The Economics of Inequality, Discrimination, Poverty, and Mobility

421 Pages·2018·7.89 MB·English

by  Robert S. Rycroft

The Economics of
INEQUALITY,
DISCRIMINATION,
POVERTY, AND MOBILITY
If there was any question before, there is no longer a question today:
inequality, discrimination, poverty, and mobility are prominent national
issues. The notion of “The American Dream” has been sold to genera-
tions of young Americans as the idea that working hard and following
your dreams will allow you to break through any barriers in your path
and inevitably lead to success. However, recent findings on inequality,
discrimination, poverty, and mobility show that “The American Reality”
is very different.
The second edition of this introductory-level text brings together the
essential materials on what economists have to say about these findings
and brings students up to date with current thinking. It covers several
ground-shattering events, such as: the election of Barack Obama followed
by Donald Trump; the passage of the Affordable Care Act and attempts
to repeal it; and the publication of Thomas Piketty’s Capital in the 21st
Century, among many others. With an emphasis on data, theory, and
policy, this book tackles these issues by exploring three key questions in
each chapter: What do the data tell us about what has been happening to
the American economy? What are the economic theories needed to under-
stand what has been happening? What are the policy ideas and controver-
sies associated with these economic problems?
Key controversies are highlighted in each chapter to drive classroom
discussion, and end-of-chapter questions develop student understanding.
This clearly written text is ideally suited to a wide variety of courses on
contemporary economic conditions, inequality, and social economics in
the United States.
Robert S. Rycroft is Professor of Economics at the University of Mary
Washington, USA, and is currently completing his fortieth year on the
faculty. He teaches courses in Poverty, Affluence, and Equality, Labor
Economics, Public Finance, and Microeconomics.

The Economics
of INEQUALITY,
DISCRIMINATION,
POVERTY,
AND MOBILITY
Second Edition
Robert S. Rycroft
Second edition published 2018
by Routledge
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and by Routledge
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Routledge is an imprint of the Taylor & Francis Group, an informa business
© 2018 Taylor & Francis
The right of Robert S. Rycroft to be identified as author of this work has been asserted by him in
accordance with sections 77 and 78 of the Copyright, Designs and Patents Act 1988.
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Trademark notice: Product or corporate names may be trademarks or registered trademarks, and are used
only for identification and explanation without intent to infringe.
First edition published by M.E. Sharp 2009
Library of Congress Cataloging in Publication Data
A catalog record for this book has been requested
ISBN: 978-1-138-19437-3 (hbk)
ISBN: 978-1-138-19439-7 (pbk)
ISBN: 978-1-315-63886-7 (ebk)
Typeset in Times New Roman by
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Visit the companion website: www.routledge.com/cw/rycroft
Contents
Preface to First Edition vii
Preface to Second Edition xi
PART I Inequality
1. The Pie and How We Slice It 3
2. Labor’s Slice of the Pie 21
3. The Foundations of Labor’s Slice 40
4. The Slices of Capital, Land, and Entrepreneurship 70
5. Labor Markets That Do Not Clear 93
6. Slicing the Pie in a Nondiscriminatory Pure Market Economy 113
7. Equalizing the Slices 130
8. How Big A Slice Do We Deserve? 157
PART II Discrimination
9. Does the Slice We Receive Depend on Our Race, Gender,
Ethnicity, etc.? 177
10. Detecting and Measuring Discrimination 193
11. Reducing the Impact of Discrimination on How the Pie is Sliced 212
PART III Poverty
12. A Slice Too Small 237
13. Making Small Slices Larger 266
PART IV Mobility
14. How the Size of a Slice Changes Over a Career 291
15. How the Size of a Slice Changes from Generation to Generation 323
16. The Accumulation, Distribution, and Transfer of Wealth 344
v
vi Contents
PART V Final Thoughts
17. Equalizing and Enlarging the Slices 369
Bibliography 384
Index 402
Preface to the First Edition
A metaphor with widespread applicability in the field of economics is
“slicing the pie.” Economists are wont to speak of the economic goals of
efficiency and equity. What is meant by efficiency and equity? The terms
can be defined in a fairly obscure manner by using words or mathemat-
ical equations, or, we can simply imagine a pie. The efficiency goal is
associated with the size of the pie. An efficient economy produces a large
and rapidly growing pie (the pie, of course, is the goods and services that
give us our standard of living). The equity goal is associated with how
big a slice each of us receives. An equitable economy provides everyone
with their “just dessert.” As a society, we want to do both, grow the pie
rapidly and slice it equitably. What makes it interesting is the feedback
loop from how we slice the pie to how fast it grows. Many economists
believe efforts to slice the pie more equitably inevitably slow the growth
of the pie. Others believe judicious reslicing may, in fact, speed the
growth of the pie. This book is about “slicing the pie”—why is the pie
sliced the way it is, what is the connection between how the pie is sliced
and how rapidly the pie grows, what if people get a slice “too small,” and
how does the slice we receive change over our career and how does our
slice influence what our children can expect to receive? In other words,
this book is about the economics of inequality, discrimination, poverty,
and mobility.
This book is a useful read for anyone who wants to bring themselves up
to speed on these issues, but its primary intended use is as a textbook for
students enrolled in undergraduate economics classes that deal with any
combination of those issues. The book originated out of frustration. For
literally decades, I have taught an undergraduate economics course at the
University of Mary Washington called Poverty, Affluence, and Equality.
The course is about “slicing the pie” in the context of the United States (it
is not an economic development course). What caused my frustration was
the unavailability of an adequate textbook. In my judgment, there were
no textbooks that both covered the material at the level of rigor I thought
appropriate for undergraduates in an economics course, and covered all
the topics I wanted to cover. I was faced with two choices. I could fume or
do something about it. I initially fumed, but not much came of that. I then
decided to do something about it, and this book is the result.
vii
viii PrefaCe to the first edition
The book has a very deliberate structure. It begins with the inequality
problem—how the pie is sliced. We first look at the functional distribution
of income in a pure market economy. This allows the basic tools of demand
and supply to be introduced (it would be helpful if students had principles
of economics before taking this course, but not essential). Then we move
in the direction of an explanation of the personal distribution of income by
considering the impact of individual differences in tastes, tolerance for risk
and time-preference, the direct and feedback effects of government poli-
cies that explicitly or implicitly redistribute income, and the influence of
discrimination. Next we look at the problem of “a slice too small.” How do
we measure poverty, how many people are poor in the United States, what
is the fundamental cause(s) of poverty, and what policies do we employ to
combat it? Finally, we look at how the size of a slice changes over a career
and across generations. What factors influence intra- and intergenerational
mobility and wealth accumulation, distribution, and inheritance?
What distinguishes the book are the following:
• A detailed (but not highly mathematical) development of the eco-
nomic theory underlying the analysis—To fully understand the issues
in the fields of inequality, discrimination, poverty, and mobility, stu-
dents need to have a good grasp of economic theory. In particular, to
understand the very contentious debates over the appropriate policies
in these areas, students need to be aware of the trade-offs involved
and this requires an adequate grounding in economic theory. My book
takes pains to develop the theories of labor demand, labor supply,
investment in schooling and on-the-job training, incentive-based
compensation schemes, intergenerational mobility, efficiency wages,
reciprocity in the labor market, tax incidence and the incentive effects
of taxes, among others, and addresses the efficiency aspects of policy
proposals.
I felt the available relevant textbooks shied away from this meth-
odology, probably because the student audience for this type of
course was thought to be so multidisciplinary (along with economics
majors, courses like this would be sought by sociology, psychology,
anthropology, political science, international affairs, English, history,
and business majors, among others) that an emphasis on “real” eco-
nomics might scare them away. My experience has given the lie to
that feeling. My students are typically a wide-ranging, multidiscipli-
nary crowd, but they have handled the economics I have given them
(even if they do not love it) so I believe economists do not need to be
timid about using their disciplinary tools.
• Greater emphasis on mobility—In recent years, economists have
made great strides in understanding and appreciating the significance
of intragenerational and intergenerational mobility. Only a little bit
of this work has made it into textbooks. My book will provide
expanded coverage of mobility issues understandable by typical
undergraduates.
PrefaCe to the first edition ix
• Greater emphasis on wealth accumulation, distribution, and inher-
itance—Leaving out these topics from a discussion of what is ulti-
mately the well-being of people seems like a major omission. I
devote one full chapter and parts of a few other chapters to discussion
of these issues.
• Greater emphasis on discrimination law—Discrimination law and the
court decisions that interpret it are an important part of the analysis
of discrimination. Most undergraduate textbooks, in my judgment,
do a fairly superficial job of dealing with these topics. I will provide
much expanded coverage of these issues. Most notably, I will discuss
several relevant Supreme Court decisions in a detailed, informative,
and colorful manner. This material will help support classroom dis-
cussion of these issues.
• Full and fair treatment of the controversies in the fields—The eco-
nomics of inequality, discrimination, poverty, and mobility are
chock full of controversy. Examples of contentious issues include
the minimum wage, what is the appropriate way to measure poverty,
how much mobility is there, comparable worth, whether the Supreme
Court has interpreted the antidiscrimination statutes correctly, the
efficiency and equity of affirmative action, and the optimal degree
of redistribution, to name a few. These controversies will be given a
full and fair treatment written in such a way that instructors can use
the textbook material as a way to motivate a variety of classroom
discussions and debates.
Courses in inequality, discrimination, poverty, and mobility are among
the most idiosyncratic that economists offer. Every instructor has his or her
own take on what ought to be covered. This book is not just my Poverty,
Affluence, and Equality course. Rather, it is my course-and-a-half, or my
course and another. I have included way more material than I could pos-
sibly cover in a semester. With classes devoted to debates on important
topics, student presentations of papers, classroom discussions of assigned
readings, and instruction in how to do research, writing, and speaking in
the discipline, not to mention tests and homework, there simply is not the
time. In its current incarnation, there is no chapter I cover completely and
some I skip entirely, like Chapters 4, 8, and 17. I doubt if anyone could
cover all this material in a semester, even if you just lecture (which I do not
encourage). Conceivably this book could be used for two semester-long
courses, if you have that luxury.
Another aspect of the idiosyncratic nature of the course is even if pro-
fessors could agree on the topics, they are unlikely to agree on how to
evaluate conflicting empirical evidence (for example, does raising the
minimum wage reduce employment opportunities or not?), and the nor-
mative aspects of policies (how much redistribution is required in a just
society?). As implied above, I pride myself in thinking this book could
be used by professors coming from many different points along the ideo-
logical spectrum (except the extremes at both ends). I think I have aired