1. Addison Wesley Longman, Inc. © 2000 Chapter 14 Inequality in Earnings

2. Addison Wesley Longman, Inc. © 2000 Earnings Distribution with Perfect EqualityFigure 14.1

3. Addison Wesley Longman, Inc. © 2000 Distributions of Earnings with Different Degrees of DispersionFigure 14.2

4. Addison Wesley Longman, Inc. © 2000 Fairness Wages and salary represent 60% of household income Income for property – profits, interest, dividends and inheritance Income from government is from transfers Why are wages different? –Inborn skills –Acquired skills and effort –Compensating differentials –Multiples household incomes –Unemployment What is fair?

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10. What is the Current Distribution? TOTAL WAGES PROPERTY TRANSFERS 1/5 6 5.7 1.027.6 2/5 9.1 11.9 4.026.1 3/5 14.7 19.9 8.418.7 4/5 23.6 27.3 16.413.9 5/5 46.6 35.2 70.213.7 1% 10 3.2 29.71.5

11. Addison Wesley Longman, Inc. © 2000 Wealth vs. Income What if we consider wealth and not income? What happens to income distribution? top 20% have 46% of total income top 10% have 72.5% of wealth Why? Focus here on income differences 1998: top 20% - $127,529 bottom 20% - $9,223 Remove government transfers, include cap gains, health benefits: – top 20% - 54% of total bottom 20% - 1% of total

12. Addison Wesley Longman, Inc. © 2000 Source of Wage Differences Technology –technology rewards skilled workers –Technology is a substitute for unskilled labor and a complement for skilled labor Generational Movement –Father in lowest 5% in earnings, son has 75% chance of being in lowest half –Father in highest 5%, son has 75% chance of being in upper half –41% of families in lowest 1/5 in 1969 remain there in 1994 –6% of those families made it to the top 1/5

13. Addison Wesley Longman, Inc. © 2000 The Transmission of Inequality Across GenerationsExample 14.2

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15. Comparisons International comparisons –Ratio of earnings of the 80 th % to the 20 th % US ratio for men is 4 Highest discrepancy in developed world Canada, UK, France are over 3 Sweden, Australia under 2.25 Comparisons over time –1997: ratio was 3.43 –1975: ratio was 2.58 –(lower income group lost income in real dollars) Comparisons by gender –1997: ratio was 4.4 –1975: ratio was 4.41 –(both groups improved in real dollars)

16. Addison Wesley Longman, Inc. © 2000 Explanations Ratio of college to high school earnings has risen Are high earners working more hours? –A little. Low earners have been made part-time, but the difference in hour changes is small. Theory offers some explanations –Supply –Demand –Market changes

17. Addison Wesley Longman, Inc. © 2000 Changes in Supply As the Dominant Cause of Wage ChangesFigure 14.3

18. Addison Wesley Longman, Inc. © 2000 Evaluating the Explanations Supply changes –Changes in Supply. Is there a shortage of highly skilled workers? Table 14.6 shows that groups with the greatest wage increases had greatest rise in employment. However, immigration could explain low wages on the low end. Demand changes –Inter-industry: demand in service industry rose. These are educated workers and wages would rise. Demand in manufacturing fell which would depress wages. –Intra-industry: % of management rose. Institutional changes – unions declined

19. Addison Wesley Longman, Inc. © 2000 Lorenz Curves for 1980 and 1992 Distributions of Income in the United States Figure 14A.1

20. Addison Wesley Longman, Inc. © 2000 Lorenz Curves That CrossFigure 14A.2