Transcript chap 016

Chapter 16
The Distribution of Personal
Earning
McGraw-Hill/Irwin
Copyright © 2010 by the McGraw-Hill Companies, Inc. All rights reserved.
1. Describing the
Distribution of
Earnings
16-2
Annual Earnings
Distribution, 2007
• The distribution of
personal earnings among
full-time workers is highly
unequal and skewed right.
• The distribution is
characterized by
(1) much bunching around
the leftward mode,
(2) an extended rightward
tail,
(3) a mean, $46,179, that
exceeds the median,
$35,000, (one-half above,
one-half below).
16-3
Distribution of Annual
Earnings, 2007
• The distribution
of personal
earnings among
full-time workers
is highly unequal
as the highest
20% of earners
received 46.0% of
all earnings.
16-4
2. Explaining the
Distribution of
Earnings
Factors include differences in
o
o
o
o
o
o
Formal Education
On the Job Training
Ability
Family Background
Discrimination
Risk Taking & Luck
16-5
Human Capital Theory
o Formal education
• Higher quality and quantity of formal
education leads to greater earnings.
• Differences in ability, discrimination, cost of
funds, individuals differ in the amount
education people acquire.
∞This leads to differences in earnings.
o On-the-job training
• More on-the-job training increases earnings.
• On-the-job training helps explain why older
persons have higher earnings.
16-6
Human Capital Theory
• Persons with more formal education get onthe-job training and thus expand their earnings
differentials with less-educated workers.
• Workers with on-the-job training tend to work
more hours per year and thus the variance in
annual earnings.
16-7
Modified Human Capital Theory
o Ability
• Direct effect
∞Persons with greater ability will have greater
earnings due to their greater productivity.
• Complementary effect
∞If elements of ability are complementary (e.g., IQ
and motivation), then they will have a
multiplicative rather than an additive effect on
earnings.
• Human capital effect
∞Persons with more ability will get more education
and thus increase earnings inequality.
16-8
Modified Human Capital Theory
o Family background
• Direct effect
∞A child born into a family with a family-owned
business is likely to employed in the family
business and have higher earnings later in life.
∞Families with “good connections” may be able to
help their children get high-paying jobs with
friends and associates.
• Human capital effect
∞High income families can more readily provide
formal education for their children.
16-9
Modified Human Capital Theory
o Discrimination
• Discrimination increases earnings inequality
in several ways:
∞Lowers the earnings of women and minorities
∞Occupational segregation raises the earnings of
males and whites as well as lowering the earnings
of women and minorities.
∞Poorer black children tend to attend worse
schools and are less likely to go to college.
16-10
Modified Human Capital Theory
o Chance and risk taking
• Luck and risk taking play a role in the
unequal distribution of earnings.
∞A few high paying positions such as a
professional athlete, rock star, best-selling
authors, CEO, etc.
~ This leads to an unequal distribution of earnings since
only a few people who try succeed, many fail, and even
more don’t try.
∞Random luck determines who gets a high wage
offer in the distribution of earnings for a given
occupation.
16-11
Question for Thought
1. Speculate as to how successful attempts by the
government to tighten the distribution of family
income through transfers might inadvertently
make the distribution of annual earnings more
unequal.
16-12
Question for Thought
1. Critically evaluate this statement: “Lifetime
earnings are less equally distributed than annual
earnings.”
16-13
4. Rising Earnings
Inequality
16-14
• The 90-10
ratio is earnings
at the 90th
percentile
divided by
earnings at the
10th percentile.
Wage Inequality,
90-10 Ratio
• Earnings
inequality has
risen for both
men and women.
• Earnings
inequality grew
most rapidly
between 1979
and 1989.
16-15
Table 15.1 The Dispersion of Earnings by Gender, Ages 25–64, 1980–2008 (Expressed in 2008 Dollars)
Modern Labor Economics: Theory and Public Policy, Eleventh Edition
Ronald G. Ehrenberg • Robert S. Smith
Copyright ©2012 by Pearson Education, Inc.
All rights reserved.
Table 15.3 Mean Earnings and the Returns to Education among Full-Time, Year-Round Workers between the Ages of
35 and 44 (Expressed in 2008 Dollars)
Modern Labor Economics: Theory and Public Policy, Eleventh Edition
Ronald G. Ehrenberg • Robert S. Smith
Copyright ©2012 by Pearson Education, Inc.
All rights reserved.
Table 15.5 Employment Shares (within Gender) of Educational Groups, Workers 25 and Older: 1980, 1990, 2005,
2008
Modern Labor Economics: Theory and Public Policy, Eleventh Edition
Ronald G. Ehrenberg • Robert S. Smith
Copyright ©2012 by Pearson Education, Inc.
All rights reserved.
Table 15.6 Changes in the Share of Employment for Four Major Occupational Groups, 1983–2009
Modern Labor Economics: Theory and Public Policy, Eleventh Edition
Ronald G. Ehrenberg • Robert S. Smith
Copyright ©2012 by Pearson Education, Inc.
All rights reserved.
Why the Increase in Earnings
Inequality?
o Deindustrialization
• Employment has shifted to the low wage and
high variance service sector.
• The employment shift to services can only
explain a small part of the rise in inequality.
16-20
Why the Increase in Earnings
Inequality?
o Import competition and the decline of
unions
• Increased import competition and the
associated decline in unionism has lowered
the wages of less-educated workers and thus
raised inequality.
16-21
Why the Increase in Earnings
Inequality?
o Increased demand for skilled workers
• The demand for skilled workers has risen
relative to less-skilled workers, which has
increased inequality.
∞The demand for skilled workers has risen within
industries as firms have adopted new technologies.
∞Product demand has shifted across industries
towards high-tech industries that employ more
skilled workers.
16-22
Why the Increase in Earnings
Inequality?
o Demographic changes
• The entrance of less-skilled baby boomers and
female workers during the 1970s and 1980s may
have increased inequality between new and
experienced workers.
∞ The increased labor supply may have increased the share of
low-wage workers in all industries.
∞ The increased labor supply may have decreased the wages
of workers in low-wage labor markets.
• It is likely that labor supply shifts played a small
role since most of the increase in inequality has
been within each age group.
16-23
Trends in US Upward Mobility
o Source: Rana Foroohar, Time, Vol. 178,
11/14/2011, pp. 26-35
o US no longer the land of upward mobility
• More mobility in Europe now
∞ In US, if you were born in 1970 into a bottom 20%
family, there’s only a 17% chance of making it to
the top 40%
∞ 42% of US men with fathers in bottom 20%
incomes stay there.
∞ Scandinavians, Canada and Germans have > 2X
more upward mobility. Even French 1.5X greater
16-24
Trends in US Upward Mobility
o Growing US inequality has been the
primary reason upward mobility has
diminished
• High US inequality makes it harder to jump
rungs. Top 1% earn 21% of all income and
have 35% wealth. More equality in Europe
makes it easier to move to the next rung up.
• The dominance of financial services led to
rapid increase in CEO pay across industries.
∞ 1970 average US CEO pay 40X lowest company worker (like
in Europe today)
∞ Today it’s 400X
16-25
Trends in US Upward Mobility
o Two megatrend causes rising inequality
• Rise of Emerging Economies
∞Since 1980, US companies that make products or
services that could be traded with other countries
have created zero jobs, i.e., manufacturing
∞Only job growth is in retail and health care which are
low wage sectors
• Tech driven economy
∞ Computerization has taken jobs that used to be
done by workers (robots) and reduced the number of
workers needed (software)
∞Share of middle income jobs has declined from 52%
in 1980 to 42% in 2010.
16-26
Trends in US Upward Mobility
o Cure: Reform Education & Training
o US education quality is poor
• 26th worldwide in overall quality, worse in
math & science
• New teachers are of poor quality
∞23% in top 1/3 of SATs, 30% in 2nd 1/3 and 47% in
the bottom 1/3.
• US school year is short
∞Asian children get 2 extra years of class time
before they graduate high school.
16-27
o Reform important because US labor force
is relatively high wage and poor quality
compared to trading partners.
o Prospects for reform are dim
• Conflicts with public teacher’s union and
politician desires at the local level
• Conflicts with tight money budget realities
• Americans choose to avoid math & science in
favor of soft subjects which don’t improve our
competitiveness
16-28
Extra Slides
16-29
Lorenz Curve
100
Perfect Equality
Percent of Full-time
Earnings
• The Lorenz curve provides a
summary of the earnings
distribution.
• The straight red line
represents perfect equality in
the earnings distribution.
Twenty percent of all earners
get 20 percent of all earnings,
40 percent of the workers
would get 40 percent, etc.
• The curved blue line
illustrates a Lorenz curve. The
curve shows that lower
income workers do not
receive a proportionate share
of all earnings.
• The greater the area
between the line of perfect
equality and the Lorenz curve,
the more unequal the
distribution of earnings.
0
Lorenz Curve
Percent of Full-time Workers
100
16-30
Gini Coefficient
o The Gini coefficient provides a way to
quantify the Lorenz Curve.
area between Lorenz curve and diagonal
Gini
Coefficient =
total area below diagonal
The Gini coefficient ranges between 0
(perfect equality) and 1 (perfect
inequality). The Gini coefficient in 2007
was .40
16-31
Cautions
o Full-time versus part-time workers
• The previous data only includes full-time
workers.
• If part-time workers were included income
variability would increase.
o Fringe benefits
• The previous data did not include fringe
benefits.
• If fringe benefits were included income
inequality would increase since those with
high incomes also have high fringe benefits.
16-32
Cautions
o Individual versus family income
• The previous data is based on individual
income.
• The mean and median of the family income
distribution is higher.
• The family income distribution is more equal
since the wives of high-income men are less
likely to work due to the income effect.
o Static portrayal
• This income distribution don’t give information
about changes in the distribution.
16-33
Cautions
o Other income sources
• High wage income persons tend to have
higher rental, interest, and dividend income.
∞Including these sources increases inequality.
• Low wage income persons are more likely to
get income transfers such as welfare.
∞Including these sources decreases inequality.
• If all other income sources are included, then
the income distribution becomes more equal.
∞The income transfer effect is stronger.
16-34
3. Mobility Within the
Earnings Distribution
16-35
Life-Cycle Mobility
o Earnings rise with age and then fall near
retirement.
o Even if everyone had the same earnings
stream over their career, we would still
observe annual earnings inequality since
the work force consists of workers of
different ages.
o The inequality in annual earnings
overstates the inequality in life-time
earnings.
16-36
Churning
o There is a lot of churning or year-to-year
movement across earnings categories
independent of life cycle effects.
o The earnings mobility rates are lower for
blacks than whites and less in the lowest
and highest earnings categories.
16-37