The Economics of Rising Inequalities

373 Pages·2002·21.715 MB·English

by  Daniel Cohen, Thomas Piketty, Gilles Saint-Paul

THE ECONOMICS OF RISING INEQUALITIES
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The Economics of Rising
Inequalities
Edited by
DANIEL COHEN, THOMAS PIKETTY,
and
GILLES SAINT-PAUL
OXPORD
UNIVERSITY PRESS
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Contents
Introduction vii
List of Contributors xiii
PART I, MARKETS AND INSTITUTIONS
1. The Distribution of Earnings in Spain during the 1980s:
The Effects of Skill, Unemployment, and Union Power 3
Olympia Bover, Samuel Bentolila, and Manuel Arellano
2* Earnings Inequality in Portugal and Spain:
Contrasts and Similarities 55
Olga Canto, Ana R. Cardoso, and Juan F. Jimeno
3. Changes in Unemployment and Wage Inequality:
An Alternative Theory and Some Evidence 75
Daron Acemoglu
4. Does Competition at School Matter? A View Based upon the
Italian and Japanese Experiences 103
Giorgio Brunello and Tsuneo Ishikawa
5. The Causes of the Touth Employment Problem':
A (Labour) Supply Side View 133
Etienne Wasmer
6. Pareto-Improving Immigration in an Economy with
Equilibrium Unemployment 147
Javier Ortega
PART IL LIFETIME INEQUALITIES AND THE
SCOPE FOR REDISTRIBUTION
7. Consumption Inequality and Income Uncertainty 171
Richard Blundell and Ian Preston
8. Income Redistribution within the Life Cycle Versus Between
Individuals: Empirical Evidence Using Swedish Panel Data 205
Anders Bjorklund and Marten Palme
vi Contents
9. Earnings Dispersion, Low Pay and Household Poverty in
Italy, 1977-98 225
Andrea Brandolini, Piero Cipolkme, and Paolo Sestito
10. Changes in Home Production and Trends in Economic Inequality 265
Peter Gottschalk and Susan E* Mayer
11. Unequal Societies: Income Distribution and the Social Contract 285
Roland Benabou
12. Unemployment, Specialization, and Collective Preferences for
Social Insurance 331
John Hassler, Jose V. Rodriguez Mora, Kjetil Storesletten, and
Fabrizio Zilibotti
Index 351
Introduction
Discussions about rising inequalities often boil down to the following question: to
what extent are rising inequalities the mechanical consequence of changes in
economic fundamentals (such as changes in technological or demographic
parameters), and to what extent are rising inequalities the contingent con-
sequences of country-specific and time-specific changes in institutions? Needless
to say, both the 'fundamentalist' view and the institutionalise view have some
relevance. For instance, the decline of traditional manufacturing employment
since the 1970s has been associated in every developed country with a rise of
labour-market inequality (the inequality of labour earnings within the working-
age population has gone up in all countries), which lends support to the funda-
mentalist view. But, on the other hand, everybody agrees that institutional
differences (minimum wage, collective bargaining, tax and transfer policy, etc.)
between Continental European countries and Anglo-Saxon countries explain
why disposable income inequality trajectories have been so different in those two
groups of countries during the 1980s-9Qs, which lends support to the institu-
tionalist view. The chapters in this volume show the strength of both views.
Through empirical evidence and new theoretical insights it will show that
institutions always play a crucial role in shaping inequalities, and sometimes
preventing them, and yet that with a vergeace, inequalities across age, sex and
skills often come back through the window. From Sweden to Spain and Portugal,
from Italy to Japan and across the Atlantic, the volume will explore the diversity
of the interplay between market forces and institutions. No simple message will
emerge but it would be foolish to bet that one is more important than the other.
L MARKETS AND INSTITUTIONS
The chapter by Bover, Bentolila and Arellano looks at earnings inequality in
Spain. Using data from Spanish Social Security records, they find that Spain,
unlike France and Germany, has experienced a substantial rise in inequality in the
1980s and 1990s. This, despite the fact that wages are determined by collective
agreements as in France and Germany. The authors investigate the determinants
of the returns to skills in Spain, paying substantial attention to labour-market
institutions* They find that unions tend to compress wage inequality: the returns
to skills are lower in sectors with greater union coverage. Thus, part of the rise in
wage inequality may be ascribed to the decline in union power that Spain has
experienced as in many other countries. But on the other hand, firm-level
agreements tend to push the returns to skills up, thus partly offsetting the com-
pression effects of union agreements at the sectoral level. That is, employers tend
viii Introduction
to negotiate wages to bring them more in line with worker productivity. Another
important finding is that long-term unemployment tends to increase the returns
to skills* As argued by the authors, this is evidence of loss of skills during
unemployment spells. A higher share of long-term unemployment therefore
reduces the total supply of skills in the economy, which pushes the returns to
skills up. Massive unemployment then contributes to raise wage inequalities.
The comparison of Portugal and Spain is one of the most fascinating exercises
in the field of labour economics. Here are two neighbouring countries, which
have shared many developments in the past three decades and which stand as
opposite cases regarding unemployment. Portugal's unemployment is among the
lowest in Europe, Spain's among the highest. If one were to take Paul Krugman's
famous line that rising wage inequalities and rising unemployment are mirror
images of the same trends, one should expect the Portuguese economy to have
traded off low unemployment against large inequalities, at least when compared
to Spain. The chapter by Canto, Cardosa and Jimeno finds that this is indeed the
case. Yet it argues that the difference is not as large as one could have expected a
priori and not for the reasons that are expected. For one thing, the statutory
minimum wage (as a proportion of the average wage) is higher in Portugal than in
Spain, and the incidence is correspondingly higher in Portugal. Furthermore, the
premium which is paid in Spain to fixed-term employment is larger than in
Portugal. Finally, the coverage rate of collective bargaining is not different
(around 80 per cent in both cases). All this tends to make Portuguese institutions
no more conducive to unequal outcome than the Spanish one.
Furthermore, the driving forces regarding the composition of employment
across and within sectors are broadly similar. The major difference appears to
originate in the difference across sectors (rather than within sectors). Portugal has
maintained low-wage, labour-intensive industries where low-skill workers can
still be employed, while, in contrast, Spain has experienced relatively high wages
in the types of industries which have resulted in high unemployment among low-
skill workers. The fact that the statutory minimum wage is higher in Portugal
casts doubt on the fact that institutions are the only factors at stake here.
Other chapters in this volume focus upon institutional forces. In particular, the
chapters by Daron Acemoglu ('Changes in Unemployment and Wage Inequality:
An Alternative Theory and Some Evidence') and by Giorgio Brunello and Tsuneo
Ishikawa ('Does Competition at School Matter? A View Based Upon the Italian
and Japanese Experiences') both look at the interplay between educational
institutions and firm hiring policies. Both chapters emphasize that different
institutional equilibria can exist, and that these different institutional equilibria
can have important implications for the dynamics of wage inequality. Acemoglu
shows that small variations in the supply of skills can lead to qualitative changes
in the composition of jobs offered by firms. For instance, an increase in the
proportion of skilled workers can induce firms to stop creating a single type of
job, and can lead to an endogeneous increase in the demand for skills and in wage
inequality, which may or may not be efficient Brunello and Ishikawa show that
Introduction ix
the same parameter values can give rise to multiple equilibria: one equilibrium in
which schools are very competitive and academic degrees are highly rewarded
by the private sector (which the authors identify as Japan), and another equili-
brium in which schools are more 'flexible* and the private sector relies mostly on
internal training (which the authors identify as Italy). Such models could be used
in order to account for the wide cross-country variations in inequality trends.
The chapter by Etienne Wasmer ('The Causes of the "Youth Unemployment
Problem"; A (Labour) Supply Side View') basically argues that we should take
demographics seriously. Wasmer argues that changes in fundamental demo-
graphic parameters can account for a large fraction of the rise in youth unem-
ployment rates observed in Europe since the 1970s. More specifically, the fact
that large cohorts of workers born during the post-World War II baby-boom
entered the labour market during the 1970s induced a large labour supply shock:
the supply of low-experience labour increased suddenly, which could easily
explain why the labour-market position of these workers deteriorated so quickly.
Wasmer also argues that rising female participation induced an additional labour
supply shock which played an important role in the stoiy.
ITde fact that distribution of income may be affected by labour-market frictions
has been largely ignored in the previous literature. Such types of interactions may
be magnified if one allows for migration. In his contribution to this volume,
Javier Ortega develops a model of two countries with labour markets that are both
subject to search frictions but differ in the sense that one country has a more
efficient labour market. He shows that multiple equilibria may arise. In one
equilibrium there is no migration, while in another there is migration from the
country with the least efficient to that with the most efficient labour market.
Furthermore, this equilibrium Pareto dominates the other since all workers end up
in the best functioning labour market. Mutiplicity arises because migrants have
higher search costs, so that their outside option in bargaining is reduced. This
generates downward wage pressure, which increases incentives to post vacancies,
and thus the attractiveness of the recipient country's labour market. In Ortega's
model, migration is the sole outcome of differences in labour-market efficiency.
Migrants do not move to earn more, but to end up in a better labour market But
they do affect wages and the distribution of income.
II. LIFE LONG INEQUALITIES AND THE
SCOPE FOR REDISTRIBUTION
Labour-market outcomes are usually pointed out as the critical factors underlying
the rise of inequalities. Yet, the picture is not one for one. One reason is that a
rising dispersion of income may reflect short-run fluctuations of an individual
lifetime. This is the topic that is taken on by Preston and Blundell (on British data).
They show that inequality in both income and consumption was sharply greater
in the late 1980s for all cohorts than it had been for preceding cohorts at a similar
age. On the other hand, they also show that the variance of permanent shocks (as