Inequality in Oregon House Interim Committee on Business and Labor Oregon Legislature September 28, 2015 Bruce Weber Department of Applied Economics Oregon State University
Overview How do we measure income inequality? How unequal is the distribution of income? In Oregon and neighboring states across Oregon counties How has income inequality changed in Oregon and the U.S.? What are the sources of income inequality? What are some effects of income inequality? What can be done about income inequality? November 13, 2015 2
Many ways of measuring income inequality Indices of overall inequality Gini ratio (the most common measure) These index measures are not intuitive and easily interpretable Ratio of incomes of high and low income households Ratio of income of household at 80 th percentile to income of household at 20 th percentile Ratio of average income of the top 20% (quintile) to average income of the bottom 20% Income shares of the richest households Income share for top 10% (or the top 1% or top 20%) November 13, 2015 3
How Unequal is Oregon s Income Distribution: Ratio of Mean Incomes of Top and Bottom 20% This measure provides a sense of the size of the gap between the rich and upper middle income households and the lowest income households. A ratio of 12, for example, means that the average income of the households in the top 20 percent of the income ranking have an average income that is 12 times the average income of households in the bottom 20 percent Nationally, the ratio for counties ranges from 6 and 48, with the median value of ~12. In Oregon, the ratio for counties ranges from 8 to 21, with the median county ratio of ~12 November 13, 2015 4
Oregon has more equal income distribution than the average state November 13, 2015 5
Benton County has greatest income inequality, Hood River County has least income inequality November 13, 2015 6
How has Oregon s inequality changed over time? The income shares of the top 10% is greater than at any period for which data are available. Rising since 1950s, very rapidly in 1990s Oregon inequality has been lower than U.S. but has same pattern 45 40 35 30 25 20 15 10 5 0 Income Share of Top 10% of Oregon Income Earners U.S. Oregon Source: Frank, Mark. 2014 A New State-Level Panel of Annual Inequality Measures Over the Period 1916-2005, Journal of Business Strategies 31(1): 7 241-263
Sources of increases in U.S. inequality since 1950s? Wage incomes of top 1 % of earners have increased dramatically while the capital income share has not greatly increased Wage incomes of upper middle income earners have grown slightly Wage incomes of middle and lower income earners have been flat or declined wages of skilled labor have increased relative to wages of unskilled labor decline in bargaining power of labor has led to lower wages real value of minimum wage has decreased 8
What are some causes of inequality? Explanations for increase in inequality have been contentious: Technological change: technology makes skilled labor more productive and increases returns to skilled labor relative to unskilled Globalization: capital moves to where wages are low and returns are high, thus putting downward pressure on wages Tax Policy: low marginal tax rates for highest income earners and preferential treatment of capital gains maintain inequality Minimum wage: real value of minimum wage has declined Decline in labor unions: bargaining power of labor has shrunk Changes in social norms about executive compensation: CEO salaries have increased greatly since 1960s as executives have sought and corporate boards approved large compensation packages November 13, 2015 9
What are some effects of inequality? (1) Inequality puts a drag on economic growth because Higher income groups do not spend as high a percent of their income on goods and services as lower income households Thus for any given level of income, overall demand is lower with higher inequality Higher income groups save more out of current income than lower income groups. If these savings were invested in productive assets, they would generate higher demand However, inequality-driven lack of demand for goods and services discourages investment in productive assets to produce these goods and services November 13, 2015 10
What are some effects of inequality? (2) High levels of income inequality may destabilize and erode the social fabric This concern has been raised by such diverse commentators as Thomas Piketty in his Capital in the Twenty-First Century Joseph Stiglitz in his Price of Inequality Nick Hanauer in his warning to his fellow plutocrats that the pitchforks are coming. The level of inequality that triggers social disruption is hard to predict, depends on local context 11
What are some effects of inequality? (3) High inequality has cumulative and self-reinforcing effects, generating even higher inequality Since top earners can save more out of their high wage incomes, top earners end up with a disproportionate share of capital assets Since capital assets are disproportionately owned by high income groups, and since the rate of return earned by the higher income groups is higher than that earned by low income groups, the assets of the rich grow faster than the assets of the poor in a cumulative and circular way. 12
What can be done about inequality? Many of the forces affecting inequality are beyond the control of state government State policy options are constrained by the potential movements of firms and households across state lines Economists disagree about the effects of specific policy changes Among the policies that have been advanced are: Progressive income/estate taxes and capital gains taxes Investments in education and technology Higher minimum wages November 13, 2015 13