Global Inequality Lectureslides1

Agenda

•  Inequalityacrosscountriesswampsinequalitywithincountries.•  Inequalityofwhat:priceindices•  Inequalityofwhat:theRawlslo;ery.•  Therela=onshipbetweenwithin-countryinequalityandeconomicdevelopment.• Migra=onandmigrantlabormarkets.

Gratuitous CORE graph slide.

Country vs Class over =me (Milanovic 2005)

Our recent history.

How are Incomes Compared Across Countries

• Problem:Incomesindifferentcountriesarecomputedindifferentcurrencies.

•  Solu=on1:Computeincomesinacommoncurrencybyconver=ngusingtheexchangerate.

•  Example:SupposeImakeUS$40,000(USdollars).Howdoesthiscompareto€35,000(Euros)?OneEurosellsfor1.32dollars.So,theEuroincomeexpressedindollarsis:

1.32€/$*35,000=US$46,200

How are Incomes Compared Across Countries? • But…..Haveyoueverlivedinortraveledtoadevelopingcountry?•  Goodsaremuchcheaper(par=cularlynon-tradablegoodslikehousingandtransporta=on).•  So$40,000isworthmoreinRwandathanintheU.S.

•  So,wecancompute‘purchasingpowerparity’adjustedincomes.Wetakeabasketofgoodsthatwouldbeconsumedbyanaverageconsumerandaskhowmuchcheaperthatbasketwouldbeinanothercountry.Supposeabasketofgoods(e.g.houseandfood)wouldcostUS$100butonly14PesosinMexico.Thenwemul=plyincomesinMexicoby100/14.•  Surveydataradicallyundersamples“wherethemoneyis”.

Key point: the “data” do not speak alone.

• Whatbasketyoupickisnotaninnocentchoice.•  Someworldaverage(Geary-Khamis)orapar=cularcountry.•  Countryaverageorsomepar=cularpercen=leorpovertylines.•  Basketsarenotindependentofprice:Subs=tu=onandqualitybiases

• Comparablepricedataisscarce:ICPproject.•  Buthastomakelotsofassump=onsaboutwhatgoodsarecomparable.• Withincountrypricedifferencesveryimportant.

•  DeatonandHeston2005:China’sGDPfellby40%ahernewICPprices.

• AlwynYoung(2012)MortenJervens(2013)Africanna=onalincomeaccountsareinawfulshape.

Beyond GDP

• Manythingsma;erbesidesGDP•  Health,crime,environment,substan=vefreedoms,etc.

•  Lotsofworkonthis,mostfamouslySenoncapabili=es.•  Birthedthehumandevelopmentindex.

• Problem:adhoc,nodisciplinedwaytoreachadecisiononwhattoincludeinanindexandhowtoweightdifferentcomponents.

“Money isn’t everything, not having it is?”

• Anotherwaytorankcountriesintermsof“well-being”.•  Supposeyouhadtoliveinacountryforayear,butyouhadtolivethelifeofarandompersoninthatcountry.• Whatcountrywouldyoupick?• Howmuchwouldyoupaytoplaythatlo;eryintheUS?

Jones and Klenow 2014

•  Idea:UsetheRawlsianintui=ontoconstructa“theore=callyconsistent”measureofwell-being.•  Youdon’tknowwhoyouaregoingtobeincountryX(randomoverageandconsump=on),withflowu=lityfromlivingu,logu=lityoverconsump=onandlinearu=lityinleisure.• Accountforlifeexpectancyatbirth,e,consump=onofgoodsandservicesc,leisurel,• Assumelognormalconsump=onwithmeanc,andinequalitymeasuredbythevarianceoflogconsump=on𝜎2

With these assump=ons.

• 𝑉(𝑒,𝑐,𝑙, 𝜎↑2 )=E[u+log(C)+l]=e(u+log(c)+l- 𝜎↑2 /2)• Cancalculatethisforeverycountry•  USdatapindownu.(40yearoldinUSvaluesremaininglife6million)•  useformulafromlognormaldistribu=onofincometoinvertGinicoefficienttoget𝜎2

•  Thenask:howmuchextraconsump=onλdoyouneedtomakeyouindifferentbetweenlo;eryintheUSandcountryX(sayIndia)• 𝑉(𝑒↑𝑈𝑆 , 𝑐↑𝑈𝑆 , 𝑙↑𝑈𝑆 , 𝜎↑2𝑈𝑆↑  )=𝑉(𝑒↑𝐼𝑛𝑑𝑖𝑎 , 𝜆↑𝐼𝑛𝑑𝑖𝑎 𝑐↑𝐼𝑛𝑑𝑖𝑎 , 𝑙↑𝐼𝑛𝑑𝑖𝑎 , 𝜎↑2𝐼𝑛𝑑𝑖𝑎↑  )

Within-Country Inequality and Development

• KuznetsinvertedUhypothesis:•  Newsector(e.g.industry)emerges,ini=alinequalityincreasesasearlyadoptersmakealotofmoney,butthenassectoraltransi=oncompletesinequalityfalls.•  Poli=csanimportantcomponentofthereduc=onininequality.

Indeed very nice K-curve in cross-country data.

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Too many stories consistent with K-curves.

• Whydoesstructuralchangegoalongwithinequality,anyway?•  EastAsiancounterexamples?•  Focuson“poli=cal”vs“economic”storiesratherthanmalignandbenign.

•  Economicstories:Lewis-isianturningpointsasasectoraltransi=oncompletes.•  Equilibrium(eitherviatechchange,factoraccumula=on,ormarketforces)restoredbetweennewandoldsector,rentsgone.

• Poli=calstories:Polanyi’sdouble-movementreassertsitself.•  (Social)DemocracyandWar.•  EgalitarianPoli=calRevolu=onsatthepeakofKuznetscurves.

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A proposed synthesis…

•  GeneralizedTechnologicalShihHappens(steam,gasolineengines,masselectrifica=on,computers,internet).•  Ifbarrierstoadop=onlow,earlyadoptersmakeoutlikebandits,andusenewfoundwealthtotryto“pulluptheladder”,consolida=ngpoli=calandeconomicbarrierstoentry,loca=ngmonopoliesabroad,inheritance,etc.•  Some=mesthisworks,some=mesitdoesn’t.

•  Dependsonpoli=calins=tu=onsanddegreeofini=alincomeinequality.

• Whenitworks,getdelayed“poli=calKuznetsplateau”.•  Otherwiserapidandendogenous“economicKuznetspeak”

•  DifferentmechanismsimplydifferentK-cycleamplitudeandfrequency.

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Some evidence: never-democracies vs others and always-democracies vs others.

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Needinequalityforgrowth?Growthcausesinequality?

Inequality within and between Mostly bc of China

Migra=on and Development.

•  Ifyoubelievethedeterminantsofunderdevelopmentaredurablecountry-specificthingslike“ins=tu=ons”,perhapsbestroutetowardsallevia=ngglobalinequalityisinterna=onalmigra=on.• But:countriesthatadmitmostimpoverishedmigrantsarealsomostrepressivetowardsthosemigrants.•  Indenturedlaboroldformoffacilita=ngmigra=on.

Many people from poor countries want to come.

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Trade-off between internal and global inequality? (Weyl 2015)

One of the most dis=nc=ve things about the UAE •  89%ofthepopula=onismigrant.•  98%oftheprivateworkforce.• MigrantsareontheKafalasystem.• CommonintheGCCcountries(OriginsinBri=shPoli=calAuthority).•  Tiedtopar=cularemployerson3-yearcontracts.• Whencontractexpires,workerhastorenewwithpreviousemployerorleavecountryforatleast6months.•  RequireNo-Objec=oncer=ficate.

• RepealedinJan2011.

This system is a^acked a lot by ac=vists.

• HumanRightsWatch2014report:“IAlreadyBoughtYou”•  “UndertheUAE’svisasponsorshipsystem(knownaskafala),aforeignworker’sabilitytoenter,live,andworklegallyintheUAEdependsonasingleemployerwhoalsoservesastheworker’svisa“sponsor.”[33]Notonlydoesthissystemgiveemployersinordinatecontrolovertheworker,butUAElawshavefewsafeguardsformigrantworkerstoescapefromthisdependencyincaseswheretherela=onshipbecomesexploita=veorabusive.”

A more economics-ish cri=cism

•  Thisisaclearexampleofamonopsonis=clabormarket.•  Employershavemarketpowerovertheirworkerswhentheircontractsexpire.• Alsomeansworkersaretechnicallyexploited,inaneoclassicalsense.• Wagesarebelowmarginalproduct.

• Paper:Uses2011reformtoes=matedegreeofmonopsonypowerandrateofneoclassicalexploita=on(wage=50%ofmarginalproductpre-reform).

Monopsony in labor markets is pervasive.

•  Searchfric=ons,commu=ngcosts,ameni=esandsocialrela=onshipsonthejobmeanthatjobsareimperfectsubs=tutesforeachotherfromworkerPOV.•  Explainsmanyempiricalpuzzlesineconomics(e.g.gendergaps),mostprominentlylackofminimumwageeffectsonemployment(CardandKrueger1995,Dube,Lester,ReichJOLE2015)• Butdirectes=matesoftheeffectoflabormarketcompe==onarefew.• Kafalasystemreformallowsonesuches=mate,inaclearlyuncompe==veenvironment.

Iden=fica=on strategy

• Nicefeatureofreform:workershadtostaywiththeiroldemployersun=ltheircontract/visasexpired.• Contractsuniversally3yearsinlength.• Workerswhosecontractsexpiredbeforethereformhadtostaywiththeiremployersorgobacktosourcecountry.• Workerswhosecontractsexpiredaherthereformcouldfindanewemployer.•  Expecttoseejumpsinwagesaroundcontractsthatexpirepostreformrela=vetopre-reform.

Iden=fica=on strategy

~11% increase in earnings

Increase in probability of staying with firm.

Neoclassical Rates of Exploita=on

• AdaptLernercondi=onfromproductmarketsforfactormarkets.• MPL-w=w/elas=cityoflaborsupplyfacingthefirm• WefinddenominatorofRHS=10%fallinsepara=ons/10%earnings=1•  ImpliesMPL/w=2,or50%rateofexploita=on.•  Vedder1978:w=48%ofMPLforslaves.•  Isen2014:w=75-80%ofMPLforworkers(iden=fiedusingsuddendeaths).

• Canusethistoimpute“repara=onsbill”ac=vistsaredemandingforNYUAbu-Dhabi,Guggenheim,etc.•  Justdoubleactualwagebill.

A be^er class of models.

• Butmonopsonyisjustoneofageneralclassofmodelswithanoldanddis=nguishedvintage.•  Mid-20thcenturyIns=tu=onalistlaboreconomistshadaviewthatlaborwas“notacommoditylikeanyother”.•  1946AERdebate:LesterarguingwithMachlupandS=glerovertheminimumwage.•  Solow1979:Ifthewageenterstheshort-runproduc=onfunc=on..inalaboraugmen=ngway….thecostminimizingwageistheonethatminimizesthecostofaunitofeffortoreffec=velabor.

• Widevarietyofmodelswithtwocharacteris=cs:•  Wagesarealabor-augmen=nginput,sooutput=f(w,l)•  Employerssetwages,butdon’tnecessarilywantthelowestwagepossible.•  Monopsony,efficiencywages,adverseselec=on,firm-specifichumancapitalandintra-firmbargainingbetweenworkersandfirmscanallbeshowntoyieldmodelslikethis.