Inequality

Krishna Pendakur
Department of Economics
Simon Fraser University
Outline

• Inequality in Canada and the USA over the century

• Piketty’s Capital in the 21rst Century
• Piketty and Saez: 3 Facts; r>g

• Other Inequalities: Firms, Age, Gender, Ethnic Origin

• Measuring Inequality
• Gini Coefficient
• Inequality of What? Income, Consumption, Wealth

• Explaining the Rise in Inequality

• Technology; Institutions; Globalization

• World-Level Inequality: Branco Milanovic

 Top Income Shares---Canada and USA

Source: Veall, 2013

GDP per Capita, Canada, 1960 – 2020
data.worldbank.org
Source: Osberg 2018, Fig 2.1
Wages and Productivity in the USA and Canada
• Harrison, Peter, 2009, “Median Wages and Productivity Growth in
Canada and the United States”, url:
http://www.csls.ca/notes/note2009-2.pdf
 Top Percent and Bottom Half Shares---USA

Source: Piketty, Saez and Zucman 2018

 Income Stagnation for Bottom Half---USA

Source: Piketty, Saez and Zucman 2018

 Piketty and Saez: 3 Facts

• We find large changes in the levels of inequality, both over time and
across countries. This reflects the fact that economic trends are not
acts of God.

• First, we find that whereas income inequality was larger in Europe

than in the United States a century ago, it is currently much larger in
the United States.
Fact 1
• Second, we observe the same “great inequality reversal” between
Europe and the United States when we look at wealth inequality
rather than income inequality.
• In contrast to income inequality, U.S. wealth inequality levels have still not
regained the record levels observed in Europe before [WWI].
• The US has always had a “wealth middle class”. Europe did not before WWI.
• The United States is the land of booming top labor incomes; Europe is
the land of booming wealth (albeit with a lower wealth concentration
than in the United States).
Fact 2
• capital=wealth.
• Third, in Europe, the wealth-income ratio followed a U-shaped
pattern; in the USA, the pattern is flatter.
• The fall of European wealth-income ratios following the 1914–1945
capital shocks can be well accounted for by three main factors:
• direct war-related physical destruction of domestic capital assets
• lack of investment
• a fall in relative asset prices
Fact 3
• Recovery was very slow.
• If savings are a small fraction of income, saving 5 GDPs takes a long time.
• Harrod-Domar-Solow balanced growth path:
• ”growth rate”=population growth rate plus productivity growth rate
• capital/income converges to (savings rate)/(growth rate)
• If the growth rate doubles, the wealth/income ratio converges to half its
previous value.
• In a low-growth society, the accumulated capital stock plays a big role,
because accumulating capital is the only way to get more income.
• Capital is back because low growth is back.
 r>g over time
• r is the (net of tax) rate of return to capital.
• if r>g, wealth accumulates, and since it is concentrated, it
accumulates in the hands of the wealthy, so wealth inequality is high.
• Wealth inequality contributes to income inequality, because rich people get
income from wealth
• r-g was big before the 20th century (around 4 per cent).
• But, it was much smaller (close to 0) in the mid-20th century
(especially in the USA).
• Now growing again (about 1 per cent now)
Coolest t shirt ever
r over history
 Other Inequalities
• Firm Inequality
• Concentration
• assets

• Group Inequality
• Age
• Gender
• Ethnic origin
 The New Age of Monopoly Capital
• We have entered a new age of monopoly capital
• Sociologists have worried about this for a long time (Baran and Sweezy 1966) but
economists are late to this realization.

• Firms have assets, a measure of firm size.

• If they are similarly sized, their markets might be pretty competitive.
• If they are very unequally sized, their markets might be monopolized.

• Big firms have power over

• Consumers
• Workers
• The state
 Top Per Cent Shares of Firm Assets

From: Kwon, Spencer Yongwook and Ma, Yueran and Zimmermann, Kaspar, 100 Years of Rising Corporate Concentration
(February 13, 2023). University of Chicago, Becker Friedman Institute for Economics Working Paper No. 2023-20,
Available at SSRN: https://ssrn.com/abstract=4362319 or http://dx.doi.org/10.2139/ssrn.4362319
 Inequality Across Birth Cohorts: HS grads
The age-income profile is lower for the young

Source: Beaudry et al, 2000

 Inequality Across Birth Cohorts: Uni grads
The age-income profile is lower for the young

Source: Beaudry et al, 2000

Gender Inequality---Canada, Fortin et al
 Indigenous and Visible Minority Inequality in Canada
0.1

0
Proportionate Gap

-0.1

-0.2

-0.3

-0.4

-0.5
1970 1975 (est) 1980 1985 1990 1995 2000 2005 2010 2015

Vismin F emale Aboriginal F emale Vismin M ale Aboriginal M ale

Source: Pendakur and Pendakur 2011; additional author calculations.

 Inequality Measures
• Inequality measures based on quantiles
• The 90-10 ratio is the ratio of the 90th percentile income to the 10th percentile
income.
• Income shares
• Top per cent share
• Top 10% share
• etc
• The 80-20 ratio is the ratio of the income shares of the top and and bottom
quintiles.
• Historically, these have been around 4 and 40 per cent (the “4 and 40 rule”, yielding a
ratio of 10.
• Now the ratio is closer to 12 in Canada, 16 in the USA
 Lorenz Curve and Gini Coefficient
• The income share of a part of the population is the fraction of all income going to
that part of the population.
• From earlier graphics
• the income share of the top 1 per cent in the USA is now 20 per cent. So the 99% share is 0.80.
• The top decile share (10 per cent share) is around 50 per cent. So the 90% share is 0.50.
• The bottom 50% share is around 10%. So the 50% share is 0.10.
• the Lorenz Curve maps the population percentile on the x-axis against the income
share of the population up to that percentile on the y-axis.
• What are 3 points on the Lorenz curve, given 2a above?
• Bottom 10% has 0.10, bottom 90% has 0.50, bottom 99% has 0.80, so 3 points are (0.50,0.10),
(0.90,0.50) and (0.99,0.80).
• the Gini Coefficient is an inequality measure, defined as twice the area between
the 45 degree line and the Lorenz Curve.
• It goes from 0 to 1. It is 1 if everyone has nothing except 1 dude who has everything. It is 0 if
everyone has the same amount. (prove both statements) Osberg Figure 1.5
 Inequality of What?
From Wealth to Income to Consumption
• Income
• Over what period? Daily, annual, lifetime?
• Taxes and Transfers
• Consumption
• Smoothing
• Wealth
• Bequests, dynasties

• WealthàIncomeàTaxes/TransfersàConsumption/SavingsàWealth
Top Per Cent Shares of Wealth: Canada and USA

World Income Database:

https://wid.world/data
Transitory vs Permanent---Canada, Veal
Top Per Cent Shares of Income: Canada and the USA

World Income Database:

https://wid.world/data
 Taxes and Transfers
• Market income is the gross (before tax) income for a household from
all sources except government.
• Because CPP is off-budget, CPP income is counted as market income.
• Disposable income (aka: ”after-tax” or “net” income) adds transfers
and substracts income taxes. Transfers include child benefits, welfare
payments, Old Age Security payments, etc.
• Because income taxes are progressive, and because transfers target
the bottom of the income distribution, the tax-and-transfer system is
equalizing.
• Because the redistribution is mostly in the middle, the top per cent
share is not very informative. So, we use Gini Coefficients.
Taxes and Transfers---Canada (Fortin et al 2013)
Taxes and Transfers---USA
 Publicly Provided Goods Are Equalizing

• OECD, 2015, Divided We Stand

• https://www.oecd.org/els/soc/dividedwestandwhyinequalitykeepsrising.htm

• Figure 9, page 36, shows how redistribution varies across countries. In all
countries, redistribution through the tax system reduces inequality.

• Figure 11 is extremely cool: it shows the difference between inequality of

disposable income vs inequality of disposable income plus publicly provided
goods and services (aka: extended income).
 Gini Coefficients: Disposable Income

https://data.oecd.org/chart/7fHN
Consumption--- Canada (Norris and Pendakur 2013)
•Q
 Explanations for Growth in Inequality

• We don’t fully understand the mechanisms. Understanding the

evolution of inequality is a long-term project.

• Candidates:
• Technological Change

• Institutions/Laws/Norms

• Globalization and Trade

 Fortin et al: Technological Change
• Skill-Biased Technical Change: the marginal value of workers declined
• Returns to education: (Fortin et al): “For Canada, in 1980, men with a university bachelor’s (BA)
degree earned 32 percent more than those with a high school (HS) diploma, after controlling for
differences in work experience (Boudarbat, Lemieux, and Riddell 2010). By 2005 that gap had
increased to 40 percent… The BA-HS gap for women, for example, increased from 45 percent to
51 percent between 1980 and 2005.” This is not very much of the increase in overall inequality.
These changes are too small.
• (Fortin et al): Probably not skill-biased technical change since the 1990s, because the computer
revolution occurred after the big increase in inequality. But, a more “nuanced “routine-biased
technical change” view appears to be able to account for the polarization of wages and
employment in the United States and the polarization of employment in Canada and some
European countries.” Workers in routinizable jobs got shafted.
• But: the timing is weird: in the USA, the biggest increase in inequality was in the 1980s.
Alvaredo et al: The Top 1 Per Cent in Global Perspective

Background
• "Simon Kuznets (1955) famously hypothesized that economic growth would
first be accompanied by a rise in inequality and then by a decline in
inequality."
• Figure 1 (page 2) looks like this but backwards.

• Saez 2011: In the USA, the ”top 1 percent incomes captured more than half of
the overall economic growth of real incomes per family over the period 1993-
2011.” and all the growth after 2008 (Chancel, Piketty and Saez 2022)

• Some countries had falling then rising inequality over the 20th century
• Other countries had falling then stable inequality over the 20th century
U shapes
L shapes
 Alvaredo et al: Technological Change

• Figures 2A and 2B (Alvaredo et al page 6) show 2 different patterns. One is

nicer than the other. Why the different outcomes?
• "To us, the fact that high-income countries with similar technological and
productivity developments have gone through different patterns of income
inequality at the very top supports the view that institutional and policy
differences play a key role in these transformations.
• Purely technological stories based solely upon supply and demand of skills
can hardly explain such diverging patterns."
 Globalization
• Globalization and Trade
• Canada is way more traded than the USA (World Bank)
• Exports were 31% of Canada’s GDP in 2021 (3/4 of that with the USA)
• Exports are 11% of US GDP in 2021
• Mechanisms to affect incomes
• Increased competition due to substitutability (think: cheap Chinese goods)
• Increased complementarities due to larger input and output market size (think: Vancouver film industry)
• Increased returns to scale due to larger output market size (think: Vancouver gaming companies)
• Wages
• If Canada is a higher wage country than its trading partners, trade may push down wages in traded sectors
• Prices
• If Canada is a higher cost producer than its trading partners, trade may push down prices in traded sectors
 Export Share of GDP, Canada, USA, Germany

Source: https://data.oecd.org/
 Trade and Inequality, USA

Source: Antras et al, 2017

 US Cities exposed to imports lost employment
(Autor et al 2013)

Autor et al, 2013

Immigration raised wages for most in the US
(Dustmann et al 2013)
 Institutions: Minimum Wages
• A minimum wage is the lowest wage that can legally be paid.

• The Fight for Fifteen was successful.

• Minimum wages rose by 50% in real terms since 2007, from $10/hr to
$15/hr in 2021

• In contrast, real average wages rose by only 14% from $26.80/hr to

$30.67/hr ($20.67 nominal in 2007 to $30.67 nominal in 2021)
• Statistics Canada, Table: 14-10-0064-01
Real Minimum Wages
 Minimum Wages

• declining real minimum wages: minimum wages have affected

the lowest quantiles, decreasing them over the 1990s, but
increasing them lately.
• (Fortin et al): “Fortin and Lemieux (2000) provide striking
graphical evidence of the significant impact that the minimum
wage had on the shape of the bottom end of Canada’s wage dis-
tribution. The impact was greater in the mid-1990s than during
the ’80s because both the value of the minimum wage relative to
the average wage and the proportion of hours worked at the
minimum wage increased over this period.”
 Institutions: Unions
• Unions exist and raise wages if
• Governments empower workers to disrupt firm production and
• Firms have profits that can be extracted
• Unions coordinate workers, e.g., for negotiation and group benefits

• Union power comes from government:

• Right to form a union
• Right to exclude workers.
• Right to hold up production.
• Right to collectively bargain.

• About 28% of Canadian workers are unionized

• More than 60% of public sector workers
• Only 15% of private sector workers

Department name/presenter name

 Institutions: Unions
• declining unionization:
• 35% of Canadian workers were unionized in 1980; 29% in 2021.
• unions have 2 effects: raising inequality via disparity between union and nonunion workers, and
decreasing inequality by decreasing dispersion among unionized workers. The latter dominates,
so unionization tends to decrease inequality. De-unionization accounts for at least 1/5 or 1/6 of
the growth in inequality.
• (Fortin et al): “unionization declined in all three countries, with the greatest drop being in the UK
and the smallest decline in Canada. Wage inequality rose in all three countries, with the largest
growth being in the UK and the smallest in Canada. The analysis of Card, Lemieux, and Riddell
indicates that this correlation between the magnitude of the decline in unionization and the
growth in inequality is no coincidence.”…
• “For Canada as a whole, Card, Lemieux, and Riddell (2004) attribute about 15 percent of Canada’s
growth in inequality during the 1980s and ’90s to declining unionization.”
Union Density in Canada and the USA

Source: Riddell, W.C., 1993. Unionization in Canada and the United States: a tale of two countries. In Small differences that
matter: Labor markets and income maintenance in Canada and the United States (pp. 109-148). University of Chicago Press.
 Recent Union Coverage in Canada

Source: Statistics Canada (2015)

https://www150.statcan.gc.ca/n1/pub/14-28-0001/2020001/article/00016-eng.htm
 Recent Union Coverage in the USA
Union Members as a Fraction of All Workers, USA
30.0

25.0

20.0

15.0

10.0

5.0

0.0
Year19731974197519761977197819791980198119831984198519861987198819891990199119921993199419951996199719981999200020012002200320042005200620072008200920102011201220132014

%Mem

Source: Statistics Canada (2015)

Unionization Rates: 1981 to 2022

https://www150.statcan.gc.ca/n1/pub/36-28-0001/2022011/article/00001-eng.htm
 Empower Workers by Empowering Unions

• We’re in a new age of “monopoly capital” (cf. Baran and Sweezy 1966)
• So, powerful unions are more necessary than 40 years ago

• But private sector unionization has declined by half since 1981.

• The power of unions is given by the state: it is a public choice

• Unions have more power here than in the USA, but less than in Europe

• We could further empower unions: make it easier to organize, easier to collect

dues, harder to opt out of the union, harder to hire replacement workers, make
collective bargaining mandatory in more settings, etc
Department name/presenter name
 Increase Unionization: A Wrinkle
• Empowered private sector unions extract profits for workers
• Take from owners/capitalists
• Their labour action hurts owners/capitalists (and consumers a bit)
• Might raise prices, hurting consumers
• Consumers can opt-out, by switching products or firms

• Empowered public sector unions extract government spending for workers

• Take from taxpayers
• Labour action hurts taxpayers, not government directly
• Will raise costs, hurting taxpayers
• Taxpayers cannot opt out

• Perhaps: empower all unions, but declare some public-sector jobs as “essential”,
lacking the right to strike.

Department name/presenter name

 Corporate Governance
• In Canada, publicly held firms are legally required to try to make money for their
shareholders.

• Worker-owned firms and coops

• E.g., Mondragon wood coops in Spain Euro12 billion revenue

• Codetermination in Germany
• Some German firms (especially large manufacturing firms) have workers on their boards of
directors
• These firms have less employment volatility, shorter work weeks, higher productivity and higher
investment than other firms (Jäger et al, 2021, Labor in the Boardroom, NBER Working Paper
26519).

• The Democrats proposed measures like this in the Reward Work Act and the Accountable
Capitalism Act in 2018
 Continental Europe
• Other countries, especially those of continental and northern Europe,
have had a different experience.
• Germany, Scandinavia, Netherlands, etc, all have much lower inequality
and vastly different social and economic institutions:
• Vast amount of publicly funded training in Germany
• Unionization around 80-90%
• Workers’ wages rise with productivity
• High tax rates, lots of public goods (e.g., public housing, health care,
transportation, etc)
• The state is involved in many aspects of life that we’d find strange, e.g., wage
negotiations between firms and workers; what do university students learn; who
goes to what school

Department name/presenter name

 Distinguishing Explanations
• Timing
• Globalization and technical change are worldwide phenomena
• If these are the prime causes, then they should impact inequality similarly worldwide
• Germany and Canada are both highly traded, and increased trade massively
• But inequality in Germany increased only somewhat since WWII
• In the USA, workers were not protected from trade induced wage changes
• Institutional differences
• Different countries have different approaches to taxation, unions, public
education, etc
• Institutional changes
• Many countries have undergone sudden transitions
 Data on Inequality Around the World

• OECD
• http://www.oecd.org/social/inequality.htm
• http://www.oecd.org/els/soc/dividedwestandwhyinequalitykeepsrising.htm
• http://www.oecd.org/social/income-distribution-database.htm
• World Bank
• http://data.worldbank.org/topic/poverty
• http://www1.worldbank.org/poverty/visualizeinequality/
• World Income Database
• https://wid.world/
• https://wid.world/data/
 World Inequality

• We have seen since mid-century

• Rising inequality within rich countries
• Falling inequality across countries
• Poor countries are dramatically less poor than 40 years ago

• Should we be concerned with

• Within-country inequality?
• Across-country inequality?
• World-level inequality?
 World Level Extreme Poverty: <US$2.15/day

Darkest: East Asia, South Asia, Subsaharan Africa, ROW

 Global Inequality 1820 to 2020

Chancel, L. and Piketty, T., 2021. Global income inequality, 1820–2020: the persistence and mutation of extreme inequality.
Journal of the European Economic Association, 19(6), pp.3025-3062.
 Branco Milanovic’s View

• "Angus Maddison has estimated that around 1850, the mean income in the
poorest countries in the world (Ceylon and China) was around $PPP 600. At
the top were the Netherlands and the United Kingdom with a GDP per capita
of about $PPP 2,300.
• Thus, the ratio between the top and the bottom (of country mean incomes) was less
than 4 to 1.
• Consequently, the better-off workers who earned incomes close to the national means,
could not, in terms of their standard of living, differ from each other by more than the
ratio of 4 to 1."
• "Thus, similarity in the economic position of workers across the world,
implicitly assumed by Marx and Engels, had a firm basis in the reality of the
time."
 Within- vs Across-Country Inequality in 1850

• "In a pioneering work, François Bourguignon and Christian Morrisson (2002)

have used a collection of their own and other authors’ estimates of income
distributions for 33 country-groups and mean incomes from Angus Maddison
to construct worldwide income distributions, at approximately twenty-year
intervals, for the period 1820-1992.
• They estimate global inequality, measured by the Gini coefficient, to have
been about 53 Gini points in 1850, and to have been composed in almost
equal proportions of between-country and within-country inequalities.
• Specifically, Bourguignon and Morrisson estimate that the global Gini in 1850,
amounting to 53.2 points, can be broken down into 25.9 Gini points (49
percent) due to location, and 27.3 Gini points (51 percent) due to class."
Within- vs Across-Country Inequality Today
• "If we use the same decomposition between location and class today, when
our data are much better than for the past, we find that of the global Gini,
which amounts to 65.4 points.
• 56.2 Gini points or 85 per cent is due to differences in mean country incomes, and only
9.2 Gini points (15 percent) to class.
• Not only is the overall inequality between world citizens greater in the early 21st century
than it was more than a century and a half ago, but its composition has entirely changed;
• from being an inequality determined in equal measures by class and location, it has
become preponderantly an inequality determined by location only."
• "In 1870, the gap between the richest countries (Australia and Great Britain)
and the poorest (Nepal and Ghana) was 8 to 1; in 2007, it is 31 to 1 (United
States and Norway vs. Nepal, North Korea and Ghana)."
 Across-Country Inequality Today

• Table 1 (page 17): occupations have very different pay across countries.
• "[a] world where location determines to a large extent one’s income ... must
be a world of huge migratory pressures because people can increase their
incomes several fold if they migrate from a low mean-income location to a
high mean-income location."
Branco Milanovic: Inequality Within and Between Countries

• "Inequality between world citizens in mid-19th century was such that at least
a half of it could be explained by income differences between workers and
capital-owners in individual countries. Real income of workers in most
countries was similar and low."
• Now, "more than 80 percent of global income differences is due to large gaps
in mean incomes between countries."
Country Ventile to World Ventile
Bottom and Top Ventiles Across Countries
References
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