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Does Inequality Beget Inequality? Experimental Tests of the Prediction that Inequality Increases System Justification Motivation
Kris-Stella Trump & Ariel White
Journal of Experimental Political Science, forthcoming
Abstract:
Past research shows that growing inequality often does not result in citizen demands for redistribution. We examine one mechanism that could explain why people do not protest growing inequality: a particular sub-prediction of system justification theory (SJT). SJT argues that humans have a psychological need to justify their social system. The specific sub-prediction of SJT tested here is the idea that inequality itself increases system justification. This could yield a negative feedback loop in which political responses to inequality grow ever less likely as inequality grows more extreme. Previous research on this hypothesis relied on cross-sectional survey data and provided mixed results. We take an experimental approach and ask whether exposure to economic inequality makes people more likely to defend the system. In one main study and two replications with varying samples, experimental treatments, and outcome measures, we find no evidence that information about economic inequality increases system justification motivation.
Corporate Tax Cuts Increase Income Inequality
Suresh Nallareddy, Ethan Rouen & Juan Carlos Suárez Serrato
NBER Working Paper, May 2018
Abstract:
This paper studies the effects of corporate tax changes on income inequality. Using state corporate tax rate changes as a setting, we show that cutting state corporate tax rates leads to increases in income inequality. This result is robust to using regression and matching approaches, and to controlling for a host of potential confounders. Contrary to the effects of tax cuts, we find no effects of tax increases on income inequality at the state level. We then use data from the IRS Statistics of Income to explore the mechanism behind the rise in income inequality. We find tax cuts lead to higher reported capital income and a decrease in wage and salary income. These effects are concentrated among top earners, and we find no effects for those reporting less than $200,000 in income. This result provides evidence that one mechanism for the relation between tax cuts and inequality is that wealthy individuals shift their income to reduce taxes while others do not. Finally, we explore the effects of corporate tax cuts on capital investment using data from the Annual Survey of Manufactures. We find that tax cuts lead to an increase in real investment, suggesting a trade-off between investment and inequality at the state level.
Inequality of Subjective Well-Being as a Comprehensive Measure of Inequality
Leonard Goff, John Helliwell & Guy Mayraz
Economic Inquiry, forthcoming
Abstract:
The link between happiness and overall inequality is best studied using an index that incorporates different aspects of inequality, and is measured consistently in different countries. One such index is the degree to which happiness itself varies among individuals. Its correlation with both happiness levels and social trust is substantially stronger than the corresponding correlation for income inequality. This remains so after allowing for bounded scale reporting, including a purely ordinal measure of dispersion. Moreover, the correlation is stronger for individuals who profess to care most about inequality. The link between happiness and inequality may thus be stronger than previously appreciated.
New Evidence on the Relationship between Inequality and Health
Jaesang Sung, Qihua Qiu & James Marton
Georgia State University Working Paper, May 2018
Abstract:
The relative income hypothesis suggests that an individual’s health is impacted by the income of others. However, prior studies suffer from mixed empirical findings that could be due to a lack of annual individual income data with sufficient sample size. We apply a new methodology to calculate a variety of income inequality measures based on aggregate income and household size data from various Federal data sources. Our proposed methodology provides a way to express various income inequality measures as a function of the ratio of mean to median household income under the assumption that individual income is log-Normally distributed. This approach produces a variety of precise annual income inequality measures at different levels of geography, thus solving the sample size problem by incorporating externally calculated inequality measures. Combining the 2001-2012 editions of the U.S. Behavioral Risk Factor Surveillance System with annual regional income inequality measures derived from our methodology enables us to estimate both the contemporaneous and the lagged effect of income inequality on individual health outcomes. In general, we find statistically significant evidence supporting the income inequality hypothesis and the relative deprivation hypothesis, which suggests that greater income inequality adversely affects health status in the United States.
Income and Wealth Inequality in America, 1949-2016
Moritz Kuhn, Moritz Schularick & Ulrike Steins
University of Bonn Working Paper, June 2018
Abstract:
This paper introduces a new long-run dataset based on archival data from historical waves of the Survey of Consumer Finances. The household-level data allow us to study the joint distributions of household income and wealth since 1949. We expose the central importance of portfolio composition and asset prices for wealth dynamics in postwar America. Asset prices shift the wealth distribution because the composition and leverage of household portfolios differ systematically along the wealth distribution. Middle-class portfolios are dominated by housing, while rich households predominantly own equity. An important consequence is that the top and the middle of the distribution are affected differentially by changes in equity and house prices. Housing booms lead to substantial wealth gains for leveraged middle-class households and tend to decrease wealth inequality, all else equal. Stock market booms primarily boost the wealth of households at the top of the distribution. This race between the equity market and the housing market shaped wealth dynamics in postwar America and decoupled the income and wealth distribution over extended periods. The historical data also reveal that no progress has been made in reducing income and wealth inequalities between black and white households over the past 70 years, and that close to half of all American households have less wealth today in real terms than the median household had in 1970.
Income Inequality and Class Divides in Parental Investments
Daniel Schneider, Orestes Hastings & Joe LaBriola American
Sociological Review, June 2018, Pages 475-507
Abstract:
Historic increases in income inequality have coincided with widening class divides in parental investments of money and time in children. These widening class gaps are significant because parental investment is one pathway by which advantage is transmitted across generations. Using over three decades of micro-data from the Consumer Expenditure Survey and the American Heritage Time Use Survey linked to state-year measures of income inequality, we test the relationship between income inequality and class gaps in parental investment. We find robust evidence of wider class gaps in parental financial investments in children — but not parental time investments in children — when state-level income inequality is higher. We explore mechanisms that may drive the relationship between rising income inequality and widening class gaps in parental financial investments in children. This relationship is partially explained by the increasing concentration of income at the top of the income distribution in state-years with higher inequality, which gives higher-earning households more money to spend on financial investments in children. In addition, we find evidence for contextual effects of higher income inequality that reshape parental preferences toward financial investment in children differentially by class.
The Empirics of Social Progress: The Interplay between Subjective Well-Being and Societal Performance
Daniel Fehder, Michael Porter & Scott Stern
American Economic Review, May 2018, Pages 477-482
Abstract:
Though economists have long recognized that GDP is not by itself a measure of societal well-being, most GDP alternatives incorporate direct measures of economic performance. We propose instead an independently constructed measure, a social progress index, focusing exclusively on noneconomic dimensions of societal performance, highlighting three core dimensions — basic human needs, foundations of well-being, and opportunity. GDP and social progress are correlated but distinct, the social progress dimension least related to GDP (opportunity) is strongly related to subjective well-being, and the relationship between social progress and well-being is greater for individuals at lower relative income and educational attainment.
Experiential or Material Purchases? Social Class Determines Purchase Happiness
Jacob Lee, Deborah Hall & Wendy Wood
Psychological Science, forthcoming
Abstract:
Which should people buy to make themselves happy: experiences or material goods? The answer depends in part on the level of resources already available in their lives. Across multiple studies using a range of methodologies, we found that individuals of higher social class, whose abundant resources make it possible to focus on self-development and self-expression, were made happier by experiential over material purchases. No such experiential advantage emerged for individuals of lower social class, whose lesser resources engender concern with resource management and wise use of limited finances. Instead, lower-class individuals were made happier from material purchases or were equally happy from experiential and material purchases.
The other 1%: Class Leavening, Contamination and Voting for Redistribution
Lars Lefgren, David Sims & Olga Stoddard
NBER Working Paper, May 2018
Abstract:
We perform an experiment to measure how changes in the effort exerted by a small fraction of a low-reward group affect the willingness of the high-reward group to vote for redistributive taxation. We find that a substantial fraction of high reward subjects vote in favor of greater redistribution when a very small fraction of high-effort individuals is added to a pool of otherwise low-effort poor. Contaminating a group of high-effort poor with a small number of low-effort individuals causes the most generous rich subjects to vote for less redistribution. These results suggest that anecdotes about the deservedness of a small group of transfer recipients may be effective in changing support for redistribution. We find large gender differences in the results. Relative to men, women respond three times more strongly to the existence of high-effort individuals among the poor. This behavior may help explain gender differences in support for redistribution more generally.
Moral Economies or Hidden Talents? A Longitudinal Analysis of Union Decline and Wage Inequality, 1973–2015
Tom VanHeuvelen
Social Forces, forthcoming
Abstract:
The decline of labor unions in the United States has been central to the rise of wage inequality since the early 1970s. Recently, sociologists have noted that unionization influences inequality through both direct and indirect pathways, reconciled with the concept of the moral economy, broadly shared norms of fairness institutionalized in market rules and customs that can reduce inequality in pay. While the theory of the moral economy has been resonant in the stratification literature, few have held it to empirical scrutiny. The current study assesses how selection bias from unobserved worker-level heterogeneity influences the associations between unionization and wage attainment and dispersion. To do so, I merge data from the Current Population Survey to 33 waves of longitudinal data from the Panel Study of Income Dynamics. Using combinations of variance function regression models, fixed-effects regression models, and dynamic panel models, I find that the magnitudes of associations tend to be reduced by around half after accounting for unobserved heterogeneity. Yet, more critically, the pathways linking unions and wage inequality via the moral economy prove to be remarkably robust to all tests cast upon them. Results highlight the fundamental importance of labor power resources for the contemporary rise of inequality. They provide a micro-level foundation for theories linking unionization and stratification. They identify the importance of union decline for rising earnings volatility. And they provide implications for the fallout of economic well-being for workers following antiunion policy change. Additional theoretical and policy implications are discussed.
Unions and Inequality Over the Twentieth Century: New Evidence from Survey Data
Henry Farber et al.
NBER Working Paper, May 2018
Abstract:
It is well-documented that, since at least the early twentieth century, U.S. income inequality has varied inversely with union density. But moving beyond this aggregate relationship has proven difficult, in part because of the absence of micro-level data on union membership prior to 1973. We develop a new source of micro-data on union membership, opinion polls primarily from Gallup (N ≈ 980, 000), to look at the effects of unions on inequality from 1936 to the present. First, we present a new time series of household union membership from this period. Second, we use these data to show that, throughout this period, union density is inversely correlated with the relative skill of union members. When density was at its peak in the 1950s and 1960s, union members were relatively less-skilled, whereas today and in the pre-World War II period, union members are equally skilled as non-members. Third, we estimate union household income premiums over this same period, finding that despite large changes in union density and selection, the premium holds steady, at roughly 15–20 log points, over the past eighty years. Finally, we present a number of direct results that, across a variety of identifying assumptions, suggest unions have had a significant, equalizing effect on the income distribution over our long sample period.
The Elephant Curve of Global Inequality and Growth
Facundo Alvaredo et al.
American Economic Review, May 2018, Pages 103-108
Abstract:
We present new evidence on global inequality and growth since 1980 using the World and Wealth Income Database. We plot the curve of cumulated growth from 1980 to 2016 by percentile of the global distribution of income per adult. This curve has an elephant shape due to high growth rates at the median (fast growth in China and India), modest growth rates above the median, and explosive growth rates at the top. We project the evolution of global inequality between now and 2050 combining projected macro growth rates and within country inequality evolution based on past trends.
The Political Impact of Economic Change: The Class of ’65 Meets the “New Gilded Age”
Larry Bartels & Katherine Cramer
Vanderbilt University Working Paper, March 2018
Abstract:
Over the second half of the 20th century the U.S. economy shifted from a pattern of unusually rapid and egalitarian income growth to one of slower growth and escalating inequality. We examine the impact of this transition on the political attitudes of a pivotal cohort — people who graduated from high school in 1965, near the peak of the mid-century boom, but then lived through the much slower and more unequal economic progress of the “New Gilded Age.” We explore how individuals’ social backgrounds and their economic mobility through early and middle adulthood affected their economic, social, and political attitudes. Contrary to much recent speculation regarding the political impact of long-term income stagnation, we find a strong association between upward economic mobility and increasingly conservative economic and political views. For example, whites who experienced above-average income gains in the quarter-century between 1973 and 1997 became 14 percentage points more Republican over that period, while those who experienced below-average income gains became just two percentage points more Republican. Our findings suggest that the period of “stagflation” between 1973 and 1982 played a key role in exacerbating class conflict, with upwardly mobile people pulling away from the rest of American society politically as well as economically.
Genetic Endowments and Wealth Inequality
Daniel Barth, Nicholas Papageorge & Kevin Thom
NBER Working Paper, May 2018
Abstract:
We show that genetic endowments linked to educational attainment strongly and robustly predict wealth at retirement. The estimated relationship is not fully explained by flexibly controlling for education and labor income. We therefore investigate a host of additional mechanisms that could help to explain the gene-wealth gradient, including inheritances, mortality, savings, risk preferences, portfolio decisions, beliefs about the probabilities of macroeconomic events, and planning horizons. The associations we report provide preliminary evidence that genetic endowments related to human capital accumulation are associated with wealth not only through educational attainment and labor income, but also through a facility with complex financial decision-making. Our study illustrates how economic research seeking to understand sources of inequality can benefit from recent advances in behavioral genetics linking specific observed genetic endowments to economic outcomes.
Less equal, less trusting? Longitudinal and cross-sectional effects of income inequality on trust in U.S. States, 1973–2012
Orestes Hastings
Social Science Research, forthcoming
Abstract:
Does income inequality reduce social trust? Although both popular and scholarly accounts have argued that income inequality reduces trust, some recent research has been more skeptical, noting these claims are more robust cross-sectionally than longitudinally. Furthermore, although multiple mechanisms have been proposed for why inequality could affect trust, these have rarely been tested explicitly. I examine the effect of state-level income inequality on trust using the 1973–2012 General Social Surveys. I find little evidence that states that have been more unequal over time have less trusting people. There is some evidence that the growth in income inequality is linked with a decrease in trust, but these effects are sensitive to how time is accounted for. While much previous inequality and trust research has focused on status anxiety, this mechanism receives the little support, but mechanisms based on social fractionalization and on exploitation and resentment receive some support. This analysis improves on previous estimates of the effect of state-level inequality on trust by using far more available observations, accounting for more potential individual and state level confounders, and using higher-quality income inequality data based on annual IRS tax returns. It also contributes to our understanding of the mechanism(s) through which inequality may affect trust.
A Comparative Analysis of Inequality and Redistribution in Democracies
José Alemán & Dwayne Woods
International Studies Quarterly, March 2018, Pages 171–181
Abstract:
What is the relationship between income inequality and redistributive policies? This question carries with it important implications for both scholars of comparative politics and for core political dynamics in contemporary world politics. We contend that the current literature fails to provide satisfactory answers. It generally does not acknowledge heterogeneity in the relationship between inequality and redistributive policies across space and time, nor does it use cross-nationally comparable data on government redistribution and income. In this note, we compare the relationship between inequality and redistribution over time, as well as among clusters of developed and less developed countries. We use a number of statistical models to address the complexity of the relationship. We find a positive, short-term association between inequality and redistribution, controlling for endogeneity between redistribution and market income inequality. We also find that, over the long term, inequality increases redistribution in developed democracies, but appears to decrease it in a number of developing nations.
Longitudinal determinants of end-of-life wealth inequality
James Poterba, Steven Venti & David Wise
Journal of Public Economics, forthcoming
Abstract:
Inequality in wealth among elderly households, and in particular the prevalence of very low wealth holdings, can be an important consideration in the design of social insurance programs. This paper examines the incidence and determinants of low levels of financial and total wealth using repeated cross-sections of the Health and Retirement Study (HRS) and a small longitudinal sample of HRS respondents observed both at age 65 and shortly before death. Most of those who report very low wealth holdings at the end of their life had little wealth at the traditional retirement age of 65. There is strong persistence over time in reports of very low wealth, and more generally relatively little evidence that wealth is drawn down in the first 15 years of retirement. The age-specific probability of reporting low wealth increases slowly after age 65. Low lifetime earnings are strongly predictive of low wealth at retirement and at the end of life. The post-retirement onset of a major medical condition, and, for married women, the loss of their spouse, are both associated with small increases in the probability of reporting very low wealth, but they account for a small fraction of low-wealth outcomes. Low levels of wealth accumulation before age 65, rather than gaps in the safety net after 65 or rapid spend-down of accumulated assets, appear to be the primary determinant of low levels of wealth just before death.
Economic Issues Are Moral Issues: The Moral Underpinnings of the Desire to Reduce Wealth Inequality
Andrew Franks & Kyle Scherr
Social Psychological and Personality Science, forthcoming
Abstract:
Economic inequality is a pervasive and growing source of social problems such as poor health, crime, psychological disorders, and lack of trust in others. U.S. citizens across the political spectrum both underperceive the extent of economic inequality and would prefer to live in a society with much less inequality than both exist in reality and in their subjective estimations. Across multiple studies, we examined the ability of “moral foundations” to predict people’s desire to reduce economic inequality (while also replicating research showing widespread desire for a more equal society). Moral foundations endorsements consistently predicted desire to reduce inequality even when controlling for other relevant factors (e.g., political orientation). In addition, requests for donations to an organization focused on reducing economic inequality were able to elicit more money when the requests largely appealed to the type of moral foundations endorsed by participants.
Commitment to Political Ideology is a Luxury Only Students Can Afford: A Distributive Justice Experiment
Simona Demel et al.
Journal of Experimental Political Science, forthcoming
Abstract:
Using a political-frame-free, lab-in-the-field experiment, we investigate the associations between employment status, self-reported political ideology, and preferences for redistribution. The experiment consists of a real-effort task, followed by a four-player dictator game. In one treatment, dictator game initial endowments depend on participants’ performance in the real-effort task, i.e., they are earned, in the other, they are randomly determined. We find that being employed or unemployed is associated with revealed redistributive preferences, while the political ideology of the employed and unemployed is not. In contrast, the revealed redistributive preferences of students are strongly associated with their political ideologies. The employed and right-leaning students redistribute earnings less than windfalls, the unemployed, and left-leaning students make no such distinction.
The American Dream and Support for the Social Safety Net: Evidence from Experiment and Survey Data
Weihuang Wong
MIT Working Paper, May 2018
Abstract:
I propose the status quo bias hypothesis, which predicts that housing wealth increases preference for status quo arrangements with respect to Social Security. I contrast the status quo bias hypothesis with the claim that housing wealth reduces support for social insurance, and test the hypothesis in two empirical studies. A survey experiment finds that homeowners informed about high historical home price appreciation (HPA) are about 8 percentage points more likely to prefer existing Social Security arrangements to privatized retirement accounts, compared to those informed about low historical HPA. Observational data from the 2000-2004 ANES panel show that homeowners who experience higher HPA are about 11 percentage points more likely to prefer status quo levels of spending on Social Security than those in the bottom HPA quartile. No significant HPA effects are observed among renters, and for other domains of social insurance among homeowners. The evidence suggests that housing wealth's conservatizing effect should be interpreted as a status quo preference, rather than opposition to redistributive social policies.