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Trends in Inequality Lecture 2 September 8, 2014.

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1 Trends in Inequality Lecture 2 September 8, 2014

2 1970s as a pivotal decade Rise in social equality and rise in economic inequality –Social equality, inclusiveness. Extending the civil rights revolution. –Rising influence of free market principles in shaping public policy.

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8 Changes in the U.S. Since the 1970s –Income inequality has grown a great deal –The labor market has restructured with a hollowing out of jobs in the middle. (David Autor, MIT Economics) –Incarceration has grown to unprecedented levels (Bruce Western, Harvard Sociology) –US has become more diverse in terms of race and ethnicity and immigrant generation. –Families have become more diverse with more forms of family life. Men and women have had different economic trajectories. (Bianchi, UCLA Sociology)

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10 World War II to 1973 Rising tide lifts all boats Family incomes doubled in the two decades after World War II. Expanded social security/health benefits War on poverty. All time low in Poverty rate cut in half between late 1940 ’ s and early 1960 ’ s Cut in half again by the early 1970 ’ s.

11 Quiet depression. Median income fell. Poverty rose. Oil price shock. Gas lines. Inflation high CPI rose 100% People delayed marriage, reduced fertility, married women entered LF.

12 Reagan Recovery Income per capita rose, but inequality rose steeply. Average real wage of male HS dropouts FELL by 18% Male high school graduates wages FELL by 13% Men with college held steady

13 1980 ’ s Decade of the MBA Winners: women at all levels, men with advanced degrees. Downsizing, mergers, takeovers. Outsourcing of production to foreign countries Declining demand for unskilled workers.

14 1980 ’ s Change in value of college degree relative to high school degree Among men age –In 1979 those with college degree earned 20% more –In 1989 those with college degree earned 47% more Rise in single female households, and in yuppies, and DINKs.

15 White Collar Recession, decline in average family income Median family income fell every year from Inequality continues to rise. Top 20% increasing. Bottom 80% decreasing Poverty rate was 15.1%

16 Expansion of the economy. Rich grow a lot richer. Middle grows moderately. Poor stay stagnant, or rise a small bit. Professionals and managers saw their incomes increase, but also reported longer hours. Best paid and most educated workers saw increases in hours worked. Their benefits, especially pensions rose.

17 Recession. Unemployment rises. Median Household Income Declined 3.4%

18 Rich got richer through tax cuts and income growth The rest of the distribution saw stagnation or decline

19 Which Statistics to Use? Household vs. Family Income –Census defines a family as a group of two or more persons related by birth, marriage or adoption and residing together. –Families have higher incomes. Households have greater inequality in income because of the variety of types of households. Rise in non family households. Elderly and people living alone or with non relatives.

20 Which Statistics to Use? Wage Data or Benefits –For those who get benefits, they have become a greater part of their overall compensation package. –The fraction of working men who get benefits has been falling.

21 Which Statistics to Use? Mean or Median? –Who earns more, graduates of Harvard College or those who drop out without a degree? Pre Tax or Post Tax Income? –Post tax income is more equal. Starting Dates Matter or 1968?

22 Census or Administrative Records Top earners are top coded. IRS data provides better information on the top of the income distribution. SEC data on the incomes of the top five executives in public companies provides information on executive pay.

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24 2010 Income Data Median Household Income$49,445 Family Household Income$61,544 –Married Couple Family$72,751 –Female Head, no Male$32,031 –Male Head, no Female$49,718 –Non Family Female HH$25,456 –Non Family Male HH$35,627

25 QuintileMeanShare of all income Lowest (0-20) 11, Second (20-40) 28, Third (40-60) 49, Fourth (60-80) 79, Top (80-100)169, Household Income by Quintile, 2010 Current Population Survey

26 Bank Executives Rule to cap corporate salaries for companies that take taxpayer dollars to $500,000 per year. “ Five hundred thousand dollars is not a lot of money ” said the compensation expert, James F. Reda, “ particularly if there is no bonus ”.

27 New York Times Sunday Style February 8, 2009 “ You Try to Live on 500K In This Town ” –Married with two children –Taxes=269,000 a year –Two vacations a year, a winter trip to the sun and a spring trip to the ski slopes $16,000 –A modest 3 bedroom apartment purchased for 1.5 million Cost $192,000 a year Mortagage $8,000 a month Co-op Maintenance Fee $8,000 a month

28 Costs for Rich People in NY Summer House in Southampton that cost 4 million, carries mortgage payments of $240,000 Car and chauffer Chauffer costs 75K to 125K Garage for car $700 per month Personal Trainer $80 an hour, 3 times a week, is $12,000 a year.

29 Costs of being Rich Three gowns a year for charity balls $35,000 a year. Two children in private school $64,000 Nanny $45,000 Private tutoring for SAT at 250 an hour, is $3,750 Groceries 425 every 10 days or 15,000 dollars

30 Costs of being Rich Not counted: –Restaurants, clothing, dry cleaning, spas and other grooming for family and pets, donations to charity Total Costs: 790, 750 which would require an income of 1.6 million to compensate for taxes.


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