Maurizio Franzini and Mario Planta

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1 Maurizio Franzini and Mario Planta

2 2 premises: 1. Inequality is a burning issue for economic, ethical and political reasons (Sen, Stiglitz, Piketty and many others ) 2. Inequality is today a more complex phenomenon than in the past (society distinctly divided in classes) 3 major objectives 1. Describe inequalities through different measures and indicators 2. Show differences in trends across time and space 3. Provide some general explanations and interpretations

3 The unconcerned: Inequality is a necessary condition for more market efficiency, more competitiveness and more growth who cares about inequality if we have more growth? Less inequality, less growth. The concerned but powerless: inequality depends on globalization + the growth of finance + multinational firms there is little we can do The concerned but unable to grasp complexity. The struggle against inequality is very difficult today It has multiple and overlapping dimensions: income, wealth, gender, ethnical, access to education, etc. role of finance and international production Segmentation of labor markets and the loss of class identities

4 1. What is relevant is «Disposable Income». Inequality can be affected by changes in economic policy (health, heritage etc.) D.I. depends on taxes, redistribution policies (welfare + pensions), non markets activities (public services as education + health). Inequalities must be measured after all these adjustments 2. Inequalities depend on the rise top incomes (finance + real estate wealth) or by a collapse of bottom incomes, or by the disappearance of a large middle class 3. Inequality is measured through changes in the DI of productive factors (trend toward a greater share going to capital at the expense of labor ). inequalities in disposable income vs inequalities in wealth (financial and real assets)

5 Today the labour share ranges: 55 to 63% vs 59 and 66% in 90s General decline started in the 1980s: rise of financial rents + profits share. The downward general trend inverted during the recession (2008-9) but a new fall after 2010 Falling labour share is not caused by shifts in the sectoral composition of the economy (from L intensive to K intensive) but of greater profits in financial industries and high-tech

6 Long term rise of the K share from 1975 to 2010 From 15 to 25% in 1975; to 25 to 30% in 2010 Most rapid increase in the 1980s particularly in F., G., UK Recessions provoke a decline in the capial share, and so it happened in Interpretations 1.strong bargaining power of capital in a context of great capital mobility (low taxes) 2. wages were unable to keep up with productivity increases (see next)

7 Wages are the largest source of income. Increase in inequalities depend on the decline of real wages Broadening gap between L productivity (gdp per worker) and real W; If both had moved at the same pace the functional distribution of income would not have changed Why did wages lag behind? Several explanations 1. Labour saving tech.; 2. International production; 3. Pressure from finance; 4. Weakening of unions; 5. Reduced role of national contracts.

8 These data show the difficulty that labour has had in maintaining its share of national income Between 2006 and 2010 Spain + US had the largest increase in the P90/P10 ratio (very rich-very poor) P90 is the income abowe which we find the richest 10%; P10 is the income below which we find the poorest 10%. In Spain, it went from 4.4 to 5.7 times; in the US it went from 9.6 to 10.6 times. 90% of this inequality depends on changes in jobs and wages (decline for the poor, increase for the rich). Main explanations rest in: the rise of finance, international production, changes in labour markets

9 Increasing share of income going to the already rich; Long run evolution of the top 10% income Differences between Europe and the US US: top 10% share in 2000 has surpassed the 1930s level and is almost at 50%. US: 1900 more equal than Eur. where rapid industrialization fuelled inequality Great crash + the war drastically reduced inequalities Values were stable in the 50s-70s and still declining in Europe where things began to change in the 80s. Rise of the very rich was not stopped by the crisis

10 Ultra rich (1%) account for 50% of the share of the very rich (10%). Very unequal distribution. Y share of ultra rich varies widely. Us and UK about 20% and increasing; F. and NLD 6-8% and stable; I and S. 6-8% increasing. From ultra rich to the incredibly rich (0,1%). They control 9% of total Y in the US and 6% in the Uk, more than 4 times than in the 1970s. Rise of oligarch capitalism

11 In the past incredible incomes came from rents and capital (Piketty and Atkinson) Today they come from capital and labour (about 50% with +20pts from the 70s). Extreme salaries to top-managers A dominant part of the income of the ultra-rich comes from stock-based pay (options and awards) whose value is driven by finance, insider knowledge and asymmetric information. There is no room for productivity-based pay What has happened to the other groups? (middle class)?

12 In the US the threshold identifying the top 10% is 2.4 times the median and increasing steadily; Similar trends occurred in UK, G. and NLD, although at lower levels Fr. has a very high ratio (compared to Europe) but stable I. and S. have the lowest gap and kept it stable in the last 30 years Data that compare the P90 with the P10 show similar trends: the very rich have increased their distance from the very poor and from the middle

13 From individual Y to family Y Gini coefficient ranges from 0 (perfectly equal distribution) to 1 (all Y in one household) We compare inequalities emerging from nominal Y (7), after taxes and transfers (8) and public services (9) Inequalities in advanced countries have increased everywhere with the exception of NLD Highest increase was , except G. UK, F, I, US rank as the most unequal. DK + S have a lower inequality

14 Significant redistributive impact of public action especially in Europe; Inequality is lower after taxes and transfers The same pattern of rising inequalities is evident after 1985 Even equal societies, like DK and S, have become less equal after 1995 In the last period I+NLD have experienced a decline in the Gini coefficient. The reasons are an increase in female participation rates due to gender measures while Italy s increase in 1995 was due to fiscal emergency measures

15 Difficult value of non market public services Education and wealth are the most important components (75% of total) Monetary services det. an increase of 40% in DK + S 76% rise for the poorest and 14% for the richest Fig. shows a general reduction of inequalities in all countries Higher fall for S, DK, F, UK Us is the most unequal Uk reaches Italy and Germany DK + S are the most equal with a Gini Index below 20%. Compared to 2000 all countries fare worse

16 Wage disparities have increased within different types of jobs and are a key determinant of inequality. Such a rise depends on the rise in non standard forms of employment Why? Growing inequality depends on the increasing skill premium for high skilled workers. Differences in human capital may explain wage inequality. Therefore, investment in education is recommended as the best policy for reducing inequality This conclusion is disputed: human capital variables explain 10-20% of the variance in wages Residual of inequality has different explanations (within group inequality).

17 Very low % explained by educational gaps (10% approx, only 3% in S.); Around 90% of the wage gap is linked to within group inequality (not related to education) Share of inequality due to educational has fallen since 1992 Other determinants are: reduced union power, precarious employment, segmented labour force, decentralised wage setting)

18 So far: annual flows of income. But what about the stock of wealth? Piketty s book. Wealth is made of real (houses) + financial (shares, bonds, deposits) assets - private debts. Recent surveys show that (mean values x quintile) bottom 20% have a new wealth of 0; 2 quintile: 30,000; 3 112,000; 4 235,000; 5 780,000. The last quintile own 70% of total wealth; the top 5% owns 38% Significant variations across countries: Italy and Spain are on top Real assets account for 85%, financial assets for 15%; Things worsened in the past decades: clear trend to > inequality between 1970 and 2010 in all countries. US, DK, S, NLD in 2011 have a 0,8 Gini Coefficient; 0,75 in Italy and the UK;

19 Shares of the wealthiest 10% and 1%; European aristocracy in 1900 had an almost total control of W; top 1% had almost 70% of total W The US started at lower figures The 2 WW brought about a steep fall in both countries Since 1940s US stabilised and Europe continued to fall until 1970s (welfare state and redistributive policies) Disparities rose after 70s US have returned to the 30s

20 W ineaquality is at very high levels and growing fast. In the US the concentration of W is striking, similar to that recorded in the 1930s In Europe absolute levels are lower but still at unprecedented levels since the 1960s Differences between the US and Eu are related to the W structure: Europe 2/3 of assets are real (houses) and 1/3 is financial (business and financial assets). Increase in house prices has reduced inequality US: proportions are reversed: financial capital accounts for 60% of assets. The rise of finance is a real engine of inequality Concentration of W raises problems in terms of its intergenerational transmission through inheritance.

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