What does Rising Inequality Really Mean
for Regional Economic Growth
Presented by Mark Partridge
Swank Professor in Rural Urban Policy
And Amanda Weinstein
The Ohio State University
May 18, 2012
Pacific Northwest Regional Economic Conference
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Seattle, Washington
Introduction
 The current challenge in recovering from the
Great Recession is job creation
 The 7 years before the Great Recession had the
slowest rate of U.S. job growth since the 1930s.
 In looking to the future for our next
challenge, the Great Recession may have
covered some other structural trends.
 American family incomes began to stagnate in
the mid 1970s and inequality began to rise.
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Introduction
 U.S. inequality equals the historic highs of the late 1920s.
 Some critics argue that rising income inequality is a major
cause of lagging U.S. incomes and job growth. They
contend that it is a major challenge facing our cities and
regions that reduce their ability to globally compete.
 Who are these people?
 MSNBC, Occupy Wall Street, Paul Krugman, Alan
Krueger, Head of CEA, Maybe President Obama
 Economists argue inequality is good unless it goes too far.
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Introduction
 Overview of what I am going to do:
1. Discuss trends in the U.S. and compare to
2.
3.
4.
5.
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international trends.
Describe why inequality is needed for a
dynamic market economy
Describe why inequality may be harmful
Describe empirical evidence
Discuss why inequality is increasing: narrowing
down on a possible solution.
Trends in Inequality
 What are the trends in U.S. inequality and
how does this compare to other countries.
 Until Piketty and Saez’s work with IRS tax return
data, economists did not know the concentration
of income inequality in the top 1% and above.
 Piketty and Saez are the topic of a New York Times article on
April 17, 2012.
http://www.nytimes.com/2012/04/17/business/for-economistssaez-and-piketty-the-buffett-rule-is-just-a-start.html?hp
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U.S. Household Gini Coefficient
0.480
0.470
0.460
0.450
0.440
0.430
0.420
0.410
0.400
0.390
1967
1969
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
0.380
Mid 1970s is when inequality takes off
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Income Growth in the U.S. by Percentile:
1973=100
500
400
300
200
100
0 TO 90
90-100
99-100
99.9-100
2007
2005
2003
2001
1999
1997
1995
1993
1991
1989
1987
1985
1983
1981
1979
1977
Slight decline in bottom 90%
1975
0
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Massive rise at very top
1973
Income Level in 2008 Dollars
(1973=100)
600
International Gini Comparison
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Trends in Inequality
 Did the Great Recession end rising inequality?
 Is this yesterday’s news? FRB Cleveland
 Ezra Klein and Mike Konczal report updated data from
P&S for 2010—the first full year of economic recovery.
 See Klein’s Washington Post blog.
 93% of the income gains in 2010 went to the top 1%.
 How does this break down?
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Distribution of Gains in 2010 Income
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Source: Ezra Klein, Washington Post blog. See notes for web address
1928 Peak
2007 Peak
Mid 1970s
Source ©NY Times,
April 16, 2012.
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1928 Peak 2007 Peak
Mid 1970s
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2000 Gini Coefficient Comparison
 The state with the most equally distributed income
(Vermont) has higher inequality than the most unequal EU
member (Portugal)
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Trends in Inequality
 Out of 135 countries, the U.S. now ranks behind
97 in terms of equality (CIAWorld Factbook).
 The U.S. is now more unequal than countries
such as Nicaragua, Argentina, and Venezuela (CIA
World Fact book). Places that inequality is typically
viewed as a major obstacle to growth and
development.
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Income inequality over generations
and the life cycle
 Cross-sectional inequality is a much smaller
problem if there is income mobility over the life
cycle.
 Perhaps a family has a bad year, but its income
steadily rises over time.
 This manifests itself with high mobility between
poor and rich groups—the American Dream and
rags to riches.
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Income inequality over generations and
the life cycle
 Ferrie (2005) finds high mobility in the 19th century
through 1920, but this notably declined after 1973.
 Gottschalk and Moffit (2009) and Kopczuk et al. (2010)
find mobility has either declined or remained stable.
 With stagnate mobility, more Americans are relatively
falling behind.
 Before 1973, U.S. growth was generally indicative of increasing
wealth for all Americans (Goldin and Katz, 2007).
 After 1973, Americans grew apart.
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Income inequality over generations and the
life cycle
 What about other countries?
 U.S. income mobility is lower than most
European countries (OECD, 2010).
 Sweden is more mobile with far less inequality
(Björkland and Jäntti 1997). Sweden has experienced
consistently lower unemployment rates than the U.S.
through the last decade (Eurostat, 2011).
 Has rising inequality affected U.S. economic
performance?
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Inequality is Good for Growth!
 Equity/Efficiency Tradeoff we teach 1st year students
(Okun, 1975).
 Inequality creates incentives for acquiring skills &
education, investing in capital, and promoting
entrepreneurship & innovation.
 Inequality means that you are rewarded handsomely for being
the best and “punished” for not being very good (Welch, 1999)
 Inequality promoted American cities as global cities in
particular fields.
 If you succeeded in technology, you went to places like Silicon
Valley and Seattle.
 If you succeeded in finance, you went to New York.
 If you succeeded in entertainment, you went to Los Angles.
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Inequality is Good for Growth!
 What does the empirical evidence say?
 Using data up through 2000, past studies suggest U.S.
states with more inequality had greater income growth.
 Partridge (1997, 2005); Frank (2009)
 Metro areas (especially large ones) have a positive
inequality-growth link (Fallah and Partridge 2007).
 Fallah and Partridge contend that more growth occurs where
there are economic incentives for innovation and new market
ideas—i.e. inequality (incentives) enhances agglomeration
economies in promoting growth.
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Inequality is Good for Growth!
 Despite incentives, there are still tradeoffs.
 The jobs vs. equity institutions literature of the late 1990s
early 2000s is a good example that resonates today.
 The great strength of the U.S. economy in the latter 25
years of the 20th Century was job creation!
 Conventional Wisdom:
 Flexible U.S. labor markets allow less skilled workers to obtain
work (their wages could fall), but income inequality is higher.
 “Inflexible” European labor markets experience less inequality
but have very little job creation and high unemployment.
 Nickell (1997); Blanchard & Wolfers (2000); Bertola, Blau & Kahn (2001);
 At the U.S. State Level Partridge (2006)
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Inequality is Good for Growth!
 The U.S. should have been better placed for the Great
Recession (for example) because flexible wages
would allow wages to fall and allow the U.S. to have
fewer job losses than Europe.
 What is the U.S. record post-2000?
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U.S. Employment to Population Ratio
0.75
0.7
0.65
0.6
0.55
0.5
0.45
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
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U.S.
Male
Female
Annual Employment Change
% Change Compared with Previous Year
3.0
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2.0
1.0
0.0
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
-1.0
-2.0
-3.0
-4.0
EU-27
United States
Is Inequality Harmful for Growth?
 Has inequality crossed a tipping point?
 U.S. inequality is reaching levels found in plutocracies.
 Welch (1999) even notes that inequality is problematic
when people view the system as rigged.
 If inequality rises beyond a threshold, then fewer people
are receiving a tangible share of the rewards from greater
skills, innovation, & entrepreneurship, reducing
incentives to work hard
 Looks more like a lottery that is not worth buying a ticket
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Is Inequality Harmful for Growth?
 How does inequality reduce growth?
 Inequality is linked to more poverty, crime, poor health
outcomes—perhaps less social cohesion and equity
concerns (Noah, 2010). So there are tradeoffs.
 Greater inequality may cause social instability and political
turmoil (Perotti, 1996; Persson and Tabellini, 1994).
 Ironically, economists have not focused on whether
inequality allows wealthy groups to capture a
disproportionate share of political power—say the
Occupy Wall Street hypothesis.
 Crony Capitalism reduces growth.
 Decoupling productivity from compensation.
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Is Inequality Harmful for Growth?
 Galor and Zeira (1993) and Aghion et al. (1999) show that as
inequality rises, increasing numbers of low-income households
face credit constraints, limiting access to capital to finance
education, entrepreneurship, capital investment, & innovation.
 The relative supply growth of U.S. college educated workers has
decreased since 1980 despite greater average returns to
education (Goldin and Katz, 2007).
 OECD (2011) reports that the U.S. high school graduation rate
is only 76.4% versus the OECD average of 82.2%. U.S. also
lags in educational quality. Could this be incentive based?
 OECD (2011) finds that the U.S. 25-34 year olds have about
middling ranges of college educated workers compared to other
advanced economies—i.e., a major shift from a generation ago.
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Is Inequality Harmful for Growth?
 Middle class consensus: A form of social capital for
governance that promotes stability and facilitates a good
business climate (Easterly, 2001).
 Partridge (1997, 2005) found that a greater middle-class
income share (Q3) is associated with greater income
growth—Middle Class consensus.
 But Q3 is falling—suggesting less future growth.
 Diminished expectations and credit constraints may then
offset the positive effects of inequality.
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2009 Metro Inequality: A tale of two inequalities
 The top 10 MSAs in terms of income inequality (for MSAs
larger than 300,000). Shows varying positive and negative
effects of inequality
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Empirical Analysis
 The positive growth/inequality relationship that
predominated prior to 2000 could have
reversed—i.e., it is past the tipping point.
 The results show that inequality is inversely associated with job
growth (at the 10% level), though there is no statistically
significant association with the employment-population ratio.
 These findings run counter to prevailing conventional wisdom that
flexible labor markets (more inequality) improve labor market
performance. It also runs counter to the findings comparing
Europe to the U.S. pre-2000 and for U.S. states between 19602000 (Partridge, 2006). These results need to be confirmed with
further analysis, but they suggest that patterns shifted post-2000.
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MSA Change in Employment and
Employment-Population Rate
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Change in Metropolitan Median Income
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Consequences of Inequality
 As inequality increases, the U.S. makes remarkably little progress in
reducing poverty or in providing basic necessities.
 Poverty rates have risen from 11.1% in 1973 to 15.1% in 2010 (U.S.
Census Bureau, 2011). This is the highest since 1983.
 22% of children lived in poverty in 2010.
 In 2010, about 1/6th of the population had no health insurance (U.S.
Census Bureau, 2011).
 States and countries with more inequality have greater health problems
including mental illness, drug and alcohol abuse, obesity, and shorter
life expectancy (Wilkinson and Pickett 2009).
 From 1980-2000, life expectancy for the lowest 10% rose at just half the
rate of the top 10% (Gordon and Dew-Becker2008; Kawachi and Kennedy,
1997).
 None of these patterns are consistent with greater economic
productivity or social cohesion.
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What are the possible causes of higher inequality?
 Skill-biased technological change; immigration; declining unionization;




financial deregulation, tax policy that is favorable to the wealthy; falling
real value of the minimum wage; globalization (tournament/star power á la
Lazear and Rosen, 1981; Rosen, 1981), off-shore sourcing, public
education, etc.
What about SBTC? It is non-political and a world-wide pattern.
Rising inequality is not universal. The entire developed world has
experienced SBTC and globalization, which should have common
international effects.
Atkinson et al. (2011) show income shares of the top percentile have
remained stable or decreased in Sweden and most EU countries.
The timing in wage inequality growth is difficult to explain using SBTC.
Technical change began well before 1973 when inequality began to
increase. (Card and DiNardo 2002; Lemieux 2006; Goldin and Katz 2007)
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2009 Occupation Distribution
Top 1% and Bottom 99%
0.35
Employment Share
0.30
0.25
0.20
0.15
0.10
0.05
0.00
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0-99
99-100
What’s left to explain rising inequality?
 Other causes are ultimately political decisions (Hacker
and Pierson, 2010; Noah, 2010; Atkinson et al., 2011).
 How in a democracy do the outcomes of the political process not
represent the interests of the majority?
 U.S. campaigns are drawn out. Not short parliamentary elections and less
attachment to political party. Each campaign is important.
 Together, this produces a race for political contributions to fund lengthy
expensive “modern” campaigns that require TV ads to be competitive.
 Kawachi and Kennedy (1997) find the richest 3% account for 35% of private
campaign donations for president. This does not fully account for their
influence as corporations, CEOs and company shareholders contributions.
 Today there are very few limitations on contributions or spending on
elections by special interests or Super PACs.
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What’s left to explain rising inequality?
 It is unsurprising that public policy outcomes
strongly reflect the preferences of the wealthy
(Gilens, 2005).
 Political concentration of power in the wealthy
and corporations appear to be the common
element behind rising inequality.
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What should the U.S. do?
 The U.S. needs major political institutional change
before it will make the policies to address rising
income inequality. These need to equalize the political power
and limit crony capitalism.
 Other “economic” changes in an age of “austerity”—
 Better education—especially for low income groups and early
childhood education. (Haskins and Sawhill, 2009).
 Reform U.S. tax structure to balance its burden across
economic groups.
 Reform the way U.S. corporate executives are paid.
 While other structural changes would be “nice,” they will not
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matter or happen until political reform is undertaken.
Conclusion
 Inequality provides incentives to promote skill acquisition,
enhance innovation, and entrepreneurship & risk taking.
 Inequality is a “negative” when social cohesion breaks
down and people no longer believe hard work and good
ideas are rewarded.
 As growing U.S. inequality has shifted from the broad
upper income groups (say top 25%) to just the top 1%, its
positive effects in promoting growth and facilitating global
U.S. cities has waned.
 Current trends in inequality are unsustainable and it will
increasingly cause reduced growth and hurt the
development of American cities.
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Conclusion
 We conclude that only political institutional
change will make a tangible difference.
 As shown by reforms in the Progressive Era and
the New Deal, electoral reforms are possible in
the face of very high inequality.
 The U.S. has shown great resilience when
political reforms are necessary to support the
middle-class and our democratic system.
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THANK YOU!
Email: partridge.27@osu.edu
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