Economic Inequality

by Prof. Can Erbil

March 22nd, 2023

Aspire Institute
Aspire Leaders Program

Slides and calculations: In collaboration with and courtesy of Prof. Geoff Sanzenbacher
(Boston College)

Page 0
Outline
I. What is inequality?
II. Inequality in Outcomes
III.Inequality in Opportunity

Page 1
What is inequality?
Not an easy question to answer:
• How do we define it? – ONE OF THOSE “BIG” QUESTIONS
• Inequality in what?
• Inequality between who?
• How do we measure it? – EMPIRICAL QUESTION
• Should we care about it? – ETHICAL QUESTION
• If we care about, what can we do about it? – POLICY QUESTION
All of these are difficult to tackle by themselves…

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Inequality in Outcomes
• Inequality in outcomes is the most common and easiest way
inequality is discussed.
• Income/wage inequality;
• Wealth inequality;
• Housing inequality;
• Benefit inequality (e.g., insurance, retirement plans, etc.);
• Health and mortality inequality;

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Inequality in Opportunity

• But, another kind of inequality is perhaps more fundamental to

the root of the problem; inequality in opportunity.

• Opportunity inequality occurs when a person’s circumstances

(i.e., things that are out of their control) affect their outcomes.
• Defining and measuring “Opportunity Inequality” is even harder,
so let’s start with outcomes and circle back to it at the end.

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Outline
I. What is inequality?
II. Inequality in Outcomes
III.Inequality in Opportunity

Page 5
Some inequality in outcomes may be OK…

• Different people have different incomes, benefits, wealth, and

health for a variety of reasons.

• In some cases, we may find that inequality is acceptable or even

desirable:
• Inequality rewards risk and entrepreneurship;
• It provides incentive to work and achieve education; and
• To some extent, it can get people to do difficult/tough jobs
willingly (e.g., working the night shift, teaching a large class).

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… but other times, it is unacceptable.

• In other cases, inequality is unacceptable and detrimental.

• When it follows from discrimination;
• When it flows from structural issues in society;
• When it results in power going to the advantaged/priviledged;
• When it results in poverty and low-standards of living.

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 There are five broad trends that define the inequality in outcomes
in the US economy over the last forty years.

• We call these trends “stylized facts,” – facts that are simple, easy
to verify, and broadly agreed upon, therefore seldom contains an
explanation or policy prescription.

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Stylized Fact #1: Real median earned income for working men has declined
since the mid-1970s, but not so for higher income men.

Median and 95th Percentile Earnings for Full-time, Full-Year Working Men,
1975-2018
$200,000
95th percentile,
$160,000 1975, $121,994
95th percentile,
Annual earnings

$120,000 2018, $175,795

$80,000 Median, 2018,

$56,255

$40,000
Median, 1975,
$61,002
$0
1975 1981 1987 1993 1999 2005 2011 2017

95th percentile Median

Note: Excludes self-employed individuals and unpaid workers for family businesses. All workers were between 25 and 54.
Source: Author’s calculation from the Current Population Survey Integrated Public Use Microdata Series (CPS-IPUMS).

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2020 update

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 Fact #1: For working males, income growth has been stagnant to negative in
the middle and bottom of the income distribution, but positive at the top.

• Why are higher income workers doing well?

• Skill-biased Technological Change – New technologies are used most by those
with more education, increasing their productivity and pay.
• Why are middle- and low-income workers struggling?
• Polarization/Automation – New Technologies are good at routine jobs, which
used to be middle-class, pushing these workers down to lower-wage jobs.
• Bargaining Power – Over the last forty years union coverage has declined from
25 to 11 percent, while employer concentration has likely increased.
• Trade – Developing countries have a higher supply of lower-income workers,
and therefore trade tends to affect those with already low incomes in the US.

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Fun new development: are labor unions making a come
back?

https://www.nytimes.com/2022/05/02/podcasts/the-daily/unions-amazon-starbucks.html

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Stylized Fact #2: Unlike men, full-time, full-year working women have seen
wage and salary increases across the board, but with rising inequality within…
Median and 95th Percentile Earnings for Full-time, Full-Year Working Women,
1975-2018
$160,000
95th percentile,
2018, $130,591
$120,000
Annual earnings

95th percentile,
1975, $70,386 Median, 2018,
$80,000 $45,205

$40,000
Median, 1975,
$35,569
$0
1975 1982 1989 1996 2003 2010 2017
95th percentile Median

Note: Excludes self-employed individuals and unpaid workers for family businesses. All workers were between 25 and 54.
Source: Author’s calculation from the Current Population Survey Integrated Public Use Microdata Series (CPS-IPUMS).

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Stylized Fact #2 (cont): …that have been accompanied by large increases in
labor force participation relative to men…

Labor Force Participation of Men versus Women, 1975-2018

100% Men, 2018,

89.7%
Men, 1975,
80% 93.9%
Labor force participation

60% Women, 2018,

75.9%
Women, 1975,
40% 56.4%
Men
Women
20%

0%
1975 1982 1989 1996 2003 2010 2017

Note: All individuals sampled were between 25 and 54.

Source: Author’s calculation from the Current Population Survey Integrated Public Use Microdata Series (CPS-IPUMS).

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Stylized Fact #2 (cont): …but women have not caught up to men in earnings
and, if anything, the earnings ratio between men and women has stalled out.

Median Man to Median Woman’s Earnings for Full-time, Full-Year Workers,

1975-2018
100% Equality!
Women/Men,
90% 2018, 80.4%
Women's/men's earnings

80%

70%

60%

50% Women/Men,
1975, 58.3%
40%
1975 1982 1989 1996 2003 2010 2017
Note: Excludes self-employed individuals and unpaid workers for family businesses. All workers were between 25 and 54.
Source: Author’s calculation from the Current Population Survey Integrated Public Use Microdata Series (CPS-IPUMS).

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2020 update

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 Fact #2: For women, growth has been positive, but progress towards male
earnings has stalled out between 75 and 80 percent.

• Why did women see gains?

• Education – In 1975, women were half as likely to have a Bachelor’s as men,
today they are slightly more likely to have a degree.
• Work Experience – Married women used to rarely work, but now about 75
percent do – the result has been more work experience and higher pay.
• Decrease in Occupational Segregation – In 1975, just 11 percent of workers in
the highest paying occupation were women, today it’s closer to 30 percent.
• Why are women still behind?
• Compensating Differentials – Women still act as primary caretakers, and often
require flexibility at work, and this “benefit” requires a cut in pay.
• Experience – Women are still more likely to take time off work for kids and so
still have about 3.5 years less experience than men by age 45.
• Continued Occupational Differences – Women’s progress towards higher paying
jobs stalled in the late 1990s – some of this gap is likely due to discrimination.

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European banks make slow progress on gender diversity at the top
(September 20th, 2022)

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Stylized Fact #3: Although women are making much more and working much
more, this has not increased the real income of middle-income households.

Median and 95th Percentile Household Income, 1975-2018

$300,000
95th percentile,
2018, $266,205
$250,000 95th percentile,
1975, $161,804
Annual total income

$200,000
Median, 2018,
$150,000 $76,040

$100,000

$50,000
Median, 1975,
$68,556
$0
1975 1982 1989 1996 2003 2010 2017
95th percentile Median

Note: Includes all households were the “householder” was between age 25 and 54. Income amounts are pre-tax and include all sources.
Source: Author’s calculation from the Current Population Survey Integrated Public Use Microdata Series (CPS-IPUMS).
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 Fact #3: Despite growth in women’s wages and time working, household
income for the middle-class has been relatively stagnant.

• Decline of marriage for middle-income households.

• In 1975, 84 percent of individuals with a high school degree were married –
today, it’s 55 percent.
• Theories for why have centered around the poor labor market performance of
men, although the decline is not extremely well understood.
• The end result is an actual drop in the number of two-earner, middle-income
households.
• Further inequality has been driven by “assortative mating.”
• More than ever, high-income individuals marry other high-income individuals.
• This fact could be driven by the good labor market performance of these groups.

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Powering Up. The grey bars show that, in the past, power couples were uncommon. The
red bars show that today they have become quite common…and a very common at the top.

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Stylized Fact #4: The income gap between black and white workers has been
persistent at the median (shown below) and other points in the distribution…

Median Full-Time, Full-Year Worker Income by Race, 1975-2018

$70,000 White men Black men

White women Black women
$60,000
Men: 26% gap
Men: 26% gap
Annual earnings

$50,000

$40,000

$30,000
Women: 8% gap Women: 20% gap

$20,000
1975 1982 1989 1996 2003 2010 2017
Note: Excludes self-employed individuals and unpaid workers for family businesses. All workers were between 25 and 54.
Source: Author’s calculation from the Current Population Survey Integrated Public Use Microdata Series (CPS-IPUMS).

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Stylized Fact #4 (cont): …and is more pronounced at the household than at the
individual level.

Median Household Income by Race and Black/White Ratio, 1975-2018

$100,000 70%
$90,000
1975, 61.5%
65%
$80,000
Annual total income

Black/white income
$70,000 2018, 54.3% 60%
$60,000
$50,000 55%
$40,000
50%
$30,000
$20,000
45%
$10,000
$0 40%
1975 1982 1989 1996 2003 2010 2017

Ratio White households Black households

Note: Includes all households were the “householder” was between age 25 and 54. Income amounts are pre-tax and include all sources.
Source: Author’s calculation from the Current Population Survey Integrated Public Use Microdata Series (CPS-IPUMS).

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 Fact #4: Racial wage gaps have been stable over the last forty years and are
more severe at the household level than the individual level.

• Why has individual inequality remained?

• Discrimination – Studies consistently suggest that otherwise similar black
workers are paid less than white workers.
• Education Gap – About 28 percent of black workers have a bachelor’s degree
today, compared to 44 percent of white workers.
• This gap has actually shrank over the last four decades, but now the gap is
even more important (remember, SBTC and Polarization).
• Why is household inequality so bad?
• Marriage Gap – The marriage rate today for black individuals hovers around 38
percent, compared to 63 percent for white households.
• Labor Market – Poor labor market outcomes driven by discrimination and
educational gaps play a large role in the marriage gap.
• Missing Men – Because of incarceration and youth mortality, 75 black men
for every 100 black women.

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Call Me, Maybe. The fact that the grey bars are taller than the red bars means white
candidates with the same resume got more callbacks than black workers.

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Missing Men. The grey line is near 1, meaning there are about as many white men as white
women. The red line is much lower, indicating many “missing” black men.

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Slightly-less (more in a second) Stylized Fact #5: The very top of the income
distribution has seen especially large increases in income.

Millions of Dollars $2.0m

2019, $1.55m
$1.5m

1975, $0.45m
$1.0m

$0.5m

$0.0m
1975 1982 1989 1996 2003 2010 2017
Average of 50th to 90th Percentile
Average of top 1 Percent

Source: Author’s construction from the World Inequality Database, https://wid.world/.

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Stylized Fact #5: The very top of the income distribution has seen especially
large increases in income.

$7,000,000

Top 10 percent $6,021,708

$6,000,000
Top 0.1 percent
Average annual income

$5,000,000

$4,000,000

$3,000,000

$2,000,000
$1,241,031
$1,000,000
$127,988 $303,857
$0
1975 2014

Source: Piketty, Saez, and Zucman (2017).

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It’s worth noting that the last stylized fact is less stylized than the first four

• While there is survey data freely available:

• the vast majority of it is on income distribution
• and very high earners are rarely included, and their incomes are mostly hidden
for privacy.
• So, the authors at the World Inequality Database, led by Thomas Piketty,
Gabriel Zucman, and Emmanuel Saez, constructed the data using a complex
methodology: https://wid.world/methodology/.
• A article in Vox summarizes the debate if you are curious:
https://www.vox.com/policy-and-politics/2018/1/10/16850050/inequality-tax-
return-data-saez-piketty

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Page 30
Page 31
Page 32
 Fact #5: Income growth has been highest at the very top of the income
distribution.

• One reason is rising labor income for the very rich.

• Superstar Theory – New technology makes it easier for so-called “Super
Managers” to achieve vast worldwide reaches and make huge profits.
• Pay through Stock – In the late-1980s, a push was made for more performance-
based pay, so stock options have been added on top of pre-existing salary.
• “Shenanigans” – As labor has lost bargaining power, less pressure exists to stop
CEOs from achieving pay gains through more nefarious means.
• Another is “wealth,” or income from capital, where the very rich get most of
their income and which is much more unequal than labor income.
• Increased importance of income from capital – The argument by Thomas Piketty
that as economic growth slows, the importance of capital grows…only rich
people own capital.

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The U.S. is Kind of Special. The bars are higher for the U.S. and have grown more since
the 1970s than in other developed countries.

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Britain and the US are poor societies with some very rich people
FT (September 16, 2022)
https://www.ft.com/content/ef265420-45e8-497b-b308-
c951baa68945

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US, Germany and France

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The result of these trends – especially Stylized Facts #3 and #5 – has been a
rise in income inequality as measured by the GINI Coefficient by 25 percent.

0.6

0.486
0.5

GINI Coefficient
0.4

0.397

0.3

0.2
1976 1983 1990 1997 2004 2011 2018
Note: Estimate of GINI Coefficient is based on Pre-tax Income
Source: U.S. Census, “Selected Measures of Household Income Dispersion: 1967 to 2018.” Table A4.
Page 37
In summary, we have the following five stylized facts about the last forty years
in the U.S.

1. For working males, income growth has been stagnant to negative in the middle
and bottom of the income distribution, but positive at the top.
2. For women, growth has been positive throughout the distribution, but progress
towards male earnings has stalled out between 75 and 80 percent.
3. Despite growth in women’s wages and workforce participation, household
income in the middle and bottom of the income distribution has been
stagnant.
4. Racial wage gaps have been stable over the last forty years and are more
severe at the household level than the individual level.
5. Income growth has been highest at the very top of the income distribution.

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Outline
I. What is inequality?
II. Inequality in Outcomes
III.Inequality in Opportunity

Page 39
Measuring inequality in opportunity requires defining inequality
in opportunity…which is hard.

• Circumstances = characteristics that are out of a person’s control

and affect the probability of achieving a certain outcome.

• Effort = the process that translates circumstances to outcomes.

• Equality of Opportunity = People with different circumstances

who put forward the same effort get the same outcome.

Page 40
To think about equality of opportunity, the economic outcome of
attending college is a good example…

Circumstances Attributes
• Parental income • GPA
• School resources • SAT Scores School
Effort Admissions Entry
• Number of siblings • Club involvement
• Quality of peers • Letters of rec
• IQ

Page 41
College Admissions

Page 42
Inequality in opportunity can result if 1) effort is translated poorly
across people with different circumstances…

Type I Circumstances Type II Circumstances

• Parents earn <$30,000 • Parents earn >$30,000
• Low quality school • High quality school
• 3+ siblings • 0-2 siblings
• Rowdy peers • Well-behaved peers

Effort poorly Effort well

Effort

Effort
translated translated

Attributes Attributes
• Lower GPA • High GPA
• Poor SAT scores • Good SAT scores
• Few available clubs • Many available clubs

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More with Little, Few with Lots. The taller red bars for 0-5 hours and shorter for 11-15
and 15+ confirm that teens with less-educated parents often spend less time on homework

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… or 2) if the “level” of effort differs by circumstances, maybe because lower income
high schoolers spend time working at jobs for pay.

Share of High School Seniors Working the Indicated Amount,

by Parental Education

35% Non-college graduate

31.2%
30% College graduate
Share working given amount

25% 23.6%
20.2%
20%

15% 13.2%

10%

5%

0%
Worked more than 20 hours a Worked more than 10 hours a
week for pay week on homework
Source: Adapted from Porterfield and Winkler (2007).

Page 45
These two possibilities are what making defining inequality of
opportunity so hard.

•In practice, almost everyone thinks about equalizing outcomes as

long as people put in the same amount of effort.
•This requires making sure effort translates as well for everybody.

•But, even this can create inequalities in outcomes if effort really

varies by circumstances.

•A way around this “relative effort” – what amount of effort does

someone put in relative to those in the same circumstances?

Page 46
This definition of equality of opportunity can allow us to go to the
data and see whether or not we have it.

•The nice thing about using “relative effort” is it offers a very

clear benchmark to evaluate equality of opportunity.

•Circumstances should be completely uncorrelated with a

person’s outcomes if we have complete equality of opportunity.

•This hypothesis can be taken to the data and has been by several
economists: Chetty, Hendren, Kline, and Saez
•The data is available on their website:
https://opportunityinsights.org

Page 47
Equality of Opportunity = People with different circumstances
who put forward the same relative effort get the same outcome.
•The example below shows an example of this for college admission –
as long as a person is above the median they get in to college.

Type I (disadvantaged) Type II (advantaged)

Student (rank) Hours Student (rank) Hours
1 1 1 4
2 1 2 5
3 2 3 5
4 3 4 10
5 6 5 12
6 8 6 16
7 10 7 20
8 12 8 24
Do not gain admission Gain admission

Page 48
Inequality in opportunity exists along a variety of dimensions
including college attendance... 100
Percent Attending College at Ages 18-21

80

Slope = 0.675
60
40

Slope: The percentage point increase in probability of attending

college due a 1 percentile increase in parental income
20

0 10 20 30 40 50 60 70 80 90 100
Parent Income Rank (percentile)
Page 49
 …and ultimately inequality in outcomes for income.
70
60
Mean Child Income Rank
40 30 50

One thing to think about when viewing this is truncation –

low values can only be so low and high can only be so high
20

0 10 20 30 40 50 60 70 80 90 100
Parent Income Rank
Source: Equality of Opportunity Project, www.equality-of-opportunity.org.
Page 50
And its not just that inequality of opportunity exists, it exists
unequally across the United States…

Source: https://www.opportunityatlas.org
Page 51
And within this state…living in some areas decreases future
earnings by up to 0.3 percent per year for poor children.

Belknap

Merrimack

Essex

Middlesex
Suffolk

Worcester
lk
o rfo
N

Pl
ym
ou
e
t abl

th
Provi- rn s
Ba
dence

Causal Exposure Effects Per Year: Newport

Suffolk MA: - 0.31 %
Middlesex MA: + 0.39 % Page 52
https://tracktherecovery.org

Page 53
Opportunity Atlas
https://youtu.be/8TUsUW0D8Bo?list=PLalrHnPrv5uDfis5AqstaNyKR9x63mDl4

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Summarizing
• The U.S. has experienced an increase in some kinds of inequality
over the last forty years, and stubborn persistence in others.
• The underlying causes are complicated – technology, bargaining
power, trade, caregiving, discrimination, marriage, the growth of
capital all likely play a role.
• Increasing inequality is a bigger problem when you consider that
it is hard to make it from the bottom to the top – opportunity
inequality.

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 Three closing questions:
1) Why is this so important?
§ Specificity rule – look for the cause of many problems we face
as a society today – inequality is at the root of it
§ Corrupt, autocratic leaders, disappearing jobs, educational
opportunities, political polarization, increasing disgruntlement,
etc…
2) Why focus on USA?
§ Data availability, show-casing, blue-print
3) What can I do?
• Replicate some of the “stylized facts” for your own country
• Start talking about inequality – move it up on the “agenda”
• Engage in discussing policy proposals
• Demand change! Page 56
How does Aspire fit in?

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Useful links
1)Why should we care about inequality?
https://www.ted.com/talks/richard_wilkinson_how_economic_inequality_ha
rms_societies
2)Raj Chetty - Improving Equality of Opportunity: New Insights from Big
Data https://youtu.be/4pdWpec_c0U
3)Can Policy Create Moves to Opportunity?
https://youtu.be/FG_ZE8DAYQQ
4)Black Neighborhoods Matter, Too https://medium.com/@erbilc/black-
neighborhoods-matter-too-
d2ef4fe3f05b?source=friends_link&sk=7b4f1ee563036dbfe3cf27394e1
901e8
5)The Case Against the Equality of Opportunity
https://www.vox.com/2015/9/21/9334215/equality-of-opportunity
6)Excellent blog about Inequality by Prof. Sanzenbacher
www.progressless.org

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THANK YOU!

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