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Inflation, Interest, and the Secular Rise in Wealth Inequality in the U.S.: Is the Fed Responsible?
Edward Wolff
NBER Working Paper, October 2021
Abstract:
Two hallmarks of U.S. monetary policy since the 1981-1982 recession have been declining interest rates and moderation in inflation. Coincident with these trends has been a surge in U.S. wealth inequality, with the Gini coefficient up by 0.070 between 1983 and 2019. This paper analyzes the connection between these two developments on the basis of the Survey of Consumer Finances. Contrary to expectations, the paper finds that these two monetary effects have reduced wealth inequality rather than increasing it. The effect is sizeable, with the Gini coefficient declining by 0.045 over these years. Asset price changes and debt devaluation accounted for 72.6 percent of the advance of mean wealth over 1983-2019. They also would have led to a 204.9 percent gain in median wealth, compared to the actual rise of 23.4 percent. Moreover, they have helped lower the racial wealth gap rather than enlarging it. These results are at odds with previous literature in which estimates range from a weak negative effect on inequality to neutral, small positive, and strong positive. In terms of methodology, this paper differs from previous work by focusing on only the direct effects of interest rate changes and inflation on the household balance sheet.
Why Are Relatively Poor People Not More Supportive of Redistribution? Evidence from a Randomized Survey Experiment across Ten Countries
Christopher Hoy & Franziska Mager
American Economic Journal: Economic Policy, November 2021, Pages 299-328
Abstract:
We test a key assumption underlying seminal theories about preferences for redistribution, which is that relatively poor people should be the most in favor of redistribution. We conduct a randomized survey experiment with over 30,000 participants across 10 countries, half of whom are informed of their position in the national income distribution. Contrary to prevailing wisdom, people who are told they are relatively poorer than they thought are less concerned about inequality and are not more supportive of redistribution. This finding is consistent with people using their own living standard as a "benchmark" for what they consider acceptable for others.
College Tuition and Income Inequality
Zhifeng Cai & Jonathan Heathcote
American Economic Review, forthcoming
Abstract:
This paper evaluates the role of rising income inequality in explaining observed growth in college tuition. We develop a competitive model of the college market, in which college quality depends on instructional expenditure and the average ability of admitted students. An innovative feature of our model is that it allows for a continuous distribution of college quality. We find that observed increases in US income inequality can explain more than half of the observed rise in average net tuition since 1990 and that rising income inequality has also depressed college attendance.
Consolidated Advantage: New Organizational Dynamics of Wage Inequality
Nathan Wilmers & Clem Aeppli
American Sociological Review, December 2021, Pages 1100-1130
Abstract:
The two main axes of inequality in the U.S. labor market — occupation and workplace — have increasingly consolidated. In 1999, the largest share of employment at high-paying workplaces was blue-collar production workers, but by 2017 it was managers and professionals. As such, workers benefiting from a high-paying workplace are increasingly those who already benefit from membership in a high-paying occupation. Drawing on occupation-by-workplace data, we show that up to two-thirds of the rise in wage inequality since 1999 can be accounted for not by occupation or workplace inequality alone, but by this increased consolidation. Consolidation is not primarily due to outsourcing or to occupations shifting across a fixed set of workplaces. Instead, consolidation has resulted from new bases of workplace pay premiums. Workplace premiums associated with teams of professionals have increased, while premiums for previously high-paid blue-collar workers have been cut. Yet the largest source of consolidation is bifurcation in the social sector, whereby some previously low-paying but high-professional share workplaces, like hospitals and schools, have deskilled their jobs, while others have raised pay. Broadly, the results demonstrate an understudied way that organizations affect wage inequality: not by directly increasing variability in workplace or occupation premiums, but by consolidating these two sources of inequality.
Productivity and Pay in the US and Canada
Jacob Greenspon, Anna Stansbury & Lawrence Summers
NBER Working Paper, December 2021
Abstract:
We study the productivity-pay relationship in the United States and Canada along two dimensions. The first is divergence: the degree to which the levels of productivity and pay have diverged. The second is delinkage: the degree to which incremental increases in the rate of productivity growth translate into incremental increases in the rate of growth of pay, holding all else equal. We show that in both countries the pay of typical workers has diverged substantially from average labor productivity over recent decades, driven by both rising labor income inequality and a declining labor share of income. Even as the levels of productivity and pay have grown further apart, we find evidence for some linkage between productivity and pay in both countries: a one percentage point increase in the rate of productivity growth is associated with a positive increase in the rate of pay growth, holding all else equal. This linkage appears stronger in the US than in Canada. Overall, our findings lead us to tentatively conclude that policies or trends which lead to incremental increases in productivity growth, particularly in large relatively closed economies like the USA, will tend to raise middle class incomes. At the same time, other factors orthogonal to productivity growth have been driving productivity and typical pay further apart, emphasizing that much of the evolution in middle class living standards will depend on measures bearing on relative incomes.
Where Is Standard of Living the Highest? Local Prices and the Geography of Consumption
Rebecca Diamond & Enrico Moretti
NBER Working Paper, December 2021
Abstract:
Income differences across US cities are well documented, but little is known about the level of standard of living in each city — defined as the amount of market-based consumption that residents are able to afford. In this paper we provide estimates of the standard of living by commuting zone for households in a given income or education group, and we study how they relate to local cost of living. Using a novel dataset, we observe debit and credit card transactions, check and ACH payments, and cash withdrawals of 5% of US households in 2014 and use it to measure mean consumption expenditures by commuting zone and income group. To measure local prices, we build income-specific consumer price indices by commuting zone. We uncover vast geographical differences in material standard of living for a given income level. Low-income residents in the most affordable commuting zone enjoy a level of consumption that is 74% higher than that of low-income residents in the most expensive commuting zone. We then endogenize income and estimate the standard of living that low-skill and high-skill households can expect in each US commuting zone, accounting for geographical variation in both costs of living and expected income. We find that for college graduates, there is essentially no relationship between consumption and cost of living, suggesting that college graduates living in cities with high costs of living — including the most expensive coastal cities — enjoy a standard of living on average similar to college graduates with the same observable characteristics living in cities with low cost of living — including the least expensive Rust Belt cities. By contrast, we find a significant negative relationship between consumption and cost of living for high school graduates and high school drop-outs, indicating that expensive cities offer a lower standard of living than more affordable cities. The differences are quantitatively large: High school drop-outs moving from the most to the least affordable commuting zone would experience a 26.9% decline in consumption.
High Marginal Tax Rates on the Top 1%? Lessons from a Life Cycle Model with Idiosyncratic Income Risk
Fabian Kindermann & Dirk Krueger
American Economic Journal: Macroeconomics, forthcoming
Abstract:
This paper argues that high marginal labor income tax rates on top earners are an effective tool for social insurance even when households have high labor supply elasticity, make dynamic savings decisions, and policies have general equilibrium effects. We construct a large scale overlapping generations model with uninsurable labor productivity risk, show that it has a realistic wealth distribution and numerically characterize the optimal top marginal rate. We find that marginal tax rates for top 1% earners of 79% are optimal as long as the model earnings and wealth distributions display a degree of concentration as observed in US data.
Seattle's local minimum wage and earnings inequality
Mark Long
Economic Inquiry, forthcoming
Abstract:
During the past 6 years, a wave of local minimum wage laws passed in the United States with policymakers and advocates framing the policy as a means of reducing income inequality. This report evaluates whether one of the first of these efforts, Seattle's $15 minimum wage ordinance, lowered inequality of earnings of workers in the city. I find that inequality among workers who earned less than the city's median wage was modestly reduced, yet overall earnings inequality substantially increased during the period in which the ordinance was phased in, likely for reasons unrelated to the minimum wage law.
The Generational Boundaries of Educational Advantage: Does Great-Grandparent Educational Attainment Predict Great-Grandchild Early Academic Achievement?
Megan Evans, Jonathan Daw & Michael Gaddis
Socius: Sociological Research for a Dynamic World, December 2021
Abstract:
It remains unclear how far back the intergenerational transmission of educational advantage operates because most inquiries are limited to two or three generations. In this study, the authors use four generations of family data from the Panel Study of Income Dynamics to examine the association of great-grandparents’ educational attainment with their great-grandchildren’s early academic achievement, net of intervening generations’ educational attainments. The authors find that the relationship between great-grandparent educational attainment and great-grandchild early academic achievement is nonlinear, modest, and accounted for entirely by the educational attainment of intervening generations and great-grandchild demographic characteristics. Thus, for early academic achievement, the direct transmission of intergenerational educational advantage is limited to three generations in these data.
Homeowner associations and city cohesion
Ron Cheung, Timothy Salmon & Kuangli Xie
Regional Science and Urban Economics, forthcoming
Abstract:
Homeowner Associations (HOAs) are an increasingly common form of attempts to provide localized public goods to a subset of residents in a city. As HOAs have increased in size and scope, there have been substantial debates about their benefit, and in particular, their impact on citizens who are not HOA members. One argument against HOAs has been a perception that they lessen city cohesion by setting some citizens o? from others. We investigate one channel through which HOAs might improve city cohesion: their ability to dull the desire for wealthy city residents to attempt to leave or secede from a city. We also examine the degree to which poor residents might take the secession option of wealthy residents into account when they form their preferences regarding tax levels for the city. We conduct an economic experiment aimed at eliciting preferences people may have under these different circumstances. We find that HOA-like options can reduce the desire of the wealthy to exit a city and that the presence or absence of an exit option or an HOA option can also impact the tax requests by the poorer residents in a city. Both results suggest a previously unexamined benefit of allowing HOAs.