‘native’ workers’ employment opportunities, suppressing their wages and increasing pressure on infrastructure and other public facilities. This paper examines the causal relationship between rural-urban migration and urban native workers’ labour market outcomes in Chinese cities. After controlling for the endogeneity problem our results show that rural migrants in urban China have modest positive or zero effects on the average employment and insignificant impact on earnings of urban workers. When we examine the impact on unskilled labours we once again find it to be positive and insignificant. We conjecture that the reason for the lack of adverse effects is due partially to the labour market segregation between the migrants and urban natives, and partially due to the complementarities between the two groups of workers. Further investigation reveals that the increase in migrant inflow is related to the demand expansion and that if the economic growth continues, elimination of labour market segregation may not necessarily lead to an adverse impact of migration on urban native labour market outcomes. (source, source)

More posts about arguments against open borders are here, here and here. More posts in this blog series are here.

Related Articles

• Pros of Rural-urban Migration (socyberty.com)
• Worker Shortages Seen in Chinese Export Centers (nytimes.com)
• Immigration and the economy: Everything you believe is wrong (blogs.berkeley.edu)
• Why an immigration amnesty could benefit British workers (newstatesman.com)

Economic Human Rights (41): Unemployment, a Cost-Benefit Analysis

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Unemployment is a violation of an individual’s right to work. It stunts her creativity and diminishes her wellbeing, in a material, moral and psychological sense, in many cases even pushing her into poverty, ill health and depression.

For a person with no pre-existing health conditions, losing one’s job increased the chances of reporting a new health problem by 83 percent. Overall, the newly unemployed had a 54 percent chance of reporting fair or poor health. (source, source)

Unemployment is also self-perpetuating because it makes it harder to find a new job – employers prefer candidates who already have a job. In addition, it depresses wage levels, even decades after the end of a spell of unemployment.

Needless to say, these costs don’t affect only the unemployed themselves. Their families and children also suffer:

We find that a parental job loss increases the probability of children’s grade retention by 0.8 percentage points, or around 15 percent. After conditioning on child fixed effects, there is no evidence of significantly increased grade retention prior to the job loss, suggesting a causal link between the parental employment shock and children’s academic difficulties. These effects are concentrated among children whose parents have a high school education or less. (source)

And the ripple effect of unemployment covers the whole of society. Unemployment has a social cost: above and beyond the fiscal pressure – unemployment benefits have to be paid, either through increased taxes or cuts in other public services – it deprives society of valuable input and human ingenuity.

Still, all these costs should not blind us to the real benefits that unemployment can bring. And I’m not talking about those few individuals who are “liberated” from their mind numbing jobs and take the chance offered by unemployment to start a successful business doing something they always wanted to do but never had the chance or guts to do. Neither am I referring to kidults reveling in “funemployment”, staying with their parents well into their twenties or beyond, and taking the opportunity to prolong their childhood. Those are not the majority of the unemployed.

However, some among the majority may also find a silver lining. Maybe unemployment makes them less materialistic and more financially prudent; maybe some of them will use their free time to volunteer and educate themselves; society may become humbler and gentler; maybe concerns for social justice become more prevalent since the unemployed, ex-unemployed and their friends and families have become more conscious of the role of luck in life’s outcomes, as compared to the limited role of desert. Some health indicators may improve:

Interestingly, though high-stress events such as foreclosures and unemployment may hurt the health of those directly impacted, there’s some evidence that recessions have a positive impact on a nation’s health overall. In 2000, Christopher Ruhm, an economist at the University of North Carolina at Greensboro, found that a 1 percent rise in a state’s unemployment rate led to a 0.6 percent decrease in total mortality, looking at mortality changes in the United States between 1972 and 1991. … economic downturns could improve health through “declines in smoking, excessive alcohol consumption and overeating during recessions as people look for ways to save money.” (source)

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Of course, there’s no way these benefits cancel out all of the costs. Unemployment is a scourge and a human rights violation, and capitalism doesn’t do itself any favors by maintaining and temporarily inflating its “industrial reserve army“.

More on the human cost of unemployment is here and here.

This may be the right time for some shameless self-promotion: a few years ago, I published a short book dealing exclusively with work – although that’s not what you would think when reading the title.

The Causes of Wealth Inequality (16): Wages in the Financial Sector

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[I]nequality has been soaring in part because of politics. Piketty and Saez document that the very rich today are different than those several decades ago, most importantly because they are not rentiers enjoying returns on their or their parents’ capital, but W-2 earners, enjoying very, very high salaries. Recent research by Thomas Philippon and Ariel Resheff shows a concurrent increase in salaries in the financial sector relative to the rest of the economy, confirming the pattern suggested by casual empiricism that many of these very high W-2 earners are in the financial sector.

But the expansion of the financial sector and the salaries therein over the last two decades may not have been just an unavoidable consequence of economic tides but a very political process. The deregulation of finance, despite the presence of implicit and explicit government guarantees to financial institutions which would have ordinarily necessitated significant regulation, appears to have been partly won by the financial industry as a result of lobbying, campaign contributions and the access to politicians that the industry enjoys (though this is not to argue that some of this deregulation did not have a compelling economic logic nor that free-market ideology played no role). If so, politics may have been the key factor in setting in motion the forces that have led to the massive rise in top inequality. (source)

More posts in this series are here.

The Causes of Wealth Inequality (14): Wage Stagnation at the Bottom of the Income Distribution

Income inequality has risen in many countries during the last decades, including the U.S. The causes of this evolution obviously differ from country to country, although some causes may be universal. If we focus on the U.S., one important cause is wage stagnation for middle class and poor families since the 1970s. This stagnation, combined with the fact that the incomes of the wealthy continued along their pre-1970s growth path, caused increasing income inequality. The 1970s are a clear turning point, as you can see here:

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The decades before the 1970s were what has been called a time of “shared prosperity”. Maybe trickle down economics really did work back then. Since the 1970s, however, income gains went almost entirely to the very wealthy, without much of the gains trickling down.

If that is why inequality has increased, we still have to answer the question why lower wages have stagnated. Maybe the decline of the minimum wage has something to do with it:

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And, because a picture’s worth a thousand words, here you have one:

wage stagnation cartoon, by RJ Matson

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Inspired, of course, by this Escher classic:

Ascending and Descending, 1960, Lithograph by MC Escher

More posts in this series are here.

Related Articles

• The Causes of Wealth Inequality (11): Family Structure (filipspagnoli.wordpress.com)
• The Causes of Wealth Inequality (12): Immigration (filipspagnoli.wordpress.com)
• The Causes of Wealth Inequality (13): Deliberate Policy? (filipspagnoli.wordpress.com)
• Human Rights Facts (211): U.S. Public Opinion on Income Inequality (filipspagnoli.wordpress.com)
• Have the rich caused middle class wage stagnation? (marginalrevolution.com)
• “Threshold earners” and economic inequality (stat.columbia.edu)
• US Wage Stagnation Leads to Rampant Inequality (news.firedoglake.com)

The Causes of Wealth Inequality (7): Education and Demographics

First education. Many people believe that increasing income inequality in countries such as the U.S. should be blamed on immigration: low-skilled workers have to compete against low-wage immigrants with similar skills. However, immigration’s effect on wages is one of the biggest political myths out there. If you want to understand the income stagnation at the bottom of the income distribution – mostly unskilled workers – you have to compare this group of people, not to immigrants, but to the high earners.

Starting about 1950, the relative returns for schooling rose, and they skyrocketed after 1980. The reason is supply and demand. For the first time in American history, the current generation is not significantly more educated than its parents. Those in need of skilled labor are bidding for a relatively stagnant supply and so must pay more. … In contrast, from 1915 to 1950, the relative return for education fell, mostly because more new college graduates competed for a relatively few top jobs, and that kept top wages from rising too high. Tyler Cowen (source)

Hence, income inequality rose not because of downward pressure on the lower wages (supposedly caused by immigration) but because of upward pressure on the higher wages (caused by increasing returns for schooling, which are in turn caused by stagnant supply of high education). That means we can do something about income inequality. We can improve education levels, diminishing inequality both at the bottom – by giving low-skilled people a better education and hence a better income – and at the top – by reducing the scarcity of supply of the higher educated and hence lowering the relative wages at the high end.

Now to demographics.

In general, there is more income inequality among older populations than among younger populations, if only because older people have had more time to experience rising or falling fortunes. … Since the United States is growing older … income inequality will naturally rise. Tyler Cowen (source)

Other posts in this series are here. Some data on income inequality are here.

Migration and Human Rights (27): The Economic Benefits of Immigration

The prevailing thought in most Western countries is that immigration is a bad thing, and it’s a thought shared by both governments and public opinion (see also here). Western countries, it is believed, can only accommodate a limited number of immigrants – a few hand-picked high-skilled ones, some low-skilled ones in very special circumstances for special industries and for a limited amount of time (when local labor can’t or won’t provide), and a few lucky ones who might otherwise face certain death or extreme pain in their country of origin (generously called “asylum seekers“). People merely fleeing the horrors of poverty (“economic migrants”) should think again.

When the numbers of immigrants surpass this threshold, it’s imminent disaster for these proud former rulers of the world with their efficient economies, exemplary political and legal systems and strong moral and religious traditions. Two disasters, to be precise: on the one hand, cultural and religious destruction (Eurabia style, those Muslims do multiply like rabbits, don’t they) and, on the other hand, economic destruction. Let’s focus on the latter shall we. (An age-old culture or religion that can’t withstand the onslaught of a few million poverty stricken and low-skilled nannies, builders and factory laborers doesn’t seem to deserve survival).

Immigrants are said to be a burden on social safety nets; and they bring down wages for local workers because they are willing to work for less (especially the illegal immigrants). Never mind that this is completely and utterly wrong.

However, not only are the disadvantages of immigration overstated, the advantages are understated. It turns out that relatively high levels of immigration are beneficial for the receiving economy, at least in the U.S.:

[C]omprehensive immigration reform* would raise wages, increase consumption, create jobs, and generate additional tax revenue. … This is a compelling economic reason to move away from the current “vicious cycle” where enforcement-only policies perpetuate unauthorized migration and exert downward pressure on already low wages, and toward a “virtuous cycle” of worker empowerment in which legal status and labor rights exert upward pressure on wages. …

[L]egalizing the roughly 12 million undocumented immigrants through comprehensive immigration reform as well as making future flows more flexible would grow the economy by $1.5 trillion over 10 years. … [I]n the short term (three years) [it would] generate $4.5 to $5.4 billion in additional tax revenue and consumer spending sufficient to support 750,000 to 900,000 jobs. … Conversely, the deportation prescription that is offered by immigration restrictionists would poison the already anemic U.S. economy by draining $2.5 trillion from the economy over 10 years, even before factoring in the costs to deport 12 million people and permanently seal the border. (source)

And this isn’t just left-wing extremism. Here’s another quote, from a right-wing think-tank:

This study finds that increased enforcement [of immigration law] and reduced low-skilled immigration have a significant negative impact on the income of U.S. households. … A policy that reduces the number of low-skilled immigrant workers by 28.6 percent compared to projected levels would reduce U.S. household welfare by about 0.5 percent, or $80 billion. … In contrast, legalization of low-skilled immigrant workers would yield significant income gains for American workers and households. Legalization would eliminate smugglers’ fees and other costs faced by illegal immigrants. It would also allow immigrants to have higher productivity and create more openings for Americans in higher skilled occupations. The positive impact for U.S. households of legalization under an optimal visa tax would be 1.27 percent of GDP or $180 billion. (source)

* legalization of illegal immigrants combined with visa reform

Much of the economically inspired opposition to immigration is about the wellbeing of local low-skilled workers. These people, the narrative goes, are unable to compete with low-skilled immigrants who ask lower wages, especially if they’re illegal (and don’t have to pay taxes, and their employers don’t have to pay taxes for hiring them). In the best case, this competition pushes down the wages of local people; in the worst case it pushes these people into unemployment.

The studies cited above show that such claims aren’t compatible with the facts: low-skilled local workers actually benefit from low-skilled immigration, especially if this is legal (or legalized) immigration, because it allows them to move to higher skilled positions. It also makes it possible for them to spend less time on low-skilled and non-paid activities that they can outsource, and hence they can spend more time on paid activities, which increases their income. And there’s another way in which the indigenous population – including the less wealthy parts – can benefit from immigration: legalization of immigrants pushes their wages up and increases tax revenues. Higher earning immigrants consume and invest more, which creates higher economic growth that benefits everyone. And the taxes that they pay can be used for social safety nets that also benefit everyone.

There’s actually some data showing that immigration doesn’t push down low-skilled wages. Take a look at this graph:

This chart tracks the average median hourly wage for high school drop outs - the very subgroup that immigrations most pressures – in a variety of states. If, as some claim, high levels of immigration exert relentless downward pressure on unskilled native wages, you’d expect states with large immigrant populations to exhibit very low wages for unskilled workers. That doesn’t appear to be the case. … [E]ven George Borjas, the economist most often used by restrictionists, estimates that under realistic assumptions, the drag immigrants exert on native, unskilled wages is about 4 percent. Given the universe of things screwing over the working man, immigration just ain’t that large a player. (source)

And here are some other data confirming that the effect of immigration on the wages of low-skilled workers is negligible:

California may seem the best place to study the impact of illegal immigration on the prospects of American workers. Hordes of immigrants rushed into the state in the last 25 years, competing for jobs with the least educated among the native population. The wages of high school dropouts in California fell 17 percent from 1980 to 2004. But before concluding that immigrants are undercutting the wages of the least fortunate Americans, perhaps one should consider Ohio. Unlike California, Ohio remains mostly free of illegal immigrants. And what happened to the wages of Ohio’s high school dropouts from 1980 to 2004? They fell 31 percent. (source)

More on the benefits of immigration, on the legalization of illegal immigrants (and here). More on “importing poverty“. More on open borders. A reminder of why migration is a human rights issue can be found here.

The Causes of Wealth Inequality (5): Globalization

Another one in our series about the causes of wealth inequality (see here, here and here). (If you want to know why we think this is a human rights issue, go here or here first).

Globalization is supposed to have lowered the earnings of less-educated workers by putting them in direct competition with low-wage workers around the world. This competition put pressure on wages through international trade in goods and services; through the relocation or threat of relocation of production facilities to overseas locations; through competition with immigrants in local labor markets; and through other channels. …

U.S. and European workers are told that … our societies can no longer afford a generous welfare state. …

Contrary to the standard framing, which presents globalization as something that no nation can escape or even attempt to shape, we can choose the terms under which we integrate capital, product, and labor markets across countries. Over the last 30 years we have indeed “chosen” a particular form of globalization in the United States – a form that benefits corporations and their owners at the expense of workers and their communities. If we had chosen globalization on different terms, however, economic integration would not have required rising inequality. Another globalization is possible. (source, source)

So globalization, as it has occurred and is occurring, causes higher inequality in the West in two ways:

• The direct competition with overseas workers who can produce at lower wages puts downward pressure on wages in the West, especially for low-skilled workers at the wrong end of inequality.
• Governments in developed countries react to this competition by restricting social safety nets because the taxes necessary for the funding of these safety nets hurts the competitiveness of local businesses, a competitiveness already under pressure from low-cost labor in the developing world. Less generous safety nets obviously also have a negative effect on inequality.

If these effects are real, perhaps they can explain the decline of manufacturing in many developed countries.

However, I’m not sure this pressure on wages is real and significant (I’ll try to find some data), and we also shouldn’t dismiss the benefits for low-wage workers in the West of cheaper products. This particular result of globalization can offset the possible negative wage effects of wage competition.

Also, I’m not sure governments in the West are actively attacking safety nets (here it says they haven’t during the last decades, but it seems that the recent economic crisis has convinced some to start cutting benefits). And finally, we should remember that inequality isn’t just a national problem. The inequality between countries is just as, if not more, important. And globalization has had a beneficial effect on inter-country inequality because it has redistributed wealth from rich countries to poor countries. For example, it’s hard to imagine how China could have had the same success in poverty reduction without globalization. The question is of course whether this redistribution had to come from low skilled workers in the West, rather than from their more wealthy fellow citizens. The fact that it did come, however, was undoubtedly beneficial to the poor in the receiving development countries.

If we put all the causes of wealth inequality discussed in different posts together, we get this tentative list:

• globalization (i.e. outsourcing, trade liberalization) and the resulting competition between low-skilled workers in the West and in development countries
• competition between low-skilled workers in the West and immigrants
• the development of technology and a decreasing demand for low-skilled workers
• the increased importance of cognitive skills relative to physical labor
• declining manufacturing employment
• shrinking unionization and fragmenting of collective bargaining
• changes in household size and composition (due to later marriage and more prevalent divorce, more and more households have just one adult, and hence only one potential earner)
• coupling between people with similar education and thus similar earnings potential (“marital homogamy”)
• “positive feedback”: wealth begets wealth.

More on income inequality. More on outsourcing. More on globalization.

Economic Human Rights (32): The Economic Cost of Taxing the Rich

Taxation is linked to human rights in several ways:

• It’s usually correlated with government accountability and hence democracy (i.e. political rights). States that don’t tax their citizens don’t have an incentive to be accountable. And citizens who have to pay taxes usually demand representation in return.
• Taxation is a means to reduce income inequality, and income inequality creates a number of human rights problems.
• Taxation is, in part, intended to fund a social safety net, which in turn is a means to protect certain economic human rights.
• And tax money is also used for education and healthcare, two human rights.

I personally belief that a progressive tax is best in light of the last two concerns. In a progressive taxation system, higher earners pay a larger percentage of their income on taxes. Compared to a regressive taxation system (people with higher incomes pay less in percentage of their income, as in the case of a consumption tax or VAT) or a flat tax (the tax percentage is the same for all income groups), a progressive tax reduces income inequality: it makes incomes more equal in a direct way because it reduces the income of higher-earning families by a larger percentage than the income of lower earning ones; but also in an indirect way because this system – under certain conditions – yields more tax revenues which can then be spent on poverty reduction and the safety net. Also, it seems to be a good example of a just and fair system. The strongest shoulders should carry the most heavy burden. Someone earning a low income can end up in poverty after paying a small percentage in taxes; a wealthy person will perhaps not even notice paying a relatively large sum in taxes.

The counter-narrative states that high tax rates discourage people; they are a disincentive to hard work and effort. High tax rates for high incomes discourage people who work relatively hard (they work hard supposedly because they earn a lot). Because high tax rates punish the most productive elements in a society, the whole of society suffers. More productive people will limit their productivity because they don’t want to fall into a higher tax bracket, and the money they pay in taxes can’t be invested in the economy. Taxing the rich therefore has an unacceptable economic cost. Conversely, low tax rates for the rich produce benefits for all (this is trickle down economics, read also about the Laffer curve).

But this narrative doesn’t quite stand the test of data:

top marginal tax rates and gdp growth, US data

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As is clear from this graph, high tax rates obviously don’t slow down economic growth, and low tax rates don’t speed it up. This paper also supports the claim that moderate, as opposed to dramatic, increases in marginal rates don’t have any impact on the willingness of the wealthy to participate in the economy. They won’t go Galt. Atlas won’t shrug, except to signal indifference.

The top income tax rate was 91% (beginning at taxable income of $400,000) … [in] the period from 1951 through 1963. Those were the golden years of the U.S. economy, in which the average annual rate of productivity growth was 3.1% (compared with about 1.5% after 1981). Of course, the growth might have been even faster had the marginal tax rates been lower, but the coincidence of high rates and high productivity raises challenging questions for those who believe that high marginal tax rates carry an unacceptable cost. (source)

To be fair, marginal tax rates are a crude measures of tax burden. There’s a difference between marginal tax rates and effective tax rates.

• A marginal tax rate is the tax rate that applies to the last dollar of the tax base (taxable income or spending, usually income). It’s not the rate at which all your dollars are taxed. It’s the maximum rate you’re paying on any of your dollars of taxable income.
• An effective tax rate refers to the actual rate, i.e., the rate existing in fact, for the entire income, after tax deductions and credits and taking into account lower rates for lower income brackets (see here). It’s your total tax obligation (including your income tax and any other additional taxes and/or credits), divided by your total taxable income.

But even if we look at the effective tax rates of the rich, we see that this has steadily decreased over the decades, with little or no positive effect on overall economic performance:

effective federal tax, US data

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And when there’s no positive effect of decreasing tax rates, there’s probably also no negative effect of increasing tax rates. To the extent that the wealthy (and productive, although those groups obviously don’t overlap completely) respond to changes in the tax system, their responses focus not on increased/decreased labor, productivity or investment, but on tax avoidance (see here).

The Causes of Wealth Inequality (4): Technology

Another one in our series about the causes of wealth inequality (see here, here and here). (If you want to know why we think this is a human rights issue, go here or here first).

[T]he diffusion of computers and related technology in the early 1980s steadily increased the demand for skilled workers relative to less-skilled workers, driving up the wages and incomes of more-educated workers and depressing the wages and incomes of less educated workers…

However, the technological explanation removed policy, politics, and power from the discussion of inequality, by attributing rising economic concentration to “technological progress,” a force that could be resisted only at our peril. (source, source)

Indeed, taken in isolation, this explanation obscures more than it reveals. To the extent that it reflects reality – and I think to some extent it does – we’ll still have to ask ourselves why there’s such a wide and growing distance between people with and without skills: why can’t we educate more people so that they can enjoy the wage premium of high-tech labor? Inequality isn’t just the outcome of technology but of choices regarding education, personal ones but also social and political ones.

And there’s another problem with the technological explanation of income inequality. It’s undoubtedly true that higher levels of technology increase demand for higher skilled people, and hence increases their wages (and vice versa for lower skilled people). When you combine this with the disappearance of a high number of jobs at the lower end of the wage sprectrum that are automated and replaced by computers, you end up with a strong push towards more inequality. However, this can’t explain the relatively large increase in income inequality in the U.S. and the U.K. when compared to other countries that are equally technologically advanced.

And neither can it explain why inequality is so top-heavy, in other words why the increase in income is concentrated in a tiny minority of individuals (the top 1% in the U.S.) whose skills aren’t that much different from those just below in the income distribution, if at all. Alex Tabarrok offers an interesting explanation of the fact that income inequality seems to be driven by very high earnings in the very top of the distribution. It also has something to do with technology, but not necessarily with skills:

J.K. Rowling is the first author in the history of the world to earn a billion dollars. … Why? Consider Homer, he told great stories but he could earn no more in a night than say 50 people might pay for an evening’s entertainment. Shakespeare did a little better. The Globe theater could hold 3000 and unlike Homer, Shakespeare didn’t have to be at the theater to earn. … By selling books Tolkien could sell to hundreds of thousands, even millions of buyers in a year … And books were cheaper to produce than actors which meant that Tolkien could earn a greater share of the revenues than did Shakespeare … Rowling has the leverage of the book but also the movie, the video game, and the toy. And globalization, both economic and cultural, means that Rowling’s words, images, and products are translated, transmitted and transported everywhere …

Rowling’s success brings with it inequality. Time is limited and people want to read the same books that their friends are reading so book publishing has a winner-take all component. Thus, greater leverage brings greater inequality. The average writer’s income hasn’t gone up much in the past thirty years but today, for the first time ever, a handful of writers can be multi-millionaires and even billionaires. The top pulls away from the median.

The same forces that have generated greater inequality in writing – the leveraging of intellect, the declining importance of physical labor in the production of value, cultural and economic globalization – are at work throughout the economy. Thus, if you really want to understand inequality today you must first understand Harry Potter.

More on inequality.

Human Rights Maps (76): Gender Wage Gap in the U.S.

women's earnings compared to men's, gender wage gap in the US

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Everyone, without any discrimination, has the right to equal pay for equal work (art. 23 of the Universal Declaration). So unequal pay is a human rights issue, and is probably an indication of a deeper kind of discrimination. However, unequal pay is an indication of wage discrimination, not proof. If men and women, on average receive unequal pay, it’s only discrimination if they perform equal work, which isn’t necessarily the case.

More data here. More on gender discrimination in general is here.

Human Rights Maps (73): Minimum Wages in the U.S.

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First, why is this a human rights issue? Well, there’s article 23 of the Universal Declaration:

Everyone who works has the right to just and favourable remuneration ensuring for himself and his family an existence worthy of human dignity, and supplemented, if necessary, by other means of social protection.

And there’s generally the issue of the absence of poverty as a human right. A minimum wage is obviously intended to protect people from poverty. Economists disagree on the effectiveness of a minimum wage: some believe it helps to combat poverty, others say that it increases poverty because minimum wage level regulation creates job losses: the price of labor will be higher than the price that would be fixed by unhindered supply and demand of labor (read here why this is supposed to be the case). And job losses mean more poverty. However, the evidence for this is mixed, to say the least. See here, here, here or here for studies that show no adverse employment effects of a minimum wage.

In the U.S., when state and federal regulations differ, the higher of the two rates applies. Currently (2009), the “minimum minimum wage” is $7.25 per hour. A minority of states has minimum wages higher than the federal minimum.

An updated version of the map:

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Human Rights Nonsense (8): Heightism or Height Discrimination

(Quick reminder about this blog series, so as to avoid misunderstandings: I don’t want to imply that human rights are nonsense; regular readers know that the purpose of this blog is quite the opposite. What I want to do with the posts in this series is to point to the ways in which the language of human rights is used to push nonsense. Burdening the system of human rights with frivolous demands, exaggerated problems, wrong priorities and silly talk only turns human rights into a less nobel cause, easily disparaged by those who have an interest in rights violations).

It’s a fact that taller people make more money than short people, with an additional inch of height adding about 2 percent to income in the U.S. (source, source). Even among female identical twins (whose heights can differ more than you might expect), the taller sister earns, on average, substantially more than the shorter (source).

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Moreover, taller people live better lives, at least on average. They evaluate their lives more favorably, and they are more likely to report a range of positive emotions, like enjoyment and happiness (source). They are also less likely to report a range of negative experiences, like sadness and physical pain (source, source, source). From 1904 to 1984, the taller candidate won the U.S. presidential elections 80% of the time, and only two presidents in the entire history of the United States have been shorter than the nation’s average height at the time of their presidencies (currently that’s 5.9ft) (source).

height of U.S. presidents

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Hence:

There is no denying that we place a high premium on height, be it social, sexual, or economic, and our preference for height pervades almost every aspect of our lives. Isaac B. Rosenberg (source)

The bias towards tallness and against shortness is one of society’s most blatant and forgiven prejudices. John Kenneth Galbraith, 6.8ft.

The term heightism was coined to describe discrimination based on people’s height, and some propose to include it in antidiscrimination legislation. Others go even further: a special “height tax“.

As in the case of ageism, I don’t claim that there cannot be height discrimination. Very short people are often treated badly simply because they are short. There are still some who believe - often without being fully aware of it – that short stature is an inferior trait and therefore undesirable, and as a result they view short people as inferior human beings, or perhaps even not fully human. This is despicable. If this view leads to discrimination against people on the basis of their height (or rather lack of it) then something must be done about it. Nor do I deny that some people suffer psychologically from their (perceived) lack of height, and sometimes engage in self-mutilation in order to do something about it.

What I do claim here – as in the case of ageism – is that things tend to get blown out of proportion. Is the income differential between people of normal height and slightly taller people really an instance of discrimination? Do we really believe that employers make a conscious choice to pay taller people more? Of course, discrimination doesn’t have to be conscious discrimination. But before you get all worked up about discrimination and launch proposals for legislation and government action, it’s good to consider the possibility that we are dealing with another case of the “omitted variable bias” here. Taller people don’t get paid more because they are taller, but because they (seem to) possess other valuable characteristics, such as self-esteem and positive self-image.

Tall men who were short in high school earn like short men, while short men who were tall in high school earn like tall men. That pretty much rules out discrimination. It’s hard to imagine how or why employers could discriminate in favor of past height. … Tall high-school kids learn to think of themselves as leaders, and that habit of thought persists even when the kids stop growing. (source, source)

Adolescence is a formative period for self-esteem, and when you’re tall in adolescence, you build up self-esteem and a positive self-image, something which will be rewarded in your adult professional life.

For the most part American employers probably aren’t discriminating based on height. They’re “discriminating” based on qualities that tallness seems to encourage. (source)

So it’s not heightism, yet it is discrimination none the less. But perhaps I could ask to focus our attention on other types of rights violations, many of which are much more common and harmful. Our planet is plagued by extreme poverty, famine, war, genocide, terrorism, torture and dictatorship. We can turn to heightism when we’re finished with that. But of course, I’m biased. I’m 6.3 ft, and I would certainly suffer from pro-short affirmative action if such a policy would ever be proposed. So I would dismiss it as “nonsense”, wouldn’t I?

More posts in this series.

The Causes of Poverty (24): Population Growth and Income Growth: Incompatible?

This single water tower amidst a sea of houses in Baguio, Luzon in the Philippines represents the population related demands on limited water sources

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Some blame overpopulation for many of the world’s problems such as poverty, famine and war (which are obviously rights violations). There are supposed to be too many people for peaceful coexistence and sustainable food production. Those who worry about overpopulation are often called (neo-)Malthusians, and either predict a sharp fall in population levels because of the problems caused by overpopulation (a “Malthusian catastrophe”), or/and propose population control as a measure to solve these problems.

For pretty much all of human history, population growth constrained growth in real standards of living. That’s the “Malthusian Trap”: as standards of living improved, population increased, which put a strain on resources and drove down standards of living, which in turn drove down population growth, rinse & repeat. The industrial revolution broke this trap, although it’s worth pointing out the fairly obvious fact that this is not true for the entire world. Conor Clarke (source)

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What the figure above shows is that over a roughly 3000 year period, during which there was obviously quite a lot of technological progress — iron plows, horse collars, mastering the cultivation of rice, the importation of potatoes into Europe, etc. — living standards basically went nowhere. Why? Because population growth always ate up the gains, pushing living standards back to roughly subsistence.

The figure [below] helps suggest why: technological change was slow — so slow that by 1600 or so, when England had finally reclaimed its population losses from the Black Death, it found real wages back to more or less 1300 levels again.

And here’s the sense in which Malthus was right: he had a fundamentally valid model of the pre-Industrial Revolution economy, which was one in which technological progress translated into more people, not higher living standards. This homeostasis only broke down when very rapid technological change finally outstripped population pressure for an extended period. Paul Krugman (source)

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It’s apparent from this last graph that population growth can go hand in hand with income growth, and that it’s not correct to state that population growth necessarily leads to more poverty, which in turn leads to a reversal of population growth. But these compatible evolutions of population and income seem to require technological advances.

Note: my criticism of Malthusianism and other types of overpopulation hysteria (see here for some examples) is targeted only at deterministic theories which believe in overpopulation as the main if not only cause for the world’s problems, and which see overpopulation as a global problem. I accept that in certain specific areas of the world, population pressures can make things worse. But I don’t agree that these pressures are the sole or even the main cause of problems such as poverty, famine, war etc. And neither do I agree that population control is the main remedy for these problems. For example, we all know that water shortages – even very local ones – aren’t caused by overpopulation and won’t be solved by population control. More intelligent irrigation methods are the answer. And when we leave the local level and take the global point of view, the population problem is even less salient. On a world scale, income has grown systematically faster than the world’s population during the last centuries. Population pressures do not lead us to an inevitable “trap” as Malthus and his followers claim.

Economic Human Rights (24): Outsourcing

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How can outsourcing be viewed as a human rights issue? Well, first of all, the Universal Declaration gives us all a right to work:

Everyone has the right to work, to free choice of employment, to just and favourable conditions of work and to protection against unemployment.

As well as a right to an adequate wage:

Everyone who works has the right to just and favourable remuneration ensuring for himself and his family an existence worthy of human dignity, and supplemented, if necessary, by other means of social protection.

Outsourcing can mean that people lose their jobs, and the threat of outsourcing can mean that people are forced to accept lower wages. Or course, none of this implies that there is or should be a right not to have your job outsourced to some foreign country. But outsourcing can still be viewed as a human rights issue. Even more so if we look at the receiving end. For people in India, for example, outsourced jobs can mean the end of poverty. And poverty is a human rights issue.

More on outsourcing here.

Racism (4): Competition v Racial Bias

I’ve written a lot about discrimination, inequality and poverty, but I have to admit that much of it was descriptive, moralizing and philosophical. Especially regarding racial bias, I haven’t come up with many solutions, apart from better education and affirmative action.

Gary Becker

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I’ve now discovered the work of Gary Becker, a Nobel Prize winning economist who wrote about this some decades ago (I know, I’m late). He looked at the well-documented fact that African-Americans in the U.S. earn less than whites, partly because on average they are less well educated. But even if corrected for this, there remains an unexplainable difference in wages. Unexplainable apart from racial bias. There have been many studies that have proven the existence of bias. For example, firms are 1.5 times as likely to interview someone for a job if they think the person is white, even if all other characteristics such as education and experience are equal.

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The interesting thing about Becker is that he goes beyond education, positive discrimination or labor legislation in his search for solutions. He mentions increased competition between firms. A racially biased firm will only hire a white who is more expensive and perhaps even less qualified than a black, if this firm is not under pressure from competitors. If its market is opened to competition, then other firms can and will produce the same goods at cheaper prices by hiring the black guy/gal. The biased firm would then be forced to do the same. It may remain biased – opinions on such matters are notoriously hard to change – but it no longer has the luxury of acting on its bias.

So this sounds promising, and market freedom is beneficial for other reasons as well, so it’s worth to pursue it. But don’t expect too much of the free market. There’s no invisible hand, leading those motivated by selfish motives to destroy racism without really wanting to. Much more needs to be done.