Perfect equality = O < G < 1 = Perfect inequality 4% 20% A B G = A/(A+B)

World Development Report 2006: Equity and Development

Gini coefficients in the world

World Development Report 2006: Equity and Development

Wage ratios Wage 20% W 80 W 20 W 80 W 20 W R =

Acemoglu, Daron “Technical Change, Inequality, and the Labor Market” Journal of Economic Literature, March 2002 Wages rising at upper tail, falling at lower tail

Acemoglu, Daron “Technical Change, Inequality, and the Labor Market” Journal of Economic Literature, March 2002 Residual inequality: wage differences holding constant education, experience W = βX + e; X = vector of measured skills; e = residual

Wage dispersion: ratio of the 90th percentile to the 10th percentile wage Δ Australia Finland France Germany Japan Netherlands New Zealand Sweden UK USA Source: OECD Employment Outlook, 2004

Stylized facts regarding earnings inequality 1) Inequality has been increasing steadily in the U.S. since the 1980s for both men and women 2)Inequality has been rising in other industrialized economies 3) Until 1980, inequality had been rising across countries 4) Conclusions are not sensitive to measure of inequality used

Rising inequality not due to gender discrimination Source: Bureau of Labor Statistics

Rising inequality not due to race discrimination Source: Bureau of Labor Statistics

Stylized facts regarding earnings inequality 5) Women are gaining relative to men 6) Minorities gained relative to whites before the 1980s, but relative earnings for minorities stabilized thereafter 7) Wage inequality between women increased, as did wage inequality between men 8) Residual inequality began to increase for both men and women in the 1970s

Acemoglu, Daron “Technical Change, Inequality, and the Labor Market” Journal of Economic Literature, March 2002

Stylized facts regarding earnings inequality 9) There have been coincident increases in returns to schooling over that period 10) There have been rising returns to experience over that time frame 11) Young college graduates have gained the most, especially in the 1990s 12) Rising returns to college even as relative supply has increased tremendously

Econ 1 Test Has to be a demand side reason for Rising relative employment Rising relative wages Cause must be common across industrialized economies

Acemoglu, Daron “Technical Change, Inequality, and the Labor Market” Journal of Economic Literature, March 2002

Demand for Price of Physical Capital Numbers of Workers Human Capital per Worker Physical Capital Numbers of Workers Human Capital per Worker Red: Complements; Blue: Substitutes Note: Based on share-weighted elasticities of substitution reported in Table 6 of Huang. Hallam, Orazem and Paterno, "Empirical Tests of Efficiency Wage Models."Economica 65 (February 1998): Estimated own and cross price elasticities between capital, labor and human capital per worker

Acemoglu, Daron “Technical Change, Inequality, and the Labor Market” Journal of Economic Literature, March 2002 ln(W R )= β 0 + β 1 * N R + β 2* r + e W R = relative college to high school wage N R = relative weeks worked of college educated to high school educated r = relative price of equipment capital

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Other issues Economic policy to limit inequality and labor market performance Tax and Transfer policies and inequality Inequality within occupations

Tradeoff between rising inequality and employment stability

Weinberg, Daniel. Alternative Measures of Income Poverty and. the Anti-poverty Effects of Taxes and Transfers

Buckley, John. “Rankings of Full-Time Occupations, by Earnings, 2000.” Monthly Labor Review 125 (March 2002):

CPS: Current Population Survey MINT: Social Security Administration data B. Bosworth, G. Burtless and C. Sahn “The Trend in Lifetime Earnings Inequality and Its Impact on the Distribution of Retirement Income” August 2001

Restricted to Full-time workers All workers CPS: Current Population Survey MINT: Social Security Administration data B. Bosworth, G. Burtless and C. Sahn “The Trend in Lifetime Earnings Inequality and Its Impact on the Distribution of Retirement Income” August 2001

Economic Freedom Index High Medium Low

Returns to Education and Experience among Full-Time, Year- Round Workers, Selected Ages, 1975–2003 (in 2003 dollars)