Lecture 3

September 10 2014

Changing Labor Market

• Hollowing out of jobs in the middle.• Women overall doing better over time.• Men overall doing worse over time.• Premium on education, higher educated

doing better.

Winners and Losers

• More educated men and women are winners.

• Less educated women gained some.• Less educated men lost ground.• Families with two earners made up the

difference.• Elderly did well, children fared poorly.

Source: David Autor,The Polarization of Job Opportunities Center for American Progress, August 2010

Source: David Autor,The Polarization of Job Opportunities Center for American Progress, August 2010

Incarceration and Inequality

• The growth of the imprisoned population is part of inequality in the United States, and affects measurement of poverty, unemployment and income.

Piketty and Inequality

• History of Economic Thought on Inequality– 19th Century Marx and Ricardo

• Inequality would grow—apocalypse

– 20th Century Kuznets• IRS Data 1913-1948• Kuznet Curve: Inequality will first increase with

industrialization and economic development, then it will be followed by sharply declining inequality as a larger fraction of the population partakes of economic growth.

Piketty and Inequality

• 20th Century Kuznets – Rising Tide Lifts all Boats– Fairy Tale?

• 21st Century Piketty– Economics must concentrate on the distribution

of income and wealth

Piketty and Inequality

• Income can come from two sources– Labor: wages– Capital: owning something (rent, investments,

royalties)

• He is examining the overall growth of the economy and its relation to the rate of return on capital.

Key Findings

• r=average annual rate of return on capital• g=rate of growth of the economy

– IF r>g then inequality will grow.

When the rate of return on capital significantly exceeds the growth rate of the economy (as it did through much of history until the nineteenth century and as is likely to be the case again in the twenty- first century), then it logically follows that inherited wealth grows faster than output and income. People with inherited wealth need save only a portion of their income from capital to see that capital grow more quickly than the economy as a whole. Under such conditions, it is almost inevitable that inherited wealth will dominate wealth amassed from a lifetime’s labor by a wide margin, and the concentration of capital will attain extremely high levels— levels potentially incompatible with the meritocratic values and principles of social justice fundamental to modern democratic societies.Page 26

Piketty and Inequality

• Be wary of economic determinism, the distribution of wealth is deeply political.

• The history of inequality is shaped by the way economic, social and political actors view what is just, and what is not, as well as by the relative power of those actors and the collective choices that result. It is the joint product of all relevant actors combined. ( p. 20)

Defining Poverty

• What are the different ways we could define poverty?

Defining Poverty

• What are the different ways we could define poverty?– Relative– Absolute– Subjective

The Government Definition

• 1964 Definition. Based on 1955 data.• Families spend 1/3 income on food.

Thresholds set at 3 times the cost of the cheapest nutritionally sound food plan for a family of four.

• In 1969, the thresholds stay the same, but increases tied to the CPI (Includes goods other than food.)

The Government Definition

• 1981. Eliminated the different thresholds for females and males. Eliminated separate farm/non farm thresholds.

Persons infamily/household Poverty guideline

1 $11,170

2 15,130

3 19,090

4 23,050

5 27,010

6 30,970

7 34,930

8 38,890

For families/households with more than 8 persons,add $3,960 for each additional person.

2012 Poverty Guidelines for the48 Contiguous States and the District of Columbia

Alternative Definitions

• Medical Costs• Costs Associated with Working• After tax, not before tax, income• Include noncash benefits (food stamps,

housing subsidies)• Take into account costs of clothing, shelter

and utilities.• Geographic variation.