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Originally Posted by loquitur
host, please read the OP and stick with what the topic of discussion is here. You can start your own thread if you want to lecture people on topics you want to discuss.
The question was, what kinds of inequality matter and why. If you have something to say about it, do. Otherwise, please don't clutter up the thread.
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No reaction to any of the material that I posted, ehhhh loquitur? You have the gall to post an obscenity as the crux of your OP, bullshit by Cox and Alm, passed off as an "article", and then descrube my response as clutter?
70 percent ownership of the entire wealth of the US by just ten percent of the population, is obscene, loquitur, and being the messenger of the incessant, well financed effort to dress it up, put lipstick on it in attempts to make it REASONABLE, is beneath you loquitur, beneath your intellect and your education, but here you are!
Cox and Alm are stooges, they are long exposed as such:
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http://query.nytimes.com/gst/fullpag...pagewanted=all
Economic Scene;Good news for the down and out, or are the data misleading?
By PETER PASSELL
WHAT'S all this fuss about income inequality? Sure, the richer are richer and the poor are eating Doritos. But not to worry, says W. Michael Cox and Richard Alm, researchers at the Federal Reserve Bank of Dallas: Most Americans struggling to make ends meet are on the fast track to affluence.
They found that just 5 percent of a sample of Americans in the bottom fifth of the income distribution in 1975 were still there 16 years later. Meanwhile, 29 percent of them had managed to grab the brass ring, ending up in the top fifth. And "between opportunity and equality," they remind, "it's opportunity that matters most."
The Cox-Alm study, published in the Dallas Federal Reserve's 1995 annual report, is making big waves among the movers and shakers of the political right. Indeed, after a ringing endorsement from the editorial page of The Wall Street Journal, it has become required reading for conservatives impatient with the current hand-wringing over the alleged plight of the young and immobile.
But a close look at the new research is not confidence-building. Indeed, even a casual look suggests that something -- actually, many things -- are amiss. "Cox and Alm ask the wrong question and give a misleading answer to the question they ask," argues Peter Gottschalk, an economist at Boston College and co-author of "America Unequal" (Russell Sage Foundation).
Standard measures of income distribution amount to snapshots at a moment in time. The large and growing variations between those at the top and bottom that have been reported by the Census are, of course, cause for disquiet. But liberals and conservatives generally agree that mobility matters, too. And without exception, studies that track the fortunes of individuals or families for many years suggest that lifetime income is distributed far more equally than income in any single year.
The Cox-Alm study is in this tradition. It follows 3,725 individuals ages 16 and over who remained part of the University of Michigan's Panel Survey on Income Dynamics for a 16-year period. And their conclusions are nothing short of remarkable. Of those in the bottom fifth in 1975, 95 percent were earning enough money in 1991 to have jumped in the rankings. Poverty in the 1975 snapshot was apparently no impediment to future economic success. The average income of individuals in the bottom fifth rose by $25,322, even after adjustment for inflation.
Mr. Gottschalk, however, notes that the Dallas researchers use unconventional means to reach these astonishing ends. For one thing, they measure incomes actually earned by individuals, rather than assigning individuals some prorated share of family income. As a result, the average earnings of the bottom fifth in 1975 was just $1,153 -- far less than anyone could actually live on.
Who, then, were these people? Probably not the poorest individuals, but the ones who worked only briefly in 1975. Mr. Gottschalk guesses most of them were part-time workers with marginal links to the formal labor force: students with after-school jobs, housewives who worked at the post office in the Christmas rush, and so forth.
Sixteen years later their average incomes had risen a fantastic 23-fold, to $26,475. To Mr. Gottschalk, this suggests that virtually all the former high school and college students in the sample had full-time jobs in 1991, as did most of the mothers whose children had grown up. "I'd be surprised if my teen-ager, who now earns pocket money delivering newspapers, doesn't do equally well," he allowed.
Mr. Gottschalk says, too, that by tracking individuals over time the Cox-Alm study mingles the impact of real economic mobility with income gains linked to accumulating work experience. It should hardly be surprising that 35-year-old carpenters make more than they did when they were 19-year-old carpenters....
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Actually read what is contained in my last post, and you'll have the opportunity to observe that nothing changes, even in the fullness of time. The same few (in numbers) elite, still control at least as much as they did in 1938, and they flood the media with bogus "studies" to persuade you to think otherwise. You want to believe. I want to react reasonably to the fact that the top ten percent own 70 percent of everything....that is the gulf between us, and it is damn hard to be cordial in the face of such a divide.
The "certainty" of authors Cox and Alm in your OP article, strikes me as ridiculous, knowing what I know, and here is some of it, for you to consider:
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http://woodrow.mpls.frb.fed.us/pubs/...1/standard.cfm
....Some economists prefer to look at consumption because it is less volatile than income on an annual basis for most households. People smooth their consumption based on long-term income expectations. Such a phenomenon is readily apparent among those who lose a job. While their income might plummet, consumption tends to fall much less dramatically. Such households tend to either dip into savings or take on additional debt with the expectation that higher income will return in due time.
All this is not to say that consumption wins the best-measuring-stick debate hands down, even among advocates. Sullivan, for example, acknowledged “some important practical concerns with switching to consumption,” including the fact that consumption surveys are much smaller in scale than income surveys, making it difficult to analyze local patterns because of sampling problems.
The consumption model has other blind spots. For example, it can only measure total costs; it has no ability to distinguish the quality of purchases or the utility of different types of purchases to a household. For example, a 2005 working paper by Thomas Deleire of Michigan State and Helen Levy of the University of Michigan found that higher expenditures among single-mother households during the 1990s “can be explained by a shift from food at home to food away from home.” While that is positive in some senses—less work cooking at home and more food “leisure”—an alternative explanation is that more meals were eaten outside the home out of necessity and at higher cost to the household budget, as more single mothers worked, either voluntarily or because of changes to the welfare system in the 1990s. Better off? Hard to say for sure.
Sullivan and others also point out that income poverty has simple longevity on its side. “I think it is well understood that there are flaws in the official measure of poverty,” <h3>Sullivan said. “(But) we have been using the current measure for about 40 years, so we have a nice time series that is generally understood.” A 2005 article in the BLS's Monthly Labor Review noted that most studies of well-being are based on income data “partly because of history and also partly because of habit. Income data are accessible, comparable over time, and of high quality....”</h3>
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http://www.riskcenter.com/story.php?id=16016
February 12: Commentary – Alm’s For the Poor?
Location: Chicago
Author: Paul Kasriel
Date: Tuesday, February 12, 2008
In the Sunday (February 10) op-ed section of The New York Times, Dallas Fed economists W. Michael Cox and Richard Alm argue that consumption is “a better guideline of economic prosperity than income” (You Aree What You Spend). The authors point out that while the share of national income going to the richest 20 percent of U.S. households rose from 43.6 percent in 1975 to 49.6 percent in 2006 as the share of national income going to the poorest 20 percent of households fell from 4.3 percent to 3.3 percent, the poorest really have not been falling behind so much if consumption is taken into consideration.....
...There is a line item in the Federal Reserve’s Flow-of-Funds data -- “net financial investment” in Table F.100 -- that goes a long way in explaining the “prosperity” to which Cox and Alm refer. Net financial investment is the difference between households’ net acquisition of financial assets and the net increase in their liabilities. In a previous commentary (Gene Epstein's Great American Savings (sic) Myth), I demonstrated that when net financial investment is negative, household total spending must be larger than household income. Chart 2 shows the behavior of household net financial investment as a percent of personal income. Beginning in 1999, household net financial investment has been negative, indicating that total household spending has exceeded household income. In 1975, household net financial investment was positive 8.3 percent of personal income; in 2006, it was negative 5.9 percent of personal income....
<img src="http://www.riskcenter.com/images/editlive/krapoc7k.gif">
...So, yes, the poorest 20 percent of households might be enjoying increased “prosperity” today relative to 1975. But if the households in the aggregate are spending more than their incomes and the richest 20 percent are spending less than their incomes, then it must be that the “bottom” 80 percent are spending considerably more than their incomes. That is, the bottom 80 percent have become “prosperous” by going into debt up to their eyebrows. I sure hope the consumer durables they have purchased with borrowed funds have a long useful life because the bottom 80 percent are likely to find it more difficult spending more than they earn in as much as household credit availability is tightening significantly (see Charts 5 and 6).
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http://www.people.fas.harvard.edu/~i...final_ineq.pdf
Unresolved Issues
in the Rise of American Inequality
Robert J. Gordon, Northwestern University and NBER
Ian Dew‐Becker, Harvard University
Presented at Brookings Panel on Economic Activity,
Washington, DC
September 7, 2007
....7. Consumption Inequality
While income inequality tells us about the year‐to‐year distribution of economic rewards, to understand the distribution of overall welfare, income may not be the best measure. Many authors have made the point that the life‐cycle/permanent income hypothesis implies that consumption may be a better measure of the distribution of welfare than income. Specifically, if people can insure effectively against transitory income shocks, then as the variance of those transitory shocks rises, measured income inequality will rise, but consumption and welfare inequality will stay fixed.
<h3>We have numerous data sources on income, but there is very little good data on consumption. </h3>The most widely used data set is the BLS’s Consumer Expenditure Survey (CEX), which has annual data beginning in 1980 with a few sporadic surveys before then. The CEX has two surveys; an interview survey and a diary survey. The interview survey follows households through 4 interviews each covering the prior three months of expenditures. It is designed to measure large or routine expenditures, such as
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mortgages, utilities and car purchases. The diary survey asks households to record all purchases over two two‐week periods. It is designed to measure non‐durable goods and services expenditures. An alternative to the CEX is the Panel Study on Income Dynamics (PSID). The PSID has been following a set of 8,000 households since 1968, and it obtains very detailed measurements of income, employment and health. However, the PSID only measures food consumption. a serious limitation.
The first study to use the CEX to measure the distribution of economic well‐being was Cutler and Katz (1991). Their work covered a variety of topics, including poverty rates, income inequality and consumption inequality. As in much of the other work we have discussed, they used the CPS to measure income. The majority of their analysis computed Gini coefficients. They found that the Gini coefficient for income fell from 0.379 to 0.366 between 1963 and 1980, but then jumped up to 0.397 in 1984. This result is in contrast to that of Kopczuk, Saez and Song (2007), who find that the Gini coefficient for income rose monotonically since 1953 in the SSA data. For consumption, Cutler and Katz find that the Gini coefficient fell from 0.298 to 0.285 between 1960 and 1972, but then rose to 0.314 in 1980 and 0.347 in 1984. Between 1984 and 1988 they found that inequality stayed roughly fixed.
Cutler and Katz (1991) find that income inequality is greater than consumption inequality, which is consistent with the permanent income hypothesis. However, they also find a nearly perfect correspondence between income and consumption inequality, implying that, at least during the 1980’s, increased cross‐sectional income inequality was not driven by increased transitory shocks. Or, if it was, people were not able to insure against the new shocks. Between 1980 and 1984, they found that the Gini coefficients for both income and consumption rose by the exact same amount, .033. The timing of the rise in the Gini coefficient matches similar results on the 90‐10 ratio evident in Figures 3, 4, and 5 discussed above. The only difference that they find between the two series is that the Gini coefficient for income fell by .05 between 1972 and 1980, but for consumption it rose by .29.
Following Cutler and Katz (1991), more research was done during the 1990’s on consumption inequality. Blundell and Preston (1998) provide a good review of the literature looking at the structure of longitudinal income data, citing principally Moffitt and Gottschalk (1995), Buchinsky and Hunt (1996) and Gittleman and Joyce (1996). All three of these papers study permanent and transitory shocks to income and all find increases in the variance of both types of shocks. They also confirm the result that income inequality rose significantly during the 1980’s. Attanasio and Davis (1996) replicated the Cutler and Katz results using the PSID, showing that consumption and wage inequality have followed the same path over time. They also found that these results are confirmed when looking across education and birth year cohorts.
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A major addition to the literature was Slesnick (2001), who found that during the 1990’s consumption inequality had not risen at all, in sharp contrast to the path of income inequality that we have examined. Krueger and Perri (2003) confirmed this result and provided a model of endogenous credit markets which fit with a view of the 90’s in which transitory shocks to income rose, credit markets became more developed, and consumption was smoothed out over the life cycle.
Much of the literature and the popular press now takes the Slesnick and Krueger‐Perri results as stylized facts.15 However, Attanasio et al. (2006) show that we should not close the book on consumption inequality in the 1990’s just yet. They first provide evidence raising serious questions about the accuracy of the CEX during the 1990’s. They replicate results from Battistin (2003) showing that the CEX has actually measured declining consumption during the 1990’s, and McCarthy et al. (2002) show that the CEX matches the BEA’s data on personal consumption expenditures (PCE) badly in both the level and the trend. Garner et al. (2003) further analyze the causes for the gap between the CEX and PCE data.
The mismatch between the CEX and PCE is worrisome because, as Attanasio et al. note, Banks and Johnson (1998) found that the UK’s Family Expenditure Survey (FES) matches their national accounts data well. So in principal, there is no reason a survey cannot match national accounts data.16 Moreover, Garner et al. (2003) find that the consumption category that has the largest shortfall in comparison with the PCE data is the component most widely used for consumption studies—non‐durables. Services exhibit a similar shortfall.
The most important finding of Attansio et al. is that the two CEX surveys give very different results on inequality. When looking at non‐durables consumption, the interview survey, as found by Slesnick (2001) and Krueger and Perri (2003) shows no change in inequality during the 1990s.17 On the other hand, the diary survey shows consumption inequality rising faster than income inequality.
Attanasio et al. therefore use the findings of McCarthy et al. (2002) to determine which of the two surveys measures each consumption category best. After creating an index using a combination of data from each survey, they find, as we would expect, a change in inequality roughly equal to the average of the changes in each survey alone. Between 1990 and 2000 they found the standard deviation of log consumption rose by
15. See, e.g. the New York Times’ “Economic Scene” column: “inequality of consumption… does not show a significant upward trend.” (Cowen, 1/25/2007) “It is hard to see the effects of increasing income inequality in how people actually live.” (Postrel, 11/7/2002).
16. Notably, Attanasio et al. (2006) and Battistin (2003) use a technique similar to that of the FES to combine data from the interview and diary portions of the CEX.
17. Non‐durables consumption is a common metric in consumption studies, because it avoids the problems associated with treating durable goods as capital.
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5.4 percentage points, as opposed to the1.0 percentage point found by Krueger and Perri (2003). In the CPS, the standard deviation of log wages rose by about 4 percentage points over the same period. So Attanasio et al. actually find a slightly larger increase in consumption inequality than income inequality....
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....8.2 Explanations of the Facts
What hypotheses have been proposed to explain the high level and growth of inequality in the US as compared with other OECD countries? One approach taken by Mishel et. al. (2007, p. 357) and others, is to cite a difference in the socio‐political‐economic “system” that differentiates the US from other developed countries, so‐called “American exceptionalism” that dates back to the nineteenth century. In the view of Mishel et. al. (2007), the market‐driven “US Model” leads to more inequality, higher poverty rates, an “expensive‐yet‐underperforming” health care system, and jobs that require more work hours per year and far fewer paid days off. This view is consistent with a view that culture and social norms matter in explaining numerous dimensions of American exceptionalism, of which income inequality is only one.18
18. Others include higher US fertility and relatively low US rankings in league tables of life expectancy and math/science test scores.
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Yet as Hatjes (2007), the American exceptionalism approach misses the heterogeneity in the level and growth of inequality outside of the US This points to the possibility of numerous models utilizing different combinations of policies and institutions. For instance, the UK pursued de‐unionization in the 1980s as government policy along with privatization, helping to explain the relatively high UK ranking in measures of inequality and its change. In contrast the “consensus model” adopted in the Netherlands and to a lesser extent in Sweden, Ireland, and Germany obtained moderation in wage demands by labor in return in some cases for reduced income taxes and in other cases with the expectations that managers would avoid excess compensation increases for themselves. In Germany excessive executive compensation is mitigated by such institutional features as the two‐tier company board with strong labor representation, “legal co‐determination rights,” and a high tax rate on capital gains from stock options” (Ponssard, 2001).
There is a large body of research on the effects of specific institutions on inequality. One of the most interesting and influential papers in this literature is Alesina and Angeletos (2003), which argues that there may be feedback between current redistribution and preferences for future redistributive policy. When people live in a country with high levels of redistribution, they may believe that those who are rich have only become wealthy through unfair means. This reinforces the preference for redistribution. The reverse may work in situations with low redistribution. They then argue that the multiple equilibria generated by this model may explain the difference between institutions in the US and Europe. Alesina and Ferrara (2005) provide evidence supporting the Alesina‐Angeletos model.
The most recent work empirical work is by Chong and Gradstein (2007), who find that there is a joint relationship between inequality and general institutional quality. Using panel data on a large set of countries over 20 years, they find that inequality drives future institutional quality and that institutions drive future inequality. This relationship holds for a variety of measures of institutions, including indexes of civil liberties, political rights, government stability, corruption, and rule of law. Chong and Gradstein confirm the result that inequality can affect subsequent institutions, found by, e.g. Alesina and Angeletos (2005), Hoff and Stiglitz (2004) and Sonin (2003), and extend it to show that the causation also runs in the reverse direction.19
At the very top level of incomes plotted in Figure 6 for the top 0.1 percent, Piketty and Saez (2006) point out that the divergence between the English‐speaking countries and the others occurs in labor income, not capital income, as the “working rich” have replaced the “rentiers.” They propose three broad classes of explanations. First is SBTC favoring people at the top, but they object that technological changes have
19 Chong and Gradstein provide a concise review of the somewhat small literature on institutions and inequality.
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been similar everywhere while top income shares have not. A second class includes regulations, unions, and social norms, a view that they claim implies that “the surge in executive compensation actually represents valuable efficiency gains. The third class is that the U. S. managerial power explanation that we have associated above with Bebchuk and co‐authors, “the increased ability of executives to set their own pay and extract rents at the expense of shareholders.”
We favor a blend of all three explanations. The market is at work in the increase of market capitalization in the U. S. that spilled over into executive compensation through the greater use of stock options than in other countries. We have supported the managerial power view in our summary of Bebchuk’s work in part 6.4 above. And we have summarized several institutional differences previously in this section.
The greater use of stock options to reward executives in the US than in other countries itself reflects institutional differences. Pfanner (2003) reports that in Germany, only half of the companies in the DAX stock market index have any stock option program at all. He quotes a European compensation expert as saying that “There’s obviously a cultural difference” between the US and Europe regarding stock options. And more than cultural differences are at work. According to Buerke (2000), Belgium taxes stock options when they are granted, while France and the UK impose the tax when the stock is sold. Rules vary so much across European countries that a given gain “could be taxed two or three times on the same option” if a worker moves across national boundaries.
There is an easy explanation of greater equality at the top in Japan—until 1997 stock options were illegal, except at small start‐up companies. Japan loosened its restrictions and also introduced defined‐contribution pension plans in 2001. But there is a long lag in the adoption of stock options by major companies after decades of tradition in which executive pay is many multiples less relative to average worker pay than in the US (Bremner, 1999).
Overall we see no point in trying to find a monocausal explanation of the increase in CEO pay in the US relative to other developed countries. Price‐earnings ratios increased more than in the US than elsewhere, at least through 2000, causing stock market gains to spill over into CEO pay due to the widespread and growing use of stock options. To some extent the lesser use of stock options represents a catch‐up phenomenon, with European companies adopting US practices after a lag of one or two decades.
But there is still room for a complementary institutional explanation based on different policies and regulations. Different laws (e.g., the illegality of stock options in Japan before 1997), different customs (the role of labor on corporate boards in Germany), and different institutions (consensual bargaining in the Netherlands and other countries)
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all play a role in explaining why corporations outside the US have been constrained from offering to their top officers the types of pay packages typical in the US
9. Conclusion
This paper has provided a comprehensive survey of the increase in American inequality since 1970. Our discussion treats the evolution of labor’s share, the change in 90‐50‐10 ratios of incomes “at the bottom,” hypotheses about the evolution of the 90‐50‐10 ratios, nuances in the hypothesis of skill‐biased technical change (SBTC), the causes of increased inequality within the top 10, 1, 0.1, and 0.01 percent, the distinction between consumption and income inequality, and international differences in the evolution of inequality, especially at the top.
We argued in section 2 that there have been no interesting changes in labor’s share of national income over the last two decades, once a consistent cyclical chronology is applied. Over the full period 1950–2006 labor’s share has risen, not fallen, but once the labor portion of proprietor’s income is added in, labor’s share has been almost exactly flat for more than 50 years. Further, we point out that labor’s share in national income is not related to the current debate about increased inequality. If the labor income of the highest‐paid workers increased enough, we could observe simultaneously an increase in labor’s share and a decline in the real income of the median worker.
Section 3 documents the evolution since the late 1970s of the 90‐50‐10 ratios from CPS data for men, for women, and for both together. Our most important finding is that all discussions of income by percentile below the 90th must distinguish carefully between men and women. We were surprised to learn that the 90‐10 income ratio for women has increased by fully double the increase for men. While the 90‐50 ratio for both men and women increased slowly and steadily from 1979 to 2005, the 50‐10 ratio showed a sharp jump in 1979–86 that was twice as large for women as for men. Then the 50‐10 ratio remained on a high plateau for women about 20 percent above its 1979 value, while for men the 50‐10 ratio gradually slipped back to its 1979 value.
In examining causes for these changes, we focus on four elements, the decline of unionization, the increase of trade, the increase of immigration, and the decline in the real minimum wage. The sharp concentration of the increase in the 50‐10 ratio for both men and women on the 1979–86 interval provides strong circumstantial evidence for declining unionization as a cause for men and the declining real minimum wage as a cause for women. The timing of the subsequent post‐1986 evolution of the real minimum wage is also consistent with the stable 50‐10 ratio for women. Our examination of quantitative evidence in the academic literature found a small role for the decline in unionization, but only for men. There is little solid evidence for any effect of increased trade. The immigration literature is contentious, but we were convinced by a recent paper showing negligible impact of increased immigration on domestic workers
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but rather a big downward impact on foreign‐born workers who specialize in certain occupations.
Section 5 reviews the SBTC hypothesis and potential objections to it, particularly the slow wage increases of apparently skilled occupations like engineers and computer programmers, compared to the rapid income gains of managers. We endorse the effort by Autor and co‐authors to broaden the skill distinction to three or more categories; their polarization hypothesis makes a lot of sense in explaining the facts about rising inequality and also the occupations most prone to outsourcing. The key distinction is between interactive work at the top, whether lawyers in courtrooms or investment bankers making deals in person, and interactive work at the bottom, whether attendants in nursing homes or immigrant workers mowing the lawns of well‐off people, as contrasted with a broad middle where people do routine, easily duplicative jobs that are easily outsource, such as airline reservations agents or workers at technical call centers.
Section 6 finds ample evidence that SBTC is a major explanation of increased skewness of labor incomes at the top. We distinguish three different types of top incomes. Superstars include the top members of any occupation that provides disproportionate rewards to the first‐best as contrasted to the second‐best. The pure superstar phenomenon has at its core the magnification of audiences, the fact that a single performance can be witnessed by an audience of one person or ten million people, depending on the perceived attraction and talent. A second category of top incomes is market‐driven and includes law partnerships, investment bankers, and hedge fund managers, where there is no obvious analogy to audience magnification.
The most contentious question regards the third category, that is, the sources of enormous increases in the ratio of top executive compensation to that of average workers. The core distinction is that superstars and other market‐driven occupations have their incomes chosen by the market, whereas CEO compensation is chosen by their peers in a system that gives CEOs and their hand‐picked boards of directors, rather than the market, control over top incomes. This idea that managers have power over stockholders is nothing new; it goes back to Berle and Means (1932) and R. A. Gordon (1945) that managers control stockholders rather than vice versa. This idea that the principal‐agent control of stockholders should be reversed has been applied fruitfully by such authors as Bebchuk and Fried. We endorse their idea that managerial power lies behind some of the outsized gains in CEO pay, while also recognizing that stock options created an automatic spillover from the stock market gains of the 1990s directly into executive pay.
Has consumption inequality also risen as much as income inequality? If increased cross‐sectional income inequality is simply the result of larger transitory shocks to income, and if financial markets are sufficiently well developed (assuming, against substantial evidence to the contrary, that liquidity constraints are not a major
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impediment), then consumption and welfare inequality could have stayed constant. In reviewing the evidence, it is clear that consumption data in the US does not measure exactly what we might hope for. While authors have found parts of the CEX show consumption inequality to be flat, other more believable parts of the CEX show consumption inequality to rise at roughly the same rate as income inequality. This evidence is consistent with that of Kopczuk, Saez, and Song (2007) who find that there has been no increase in income mobility associated with the rise in income inequality.
Some of the most interesting remaining issues in the area of increased inequality involve cross‐country differences. A consensus shows that the post‐1970 upsurge in US inequality is much greater than in continental Europe or Japan, with the UK and Canada somewhere in between. We propose a mix of institutional and market‐driven explanations. Institutional differences between the US and Europe include the earlier and more pervasive introduction of stock options in the US, the tradition of corporatism and cooperative bargaining in Europe that creates constraints on management compensation excess, and the larger role of unions and a higher real minimum wage in some European countries. But the market matters also; gains in profits and price‐earnings ratios in the US stock market in the 1990s spilled over to executive compensation, interacting with the large increase in the share of executive compensation taking the form of stock options.
The study of income inequality is of fundamental importance to economics. The most obvious reason is that if economics is at all concerned with understanding the development of the economy over time, we must understand not only changes in means, but also changes in distributions. Second, changes in inequality can be indicative of changes in the structure of the economy that may favor one group or another, e.g. skill‐biased technical change. Third, variation in inequality can tell us how well our theories about risk sharing and consumption smoothing actually fit with peoples’ experiences. Fourth, we can learn about the effects of various institutions on the inequality by studying the experiences of different countries. This allows informed policy choices to be made in the future. What these policy choices should be, if any, are beyond the reach of this paper. We have attempted to link facts and hypotheses, and some of these links are clearly robust. These facts should be taken into account in policy discussions, and some, simply by being aired, may improve outcomes in the economy.
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Last edited by host; 02-16-2008 at 08:06 PM..
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