Poverty and Income Distribution SECOND EDITION EDWARD N. WOLFF WILEY-BLACKWELL A John Wiley & Sons, Ltd., Publication
Contents Preface * xiv Chapter 1 Introduction: Issues and Scope of Book l 1.1 Recent trends in living standards 1 1.1.1 Income and earnings stagnate while poverty remains unchanged 1 1.1.2 Inequality rises sharply 4 1.1.3 Middle-class debt explodes 5 1.1.4 What has happened to tax rates? 6 1.1.5 Rising profits is the key 7 1.1.6 Yet schooling has continued to rise 8 1.1.7 Some conclusions 11 1.2 Causes of rising inequality 12 1.2.1 Skill-biased technology change 12 1.2.2 The shift to services 13 1.2.3 Declining unionization 13 1.2.4 Globalization 13 1.2.5 Downsizing and outsourcing 13 1.2.6 Public policy changes 14 1.3 General description of the textbook 14 Notes 17 Part I Inequality, Poverty, and Mobility: Measurement and Trends 19 Chapter 2 Income, Earnings, and the Standard of Living 21 2.1 Introduction 21 2.2 The composition of personal income in the United States 22 2.3 The standard of living 24 2.3.1 Real versus nominal 25 2.3.2 Trends in living standards in the United States 26 2.4 Factor shares 29 2.4.1 Historical studies on factor shares* 31
vi Contents 2.5 International comparisons of living standards 32 2.5.1 Per capita income 32 2.5.2 The Human Development Index 33 2.6 Household production and well-being 35 2.6.1 Defining household work 37 2.6.2 The market cost approach 37 2.6.3 The opportunity cost approach 38 2.6.4 Empirical work on household production 38 2.7 Summary 39 2.8 References, bibliography, and data sources 40 2.9 Discussion questions and problem set 42 Appendix 2.1 An introduction to the National Income and Product Accounts* 44 A2.1.1 The relation to the national accounts 46 A2.1.2 The sources of personal income 47 A2.1.3 The derivation of factor shares 48 A2.1.4 Miscellaneous issues in national accounting 49 A2.1.4.1 Treatment of international trade 49 A2.1.4.2 National income at factor costs * 51 A2.1.4.3 The treatment of capital gains 51 Notes 52 Chapter 3 Income Inequality: Its Measurement, Historical Trends, and International Comparisons 55 3.1 Introduction 55 3.2 A review of basic statistics 55 3.2.1 Mean, variance, and standard deviation 56 3.2.2 Distributions 56 3.2.3 Percentile ranking 59 3.3 Inequality measures 60 3.3.1 Concentration measures 61 3.3.2 Coefficient of variation 61 3.3.3 The Lorenz curve. 63 3.3.4 Gini coefficient 64 3.3.5 Log variance of income* 66 3.3.6 The Theil entropy index* 67 3.3.7 Atkinson's measure* 69 3.3.8 Lorenz dominance* 70 3.4 Time trends in income inequality in the United States 70 3.5 International comparisons of inequality 74 3.5.1 Inequality comparisons among high-income countries 74 3.5.2 The Kuznets curve 80 3.5.3 The world distribution of income* 84 3.6 Summary 85 3.7 References and bibliography 86 3.8 Discussion questions and problem set 90 Notes 91
Contents vii Chapter 4 Poverty: Definitions and Historical Trends 93 4.1 Introduction 93 4.2 The measurement of poverty 93 4.2.1 The official U.S. poverty standard, 94 4.2.2 Absolute versus relative poverty thresholds 95 4.2.3 Subjective poverty lines 96 4.2.4 Other concepts of poverty 99 4.3 Measurement of poverty incidence 99 4.3.1 The poverty rate and the poverty gap ratio 99 4.3.2 Composite measures of poverty* 100 4.4 Poverty trends in the United States 101 4.4.1 Composition of the poor 103 4.5 Other dimensions of poverty 107 4.5.1 Poverty spells and the permanence of poverty 107 4.5.2 The underclass 108 4.5.3 International comparisons of poverty rates 109 4.6 Other issues in the measurement of poverty -112 4.6.1 Equivalence scales 113 4.6.2 Choice of a price index 114 4.6.3 The treatment of taxes 115 4.6.4 The treatment of noncash government benefits 116 4.6.5 The role of household wealth 119 4.6.6 r Consumption-based measures of poverty 120 4.6.7 The accounting period 121 4.6.8 Other issues 122 4.7 Summary 123 4.8 References and bibliography 125 4.9 Discussion questions and problem set 130 Notes 132 Chapter 5 Household Wealth 134 5.1 Introduction 134 5.2 What is household wealth? 135 5.2.1 Wealth and well-being 135 5.2.2 Marketable wealth - 136 5.2.3 Other definitions of household wealth 140 5.3 Historical time-series data on household wealth and its composition 141 5.3.1 Trends in average wealth 142 5.3.2 Changes in wealth composition 143 5.3.3 Homeownership rates 146 5.4 Wealth inequality in the United States 147 5.4.1 Methods used to estimate wealth inequality 148 5.4.2 Long-term trends in household wealth inequality in the United States 150 5.4.3 Changes in wealth inequality, 1962-2004 154 5.4.4 The Forbes 400 166
viii Contents 5.5 International comparisons of household wealth distribution 167 5.5.1 Comparisons of long-term time trends 167 5.5.2 Comparisons of recent trends 168 5.6 Summary 171 5.7 References and bibliography 172 5.8 Discussion questions and problem set 176 Notes 177 Chapter 6 Economic Mobility 180 6.1 Introduction 180 6.2 Mobility measures 180 6.2.1 Measuring intergenerational mobility 180 6.2.2 The Shorrocks measure and other measures of lifetime mobility 181 6.3 Mobility over the time 184 6.3.1 Income mobility 184 6.3.2 Earnings mobility 188 6.3.3 Other dimensions of mobility 189 6.4 Intergenerational mobility 189 6.4.1 Results for the United States 190 6.4.2 Mechanisms of transmission 194 6.4.3 International comparisons 195 6.5 Wealth mobility 197 6.6 Summary 198 6.7 References and bibliography 200 Notes 204 Part II Explanations of Inequality and Poverty 205 Chapter 7 The Labor Force, Employment, and Unemployment 207 7.1 Introduction 207 7.2 Basic concepts of the labor force, employment, and unemployment 208 7.2.1 Employment 208 7.2.2 Unemployment 209 7.2.3 The labor force 209 7.2.4 Estimating employment statistics 209 7.3 Labor force participation rates 210 7.3.1 LFPR by gender, race, and age 211 7.3.2 Two-earner households 216 7.3.3 Educational attainment of the labor force 217 7.4 The industrial and occupational composition of employment 219 7.5 Measures of unemployment and historical trends 221 7.6 The incidence of unemployment 226 7.6.1 Jobless rates by demographic characteristic 226 7.6.2 Unemployment by industry, occupation, and region 229 7.7 Types of unemployment 232 7.7.1 Frictional unemployment 232 7.7.2 Seasonal unemployment 233
Contents ix 7.7.3 Structural unemployment 234 7.7.4 Deficient demand (Keynesian) unemployment 235 7.7.5 The debate over the causes of unemployment 236 7.8 Summary 238 7.9 References and bibliography 240 7.10 Discussion questions 243 Notes 243 Chapter 8 The Role of Education and Skills 246 8.1 Introduction 246 8.2 The human capital model 247 8.2.1 The rate of return to human capital 248 8.2.2 On-the-job training 251 8.2.3 Additional implications of the human capital model 254 8.3 Earnings, schooling, and experience 258 8.3.1 Rates of return to schooling 260 8.3.2 Lifetime earnings 267 8.4 The schooling-earnings function* 269 8.4.1 The extended earnings function* 272 8.5 Ability and earnings 273 8.5.1 Estimates of the ability effect* 275 8.5.2 The nature vs. nurture controversy 276 8.6 Productivity and earnings 279 8.6.1 Experience, productivity, and earnings 279 8.6.2 Other interpretations of the relation between schooling and earnings 281 8.7 Earnings inequality and human capital* 286 8.8 Summary and concluding remarks 288 8.9 References and bibliography 291 8.10 Discussion questions and problem set 296 Notes 297 Chapter 9 Unions, Dual Labor Markets, and Structural Models of Earnings 301 9.1 Introduction 301 9.2 The-role of labor unions 303 9.2.1 A brief history of trade unionism in the United States 303 9.2.2 Trends in union membership 305 9.2.3 The economic role of labor unions 310 9.2.4 The effect of unions on wages: The evidence 315 9.3 Segmented labor markets 319 9.3.1 Internal labor markets 319 9.3.2 The dual labor market model 322 9.3.3 An evaluation of labor market segmentation 325 9.4 Industrial composition and earnings inequality* 326 9.4.1 State and regional differences in inequality 326 9.4.2 Regional differences in income levels 328 9.4.3 Industrial composition and rising earnings inequality of the 1980s 329
x Contents 9.5 Industry wage differentials* 331 9.5.1 Explanations of inter-industry wage differences 331 9.5.2 Recent trends and efficiency wage theory 336 9.6 Occupational wage differentials 339 9.6.1 Historical studies 339 9.6.2 Trends in the United States in the twentieth century 340 9.6.3 Rising skewness at the top 342 9.7 Summary and concluding remarks 343 9.8 References and bibliography 346 9.9 Discussion questions 352 Notes 353 Chapter 10 The Role of Savings and Intergenerational Transfers in Explaining Wealth Inequality 355 10.1 Introduction 355 10.2 The basic lifecycle model 356 10.2.1 Age-wealth profiles 357 10.2.2 Longitudinal analyses* 359 10.2.3 Simulation and regression analysis* 361 10.3 Extensions of the lifecycle model 363 10.3.1 The role of uncertainty about death and lifetime annuities 364 10.3.2 The role of pension and social security wealth 364 10.3.3 The bequest motive 366 10.3.4 Precautionary savings and liquidity constraints 371 10.4 Intergenerational equity 372 10.4.1 Social security annuity and transfer wealth 372 10.4.2 Private intergenerational transfers 375 10.4.3 Generational accounting 376 10.5 Summary and overall assessment 377 10.6 References and bibliography 379 10.7 Discussion questions 385 Notes 385 Chapter 11 Sources of Rising Earnings Inequality* 386 11.1 Introduction 386 11.2 Skill-biased technological change 387 11.3 The IT "revolution" 389 11.4 Growing international trade and immigration 390 11.5 The shift to services 393 11.6 Institutional factors 394 11.7 Outsourcing and downsizing 395 11.8 Changes in the distribution of schooling and ability 395 11.9 Time trends in key explanatory variables 396 11.10 Econometric results 405 11.11 Summary and concluding remarks 408 11.12 References and bibliography 410 Appendix 11.1 Data sources and methods 416 Notes 417
Contents xi Part III Discrimination 419 Chapter 12 Discrimination: Meaning, Measurement, and Theory 421 12.1 Introduction 421 12.2 The meaning of discrimination 423 12.2.1 The Blinder-Oaxaca decomposition* 424 12.2.2 Pre-labor market discrimination 425 12.3 Theories of discrimination: an overview 429 12.4 Taste for discrimination 430 12.5 Statistical discrimination 434 12.6 The racial stigma model 436 12.7 The Marxian model 437 12.8 Overcrowding model of occupational segregation 438 12.9 Summary 440 12.10 References and bibliography 441 Notes 443 Chapter 13 Racial Discrimination: Progress and Reversal for Black Americans 445 13.1 Introduction 445 13.2 Trends and status report on racial inequality 446 13.2.1 The earnings gap: have African American workers made gains on whites? 446 13.2.2 Labor force participation and unemployment 449 13.2.3, Family income, poverty, and wealth 453 13.2.4 Hispanics 457 13.3 Migration from the South 460 13.4 Progress in educational attainment 461 13.4.1 The role of educational gains on the earnings gap* 463 13.4.2 Quality of schooling* 464 13.4.3 Returns to schooling for blacks and whites 465 13.4.4 Hispanic Americans 468 13.5 Changes in family structure among black Americans 469 13.6 Public policy and discrimination 471 13.6.1 Public policy programs 472 13.6.2 The effectiveness of the anti-discrimination programs 474 13.7 Summary and conclusion 478 13.8 References and bibliography 480 13.9 Discussion questions and problem set 485 Notes 486 Chapter 14 The Gender-Wage Gap and Occupational Segregation 488 14.1 Introduction, 488 14.2 The wage gap and labor force participation trends 488 14.2.1 Time trends 490 14.2.2 Labor force participation patterns 491 14.2.3 Explanations of the rising LFPR of women* 492 14.3 Explanations of the wage gap 494 14.3.1 Human capital differences 494 14.3.2 Occupational segregation 503
xii Contents 14.4 The role of public policy 509 14.4.1 The effectiveness of the anti-discrimination programs 509 14.4.2 Comparable worth 511 14.5 Other issues* 513 14.5.1 Effects of wives' earnings on family income inequality 513 14.5.2 The feminization of poverty 514 14.5.3 International comparisons 516 14.6 Summary 517 14.7 References and bibliography -518 14.8 Discussion questions and problem set 525 Notes 525 Part IV The Role of Public Policy on Poverty and Inequality 527 Chapter 15 Public Policy and Poverty Alleviation 529 15.1 Introduction 529 15.2 A brief history of income maintenance programs. 529 15.2.1 Early developments 530 15.2.2 The New Deal 530 15.2.3 Post-war developments 532 15.2.4 Housing assistance 533 15.2.5 Public expenditures on major federal programs 534 15.3 Unemployment insurance (UI) 536 15.3.1 A brief description of the UI system 536 15.3.2 Time trends in UI benefits 538 15.3.3 Incentive effects of the UI system 540 15.4 The social security system 541 15.4.1 Determination of the social security benefit 542 15.4.2 Incentive effects on labor supply 546 15.5 The welfare system 546 15.5.1 The workings of AFDC and TANF 547 15.5.2 Incentive effects of the welfare system 550 15.6 Work programs 554 15.6.1 Effectiveness of the work programs 555 15.7 The minimum wage 556 15.8 Conclusion and overall assessment of government programs 559 15.8.1 Effects on poverty 560 15.8.2 Proposals for reform 562 15.9 References and bibliography 564 15.10 Discussion questions and problem set 570 Notes 571 Chapter 16 The Redistributional Effects of Public Policy 574 16.1 Introduction 574 16.2 Equality as a social goal 574 16.2.1 Arguments in favor of promoting equality 574 16.2.2 Arguments against promoting equality 577
Contents xiii 16.3 The structure of tax systems 579 16.3.1 Proportional, progressive, and regressive tax structures 579 16.3.2 Inequality measures and the tax system 583 16.3.3 Vertical versus horizontal equity 586 16.4 Distributional consequences of the U.S. tax system 587 16.4.1 Tax schedules for the personal income tax 587 16.4.2 Effective tax rates for the personal income tax 591 16.4.3 The payroll tax 593 16.4.4 Other federal taxes 594 16.4.5 State and local government taxes 595 16.4.6 The overall tax bite? 596 16.4.7 International comparisons of taxation 598 16.4.8 The overall effective tax rate structure in the United States 600 16.5 The negative income tax and the EITC 608 16.6 The distributional effects of government expenditures 611 16.7 Summary and conclusion 616 16.8 References and bibliography 619 16.9 Discussion questions and problem set 622 Notes 623 Index 627 * Section contains more advanced material or special topics that may be omitted without losing continuity in the book.