Income Distribution, Globalization and Social Segmentation. Nathalie Chusseau, Lille 1 University Joël Hellier, Univ. of Lille 1 & Univ.

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1 Income Distribution, Globalization and Social Segmentation Nathalie Chusseau, Lille 1 University Joël Hellier, Univ. of Lille 1 & Univ. of Nantes 1

2 Outline Motivation & Objectives The model Social segmentation Globalization Simulations Discussion and conclusion 2

3 Motivation (1) 2 issues: 1. A growing number of poor & excluded in advanced countries (Wolff, 2010, and Antuofermo & Di Meglio, 2012, for Europe; DeNavas-Walt et al., 2013, for the US) 2. Are the rentiers back? Whereas the rentiers had almost disappeared after the great depression and the 2 nd World War, we have indications of their coming back (Piketty: inheritance and petits rentiers ) 3

4 Motivation (2) These developments have come with a deepening of the globalization dynamics characterised by: 1. A decrease in transportation and transaction cost at the international level 2. A growing size of the South in both international trade and the World production of manufacturing 3. Capital and technological transfers from the North to the South (driven by the multinational firms FDIs) 4. Almost perfect mobility of capital (both financial and physical) across advanced countries (the North) 4

5 Motivation (3) Both observed facts and economic literature tend to bind changes in income distribution to globalization: 1. An increase in the skill premium, i.e., the wage of skilled workers on the wage of unskilled workers (Chusseau et al., 2008; Chusseau & Dumont, 2013) 2. An increase in the share of capital and a decrease in the labour share in total income (Bentolina & Saint-Paul, 2003; CB0, 2011; Karabarbounis & Neiman, 2014) 3. A decrease in the corporate tax statutory rate = corporate tax competition (Zodrow & Mieszkowski, 1986; Wildasin, 1988 ) 5

6 Objectives (1) We bind the major characteristics of globalization to the changes in income distribution and tax structure to analyse the impact of globalization upon social segmentation in advanced countries by focusing on 2 social groups: the excluded and the rentiers 6

7 Objectives (2) We build a model in which (i) households differ in their skill and capital endowments, and (ii) there is a minimum consumption We generate 4 social groups (the excluded, the rentiers, the classical and the non-classical) from the labour supply (working time) behaviour of households We introduce globalization and make a distinction between North-North and North-South globalization We analyse the impact of globalization upon social segmentation, i.e., upon the size of each social group by focusing on the rentiers and the excluded 7

8 The model (1) A small open advanced economy: the factors endowments at the world level determine the factor prices This economy comprises M households and produces one good the price of which is 1. The production utilises simple labour L, skilled labour H and capital K with the Cobb-Douglas αl αh αk technology Y = AL H K, α + α + α = 1 L H K Each factor is paid at its marginal productivity: α α 1 α αl 1 αh αk wl = αl AL H K wh = αh AL H K αl αh αk 1 r = α AL H K K L H K 8

9 The model (2) Each household is endowed with one unit of simple labour L, a certain skill h i and a certain amount of capital k i heterogeneous households Skill = different characteristics that determine the individual s productivity: education, experience, effort/dynamism at work, membership of influential networks etc. Wage: wi = wl + wh hi ; Wi = wi ti with wl the wage per unit of simple labour, wh the wage per unit of skill and t i the working time Income from capital: ri = rki with r the real return to capital 9

10 The model (3) Each household is identified by the couple of endowments ( ) i, i and thus the couple i, for given w, w and r L h k ( w r ) H Each household possesses 1 unit of time she can allocate to working and/or leisure c : the minimum consumption level ensuring the minimum health necessary to live a normal social life and to participate in the labour market σ = relative deprivation σ 1 σ 1 σ 1 σ i maximises ui = b( ci c ) σ + (1 ti ) subject to the constraints c I and t 1 i i i i 10

11 The model (4) τ : corporate tax on the return to capital directly levied from the firm in the country of production These levies are utilised to provide households for the lump-sum transfer : r =τ rk 1 with k M k the average capital After tax total income : Working time: M = i= 1 I i i r G I = w + w h t + τ r + r ( ) (1 ) i L H i i i G σ t i G ( bw ) i (1 τ ) ri rg + c = max,0 w ( ) σ i + bwi 11

12 Social segmentation Social segmentation depends on the behaviour of households in terms of working time (labour supply) 12

13 Definition 1: We call: Social segmentation 1. Excluded the households who cannot attain the minimum consumption even when working during the whole of their disposable time; 2. Rentiers the households who are not excluded and choose not to work (their capital endowment is sufficiently high to discourage them working for the wage corresponding to their skill); 3. Classical the working households whose labour supply increases with their unit wage; 4. Non-classical the working households whose labour supply decreases with their unit wage. 13

14 Working time: { (, ),0} ; (, ) t = t h k t h k = i i i i i If Ii < c, ti = 1 Excluded If t h, k 0 Rentiers ( ) i i If t h, k 0,1 and t / w > 0 Classical ( ) [ ] ( ) [ ] i i i If t h, k 0,1 and t / w < 0 Non Classical i i i Social segmentation will be pictured in the plan hi, ki of individual endowments with skill and capital (individuals are distributed in the interval [ 0, h max ] in terms of human capital and [ ] in terms of capital) 0, k max ( ) bw (1 τ ) r r + c i i G σ ( bw ) We shall determine the frontiers between the different social groups within this plan σ w i + i ( ) 14

15 Proposition 1: Consider the economy with a corporate tax τ and a lump sum transfer to households rg =τ rk. Then, individuals are distributed between four groups: 1. the excluded are such that ki < E( hi ) 2. the non-classical are such that 3. the classical are such that < < 4. the rentiersare such that E h ( ) ( ) i k E( h ) k < C( h ) i i i C( h ) k R( h ) i i i i R( hi ) σ c rg wi c rg ( 1) b wi < ; C hi = ( 1 τ ) r (1 τ ) r b + 1 (1 τ ) r σ c r ( ) G + b wi R hi = ; wi = wl + wh h (1 τ ) r σ ( σ σ 1 σ w ) i i σ σ 15

16 Figure 1. Social spaces in the quadrant h, k ( ) i i 16

17 Figure 2. The four social spaces in the Space of household individuals are distributed in the interval in terms of human capital and [ 0, k ] max in terms of capital [ ] 0, h max 17

18 Globalization (1) North-North Globalization (NNG): perfect capital mobility between northern countries resulting in tax competition a reduction in the corporate tax rate modelled as follows: τ τ = τ / η and an increase in parameter initial value 1 η from the 18

19 Globalization (2) North-South Globalization (NSG): free trade between the N and the S with a in the size of the S throughout the globalization process + K and technological transfers from the N to the S (MNFs) + a high relative endowment of L in the S the adoption by the S of the northern technology, and a in the world endowment of L in relation to H and K: L/H and L/K multiplied by the same coefficient: λ >1 αl 1 wl λ αl α = wl ; w L H = λ wh ; r = λ r = an increase in the return to capital and skill at the expense of the payment for simple labour 19

20 The impact of globalization on incomes et taxes (1) North South Glob. decreases and increases w H and r North North Glob. lowers the corporate tax rate τ Hence: 1) NSG decreases the wages of households with low skill endowment and increases the wages of households with high skill endowment (a threshold in terms of h ) 2) Both NNG and NSG increase private rents τ r k 1 i ( ) w L 20

21 The impact of globalization on incomes et taxes (2) 3)North NorthGlobalization τ an increase in the private rents ( 1 τ ) r ki and a decrease in the public rents (redistribution) rg =τrk NNG augments total rents (private + redistribution) for households with a capital endowment above the average k and lessens total rents for households with a capital endowment below the average k 21

22 Results (1) From these impacts of NSG and NNG upon income distribution and redistribution, the model generates the following main results: 1) North South Glob. firstly expands the space of exclusion and subsequently reduces it (for very high levels of ) NSG w, w, r L H w H As non classical households at the frontier of the excluded space have low hi and low ki, then NSG impoverishes them and make them fall in exclusion. However with the decrease in wl and the increases in wh and r, a moment comes when these moves offset the decrease in w L for certain excluded and the number of excluded begins to decrease 22

23 Results (2) 2) NSG expands the space of rentiersand increase the number of rentiers at the outset of globalization The rentiers are households with a skill endowment which is not sufficient to incite them to work, given their high level of capital endowment. Here the impact of NSG can be seen as ambiguous: the increase in r and the decrease in w L augment the number of households choosing to be rentiers whereas the increase in w H incite them to work. We show that at the outset of glob. ( λ =1 ) the former effect dominates the latter 23

24 Results (3) 3) NNG increases both the number of rentiersand the number of excluded: - NNG increases the number of rentiers because it increases the rents (lower τ ) - NNG increases the number of excluded because the excluded are poorly endowed with capital (below the average k ) they receive more public rents (redistribution) than private rents, and the decrease in τ reduces the public rents (redistribution) 24

25 Results (4) 4)As regards the spaces of classical and nonclassical households, several opposite effects ambiguous Simulations from plausible values of the parameters to reveal the changes in the dimension of the spaces of classical and non-classical households 25

26 Simulations (1) A large range of simulations have been implemented from a series of parameters and factor payments to analyze the impact of NSG and NNG upon the size of each social space All these simulations show that NSG and NNG (i) enlarge the space of the rentiers and the space of excluded households, and (ii) shrink the space of classical households. The impact upon the space of non-classical households differs according to the type of globalization 26

27 Simulations (2) 1000 households distributed in the space 0, h 0, k with h = and {[ ] [ ]} max k max = max 10 max The distribution of skill and capital has been chosen to reproduce stylized facts in terms of crossed distribution of capital and skill between households in the US (Wolf, 2012) 27

28 Simulations (3) North-North Globalization: η moves from 1 to 1.5. NNG decreases the redistributive component of the corporate tax from 30% down to 20% τ North-South Globalization: λ moves from 1 to 1.2. NSG increases the return to skill: w H = 5.6% and diminishes the wage of simple (unskilled) labour: w L = 12% ; wh wl = 20% Combined NSG and NNG: ( λ, η) moves from (1;1) to (1.2;1.5) 28

29 Simulations (4) 29

30 NSG and the Social spaces dimensions 30

31 NNG and the Social spaces dimensions 31

32 Inverted-U impact of NSG on the spaces of rentiers and excluded 32

33 Results 1. Both NSG and NNG increase the number of excluded 2. Both NSG and NNG increase the number of rentiers 3. Both NSG and NNG lessen the number of classical households 4. Both NSG and NNG increase the number of non classical households 33

34 Impact of globalization (NNG+NSG) (1) Less redistribution due to the decline in the corporate tax (NNG) + less wages due to the decrease in wl (NSG) the poorest nonclassical become excluded because they have low skill and low capital endowments and the impact on them of a higher r and a higher wh because of NSG is limited = an increase in the space of exclusion 34

35 Impact of globalization (NNG+NSG) (2) The increase in the rents (due to higher r because of NSG and lower corporate tax because of NNG) is significantly higher for the classical with high capital endowment than the increase in the unit wage it reduces the incentive to work for the classical households with the highest capital endowment who become rentiers = an increase in the space of rentiers w 35

36 Impact of globalization (NNG+NSG) (3) The number of non-classical increases despite the fact that some of them become excluded: certain classical must become non-classical For the poorest classical, the negative impact on income of the decrease in redistribution (NNG) and in wl (NSG) is stronger than the positive impact of the increase in the after-tax capital income ( r) and in whtheir income diminishes and they become non-classical: they their working time when their unit wage lessens = an increase in the space of nonclassical 36

37 The working time Total WT per capita decreases but this covers 2 opposite changes : 1. the number of people who works decreases which lessens the WT per capita 2. the WT of people who work increases 37

38 Discussion and conclusion This model shows that globalization increases the social groups at each extremity of income distribution (rentiers & excluded) it shrinks the number of working households These results are consistent with the increase in the poverty rate experienced by a number of advanced countries in the last 30 years and they predict the coming back of the rentiers 38

39 Discussion and conclusion The number of working households decreases whereas the average working time of working households increases 39

40 Discussion and conclusion The new rentiers can come from households whose return to capital has become high enough to incite them to retire earlier than expected ( in their rents and in their skill: obsolescence, age-related decrease in dynamism etc.) 40

41 Discussion and conclusion Rentiers can be the children from rich families who prefer to live of their rents rather than having a job they consider unattractive (low efficiency) Rentiers can also be individuals who have accumulated a huge amount of capital because of very high pay at the beginning of their professional carrier due to both very high efficiency and very high working time. When their efficiency begins to decrease, they can choose to become rentiers 41