Inequality and OccupyJerry DavisRoss School of BusinessRoss School of BusinessFebruary 8, 2012

Roadmap

• What do we mean by “inequality”?• Is inequality bad?q y• How does inequality vary across countries?• How has it changed over time?• What causes inequality?• How does finance fit in?

WHAT DO WE MEAN BYWHAT DO WE MEAN BY “INEQUALITY”?

A measure of income inequality: The Gini coefficient

• Measures the extent to which the distribution of income (or consumption) among individuals (or households) deviates fromhouseholds) deviates from a perfectly equal distribution– The percentage of area that

lies between the Lorenzlies between the Lorenz curve and a line of perfectly equalityVaries between 0 (perfect– Varies between 0 (perfect equality) and 1 (perfect inequality)

4

IS INEQUALITY BAD?IS INEQUALITY BAD?

6

Is inequality just the price we pay for prosperity?

Brazil

Chile

Colombia

HondurasPanama

South Africa

60

Opposite: equality generally increases with Argentina

China

Guatemala

Malaysia

Mexico

Peru

Uruguay

Venezuela

50

GDP per capita (and with greater democracy)

Cameroon

Congo

Cote d'Ivoire

Ghana

Hong Kong

IsraelJordanMali

Morocco

Philippines

Portugal

Russian Fed

SenegalSingapore

Sri Lanka

Thailand

Tunisia

Turkey

United States

Uruguay

Vietnam

40ni

Coe

ffici

ent

AlgeriaAustralia

Austria

Belarus

Bulgaria

Burundi Canada

C ti

Egypt

France

Greece

India

IndonesiaIreland

Italy

South KoreaNetherlands

New Zealand

Pakistan

Poland

Serbia

Spain

SwitzerlandTogo

Ukraine

United Kingdom

30G

in

Austria

Belarus

Croatia

Czech Republic

Denmark

FinlandGermany

HungaryIceland

Japan

Norway

Romania

Slovakia

Slovenia

Sweden

0

13

20

0 10,000 20,000 30,000 40,000GDP per capita (constant 2000 US$)

HOW DO COUNTRIES DIFFER INHOW DO COUNTRIES DIFFER IN THEIR LEVELS OF INEQUALITY?

Inequality varies among different “flavors” of capitalism

United States

45

Portugal

40

nt

United KingdomGreece

Italy

Spain

35

ni C

oeffi

cien

Continental Europe

Market Based

Mediterranean

Australia

CanadaSouth Korea

Austria

BelgiumFrance

Ireland

Netherlands

Norway

Spain

30

Gi Co t e ta u ope

Asia

Japan Denmark

Finland

Sweden

Austria

Germany

25

0 5 10 15 20 25

Social Democratic

16

0 5 10 15 20 25

Ratio of Top 10 Employers to Labor Force

HOW HAS INEQUALITY CHANGEDHOW HAS INEQUALITY CHANGED OVER TIME IN THE US?

% of the nation’s annual income going to the top 1%

Income gains in the U.S. since 1979

19

Q: Hasn’t this happened everywhere else (e.g., because of the Internet)?

4535

40oe

ffici

ent

303

Gin

i Co

25

1955 1965 1975 1985 1995 2005A: No. There is

1955 1965 1975 1985 1995 2005Year

Canada United KingdomUnited States

no general trend toward greater inequalityinequality

WHAT CAUSES INEQUALITY?WHAT CAUSES INEQUALITY?

Is it just the decline of unions?Inequality and Union Density, 1950 – 2006

48

035

Forc

e

44ci

ent

2530

s to

Tot

al L

abor

NO: union density has

40G

ini C

oeffi

c

20on

ized

Wor

kers density has

declined every year since 1958 (almost)

36

15R

atio

of U

nio ( )

As of Jan. 2010, most union

3210

1950 1960 1970 1980 1990 2000 2010Year

members are public employees

22

Union Density Income Inequality

U.S. income inequality and 10-firm employment concentration, 1950 - 2008

488

rce

44

cien

t

6

ers

to L

abor

For

c

r = -.89

40

Gin

i Coe

ffic

4

Top

10 E

mpl

oye r .89

362

Rat

io o

f T

320

1950 1960 1970 1980 1990 2000 2010Year

Employment Concentration Income Inequality

23

Income inequality and employment concentration by year, 1950 – 2006

1994

199719992000

2001 20022003

2004

20054619611992

19931994

199519961998 2006

44

The 90s: quest for shareholder value induces downsizing, outsourcing

1950

19511952

1953

1954

1955

19561957

1958

1959 1960

1961

19621963 1964

1965

19661985

1986

1987 1988

1989

1990 1991

199242

Gin

i Coe

ffici

ent

The 60s: Conglomerate mergers increase concentration; inequality declines

1967

19691970

19711972

1973

19751976

19771978

19791980

1981

19821983

1984

40

The 80s: bust-up takeovers split conglomerates back into

1968

196919741975

38

3 3.5 4 4.5 5% Employed by 10 Largest Firms

parts; inequality increases

24

% Employed by 10 Largest Firms

Around the world, big employers are associated with low inequality

South AfricaBrazil

Chil

Colombia60

L ti Q t

Zimbabwe

China

Malaysia

Argentina

Chile

Peru

Venezuela

50

Asia Alley

Latin Quarter

North North America

United States

Cote d'IvorieCameroon

Ghana

Morocco

Senegal

TunisiaSri Lanka

Philippines

SingaporeThailand

Russian Federation

Mexico

Portugal

Turkey

40

Coe

ffici

ent

Old Europe

Canada

Australia

New ZealandAlgeria

Egypt

Indonesia

India

S KoreaBulgaria

Croatia

Poland

Serbia

Ukraine

BelgiumSwitzerlandSpain

France

United Kingdom

GreeceIreland

Italy

Netherlands30

Gin

i

Nordic Niche

Japan

Belarus

Czech Rep

Croatia

Hungary

RomaniaSerbia

Slovenia

Slovakia Denmark

FinlandIceland

Norway Sweden

AustriaGermany

3 Nordic Niche

Commie Corner

20

0 5 10 15 20 25 30 35Ratio of Top 10 Employers to Total Labor Force

Employment concentration: Colombia vs. Denmark

COLOMBIA DENMARK

Company Name Industry Class Employees Company Name Industry Class Employees

BANCOLOMBIA SA BANK 7,027 ISS AS INDUSTRIAL 273,534

INVERALIMENTICIAS SA INDUSTRIAL 6 798 GROUP 4 FALCK AS INDUSTRIAL 246 366 INVERALIMENTICIAS SA INDUSTRIAL 6,798 GROUP 4 FALCK AS INDUSTRIAL 246,366

TEXTILES FABRICATO TEJICONDOR INDUSTRIAL 5,744 A.P. MOLLER-MAERSK A/S TRANSPORT. 62,300

BANCO DE BOGOTA SA BANK 4,800 CARLSBERG AS INDUSTRIAL 31,703

SURAMERICANA DE INVERSIONES SOTH FINANCIAL 4 325 TDC AS UTILITY 20 573 SURAMERICANA DE INVERSIONES S. FINANCIAL 4,325 TDC AS UTILITY 20,573

CIA COLOMBIANA DE TEJIDOS - CO INDUSTRIAL 3,435 NOVO NORDISK AS INDUSTRIAL 20,285

ACERIAS PAZ DEL RIO S.A. INDUSTRIAL 2,834 DANFOSS AS INDUSTRIAL 17,543

BAVARIA SA INDUSTRIAL 2 729 DANSKE BANK AS BANK 15 382 BAVARIA SA INDUSTRIAL 2,729 DANSKE BANK AS BANK 15,382

COMPANIA DE CEMENTO ARGOS S.A. INDUSTRIAL 1,798 DANISCO AS INDUSTRIAL 10,634

CARTON DE COLOMBIA INDUSTRIAL 1,464 FALCK A/S INDUSTRIAL 10,241

Total 40,954 Total 708,561

Labor Force 22,771,433 Labor Force 2,834,422

26

Emp Concentration 0.18% Emp Concentration 25.00%

HOW DOES FINANCE FIT IN?HOW DOES FINANCE FIT IN?

1. Finance was responsible for corporate restructuring favoring “vertical dis-integration”favoring vertical dis integration– Hostile takeovers in the 1980s– Downsizing and outsourcing in the 1990s ff.

I th d W ll St t i t i f D k i t– In other words: Wall Street is turning us from Denmark into Colombia

2. Financiers are disproportionately represented at the p p y ptop of the 1%– Kaplan and Rauh: The top 25 hedge fund managers in 2004 earned

more than all the CEOs of the S&P500 combinedmore than all the CEOs of the S&P500 combined– “By 2007, the top five investors likely made more than the combined

five hundred executives at publicly-traded companies in the U.S.”

Oops…make that 101 jobs

BUT DON’T PEOPLE MOVE UP INBUT DON T PEOPLE MOVE UP IN THE WORLD ALL THE TIME?

The path to a comfortable middle-class life

To do list Go to college so that you can get a corporate job in

a growth sector (e.g., high tech)

Buy the biggest house you can afford

Invest your 401(k) in a low-cost index fund

Retire to Boca in financial comfort

32

Jobs in “Computer and electronic products manufacturing” in the US have declined by 750,000 since 2001

1900 0

2000.0

Computer and electronic products

1700.0

1800.0

1900.0

1400 0

1500.0

1600.0

Computer and electronic products

1200.0

1300.0

1400.0

1000.0

1100.0

Source: US Bureau of Labor Statistics

The number of jobs in the U.S. “Information” service sector has declined by 1 million since 2001

3500

4000

2500

3000

Information sector (total)

1500

2000

Publishing (except Internet)

Motion picture and sound recording

Broadcasting

Telecomms

Data processing and hosting

1000

1500 Data processing and hosting

Other information services

0

500

Source: US Bureau of Labor Statistics

America’s most innovative companies do not employ very many people

• Apple: 60,400• Google: 32 467

• Kroger: 338,000• Google: 32,467• Facebook: 3000• Amazon com: 33 700

• Jobs lost in Jan. 2009: 598 000• Amazon.com: 33,700

• Cisco: 71,825Mi ft 90 000

598,000[That’s 200 Facebooks]

• Microsoft: 90,000

TOTAL 291 392TOTAL: 291,392

Oops

Thankfully, markets always go up eventually…

S&P500S&P500 01/03/2000: $1469.25

Today:$1349.96

The path to a comfortable middle-class life

To do list Go to college so that you can get a corporate job in

a growth sector (e.g., high tech)

Buy the biggest house you can afford

Invest your 401(k) in a low-cost index fund

Retire to Boca in financial comfort

39