Posts Tagged ‘inequality’

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I have often argued that neoclassical macroeconomics is obsessed with class—and biased against the working-class—even when class is not explicitly represented in the models. That’s because, as I explained here,

neoclassical economists blame workers and their downwardly rigid wages for creating and maintaining high levels of unemployment. If the labor market is flexible, a fall in the price of labor is presumed to eliminate involuntary unemployment. If it’s not, then other means are necessary, such as austerity policies that raise unemployment, thus creating pressure to decrease nominal (and, with them, real) wages with the promise of eventually restoring full employment.

As it turns out, Mark Thoma also understands that macroeconomic policy has class implications.

Which mistake is more costly – raising rates too soon versus too late – is not just a technical question about which of the two mistakes is easiest for policymakers to reverse. We also need to ask who will be hurt the most if the Fed makes a policy error on one side or the other. If the Fed raises rates too soon, it is working class households who will be hurt the most by the slower recovery of employment. If it raises rates too late allowing a period of elevated inflation, it is largely those who lend money, i.e. the wealthy, who will feel the impact. Thus, one mistake mostly affects working class households who are very vulnerable to negative shocks, while the other hurts those most able to withstand economic problems. . .

Why do we hear so much about the need to raise interest rates now rather than later, or get the deficit under control immediately despite the risks to households who are most vulnerable to an economic downturn? Those who are most in need – those least able to withstand a spell of unemployment or other negative economic events – have the least power in our political system.

With the decline in unions and other institutions that used to give workers a voice in the political process along with rising inequality that gives even more power to those at the top, the problem is getting worse. No wonder policy has been tilted so much in favor of those at the top. Fiscal policy in particular has been far too responsive to the interests of those with political power rather than those in greatest need.

If we are going to be a fair and just society, a society that protects those among us who are the most vulnerable to economic shocks, this needs to change. The necessary change won’t come easily, the entrenched political and economic interests will be difficult to dislodge.

But the current trend of rising inequality in both the economic and political arenas along with the rising economic risks faced by working class households due to globalization, technological change, and a political system that increasingly neglects their interests is not sustainable. If these trends continue unabated, change will come one way or the other. The only question is how.

And, of course, one of those possible changes is for the working-class to abolish class entirely.

Chart of the day

Posted: 1 October 2014 in Uncategorized
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As Yili Chien explains, the increase in health care costs, together with the increase in income inequality, has made health care unaffordable for lower-income groups, enlarging the medical consumption inequality between the rich and poor.

This can be seen in the chart above, which plots the unaffordability percentage for all households in each income quintile over time. The first quintile represents the poorest 20 percent of the population, and the fifth quintile represents the richest 20 percent.

According to Chien,

Clearly, for each given year, the index level is negatively associated with income. It is not surprising that health care is more affordable for high-income households than it is for low-income households. Over time, the unaffordability index of all households showed an upward trend. From 1995 to 2012, the index increased from 11.8 percent to 16.8 percent, showing that the rapidly increasing cost of health care, in fact, burdened more U.S. households.

More importantly, there was a diverging trend of the index between the rich and the poor. The bottom quintile percentage rose from 23.3 percent in 1995 to 32.7 percent in 2012, exhibiting an almost 10-percentage-point surge. Similarly, the second quintile was also heavily affected. The index increased from 15.1 percent to 24.2 percent, also an almost 10-percentage-point escalation.

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inequality-recovery

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That’s right: during the first three years of the current “recovery,” the top 10 percent captured 116 percent of all income gains. That’s because incomes actually fell for the bottom 90 percent, even as they rose nicely for those at the top.

1 percent gains

Even more striking is the fact that 95 percent of the income gains during the same period went to the top 1 percent, with only 5 percent left for everyone else.

In other words, the fruits of the current expansion have been captured almost exclusively by those at the very top—in contrast to every other period of economic recovery in the postwar period.

We have to face the fact that capitalism’s crises have become increasingly severe, and the solutions to those crises have increasingly involved redirecting the income gains to a tiny minority at the top. Everyone else is being left behind. Is it any wonder that the current economic system is facing a legitimation crisis?

 

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Americans have no idea how unequal the distribution of income is. At the same time, they want a distribution of income that is much more equal than it currently is.

According to a new study by Sorapop Kiatpongsan and Michael I. Norton [pdf], where they looked at the estimated and ideal pay ratios of CEOs and unskilled workers, American respondents estimated the ratio of estimated incomes of CEOs to unskilled workers to be 29.6, whereas the actual ratio was about 354 (based on the fact that the average yearly compensation for CEOs of S&P 500 companies in 2012 was $12.3 million while the average worker received about $35,000). Their ideal pay ratio was only 7.

In other words, Americans think that CEOs should receive about 7 times what the average worker brings home, imagine that the actual ratio is much higher (by a factor of about four), while the actual ratio is far higher than either what they think it is (by a factor of twelve) and what the ideal would be (by a factor of over fifty).

As it turns out, Americans are not alone.

Using survey data from 40 countries (N = 55,238), we compare respondents’ estimates of the wages of people in different occupations – chief executive officers, cabinet ministers, and unskilled workers – to their ideals for what those wages should be. We show that ideal pay gaps between skilled and unskilled workers are significantly smaller than estimated pay gaps, and that there is consensus across countries, socioeconomic status, and political beliefs for ideal pay ratios. Moreover, data from 16 countries reveals that people dramatically underestimate actual pay inequality.

The task, of course, is to figure out how to close the enormous gap between the actual level of inequality and what people think the amount of inequality should be. We can start by giving workers more say in running the enterprises where they are employed.

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