Institutions and Inequality
MIT's Frank Levy and Peter Temin argue that changes in "institutions" - labor unions, social norms and government policies - play a significant role in the widening of income inequality in the US in the last 30 years. [the paper is here - you should be able to download it if you are on-campus, and read the abstract anywhere]
They construct a statistic called the "bargaining power index (BPI)": median annual compensation divided by the annualized value of output per hour. This captures the share of total output paid to the median worker - if median wages rise proportionally to output, the BPI would stay constant. The BPI began to decline in the 70's, and the decline accelerated in the 1980's.
One common story is that there is growing gap between workers with and without college degrees, which may be due to skill-biased technological change. Temin and Levy show this hypothesis is inadequate, because the BPI has declined for college-educated workers (it has declined even faster for non-college educated, hence the gap between the two groups). Interestingly, there is a considerable gender gap: the decline for female high school graduates is much less severe than for males, and the BPI is flat for female college graduates.
The postwar period was characterized by strong labor unions, high top marginal tax rates and a high minimum wage which reflected social norms that placed a high value on equality. This changed for a number of reasons in the late 1970's and 1980's - among the factors Levy and Temin cite are the cuts in marginal tax rates in the 1980's, the Volcker fed's tight money policy and less union-friendly government policies (e.g. President Reagan fired striking air traffic controllers). The tight monetary policy combined with large budget deficits led to high real interest rates and a dollar apprieciation which devastated the manufcturing sector, which was heavily unionized.
Washington Post columnist Robert Samuelson wrote about the paper. Samuelson came to some strange conclusions, as Mark Thoma explains in his post on the topic.
Separately, Brad de Long has a podcast on the rise in income inequality.
They construct a statistic called the "bargaining power index (BPI)": median annual compensation divided by the annualized value of output per hour. This captures the share of total output paid to the median worker - if median wages rise proportionally to output, the BPI would stay constant. The BPI began to decline in the 70's, and the decline accelerated in the 1980's.
One common story is that there is growing gap between workers with and without college degrees, which may be due to skill-biased technological change. Temin and Levy show this hypothesis is inadequate, because the BPI has declined for college-educated workers (it has declined even faster for non-college educated, hence the gap between the two groups). Interestingly, there is a considerable gender gap: the decline for female high school graduates is much less severe than for males, and the BPI is flat for female college graduates.
The postwar period was characterized by strong labor unions, high top marginal tax rates and a high minimum wage which reflected social norms that placed a high value on equality. This changed for a number of reasons in the late 1970's and 1980's - among the factors Levy and Temin cite are the cuts in marginal tax rates in the 1980's, the Volcker fed's tight money policy and less union-friendly government policies (e.g. President Reagan fired striking air traffic controllers). The tight monetary policy combined with large budget deficits led to high real interest rates and a dollar apprieciation which devastated the manufcturing sector, which was heavily unionized.
Washington Post columnist Robert Samuelson wrote about the paper. Samuelson came to some strange conclusions, as Mark Thoma explains in his post on the topic.
Separately, Brad de Long has a podcast on the rise in income inequality.
posted by Bill C at 3:18 PM
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