Slides for MBUS 610

1. GLOBAL INCOME INEQUALITY
Ryan W. Herzog, Ph.D.
Associate Professor of Economics
Gonzaga University

2. THE VIRTUES OF CAPITALISM

3. WHY SHOULD WE CARE ABOUT INEQUALITY?
• Social justice
• Fairness
• Sustainability
• Can we sustain long-run growth (or stable business cycles) with increased inequality.

4. INEQUALITY AND DEBT (DEBT-TO-INCOME RATIOS)

5. A MORAL RESPONSIBILITY
“The disposition to admire, and almost to
worship, the rich and the powerful, and to
despise, or, at least, to neglect persons of
poor and mean condition is the great and
most universal cause of the corruption of
our moral sentiments.”
-Adam Smith, Theory of Moral
Sentiments, I.iii.3

6. MISSION STATEMENT
Gonzaga University is an exemplary learning community that educates students
for lives of leadership and service for the common good.
In keeping with its Catholic, Jesuit, and humanistic heritage and identity, Gonzaga
models and expects excellence in academic and professional pursuits and
intentionally develops the whole person -- intellectually, spiritually, culturally,
physically, and emotionally.
Through engagement with knowledge, wisdom, and questions informed by
classical and contemporary perspectives, Gonzaga cultivates in its students the
capacities and dispositions for reflective and critical thought, lifelong learning,
spiritual growth, ethical discernment, creativity, and innovation.
The Gonzaga experience fosters a mature commitment to dignity of the human
person, social justice, diversity, intercultural competence, global engagement,
solidarity with the poor and vulnerable, and care for the planet. Grateful to God,
the Gonzaga community carries out this mission with responsible stewardship of
our physical, financial, and human resources.

7. TRENDS IN INEQUALITY
• The inequality paradox:
• Inequality if falling across countries
• Inequality is rising within countries
• What’s the story…
• Inequality has increased across most developed countries
• True even after accounting for total compensation
• Redistribution has helped but less in the US than most other places.

8. DIVIDE BETWEEN INCOME AND GDP

9. INEQUALITY WAGES (NET COMPENSATION)

10. RISING INEQUALITY WITHIN COUNTRIES

11. UNITED STATES

12. INEQUALITY
ACROSS
COUNTRIES
(BEFORE AND
AFTER INCOME
TRANSFERS)

13. WEALTH BY RACE

14. RACIAL INEQUALITY
• I’m going to start with wealth inequality…

15. RACIAL INEQUALITY (BY AGE)

16. GENERATING WEALTH
• Real Estate
• Redlining
• Mapping Inequality (University of Richmond)
• Even today, neighborhoods are still affected by policies created by HOLC in the 1930s (see
here and here).
• Great Migration and housing covenants
• As Americans moved to the suburbs in search of bigger homes and better schools, many
minorities were left behind…
• Housing covenants were created that banned homeownership by black families (even in
Spokane).

17. HOUSING AND RACE

18. EVEN TODAY?
• These policies were created more than 50 years ago, haven’t things changed? Not really.

19. RACIAL PROFILING DURING THE LENDING PROCESS
• Black applicants are more likely to be denied mortgages or pay significantly higher
interest rates (controlling for employment, down payment, income, and credit scores)…
see here.

20. INEQUALITY IN ECONOMICS
• Rethinking economics…
• For 50 years we praised ourselves for achieving unprecedented growth.
• Capitalism has brought about tremendous successes… but also contributes to rising
inequality.
• At what point does inequality slow down economic growth and/or create more volatility in the
business cycle?
• So what explains rising inequality?
• Market power? Globalization? Decline in unions? Technology? Immigration?

21. MARKETS
• Economist have praised the role of competitive markets (rightfully so), but…
• Are markets still competitive?
• Many buyers and sellers
• Perfect information
• No externalities

22. MANY BUYERS AND SELLERS
• Markets are becoming more and more concentrated
• https://promarket.org/2019/09/27/counterfeit-capitalism-of-wework-predatory-pricing-as-a-
business-model/
• https://promarket.org/2020/08/14/monopolies-silent-spreaders-of-poverty-and-economic-
inequality/
• https://promarket.org/2019/01/29/how-market-power-worsens-income-inequality/

23. INCOME INEQUALITY
Lowest
fifth
Second
fifth
Third
fifth
Fourth
fifth
Highest
fifth
Top 5
percent
1980 12,242 30,468 50,277 74,070 132,064 197,356
2017 13,258 35,401 61,564 99,030 221,846 385,289

24. INCOME GROWTH, QUINTILES
0
25
50
75
100
125
150
175
200
Real Income
(1980=100)
Lowest
fifth
Second
fifth
Third
fifth
Fourth
fifth
Highest
fifth
Top 5
percent
Average Annual
Growth (1980-2017)
Lowest – 0.21%
Second – 0.41%
Third - 0.55%
Fourth – 0.79%
Highest – 1.42%
Top 5 – 1.82%

25. WHERE DOES INEQUALITY COME FROM?
• Labor characteristics
• What do workers bring to the market?
• Market forces
• How does the market value the labor characteristics?
• Government policies
• PRE-distribution – affecting markets
• Access to education, labor regulations
• Redistribution – affecting incomes
• Taxes
• Income support (TANF, food stamps)

26. WHAT FACTORS CONTRIBUTE TO RISING INEQUALITY?
• Technological Change – 55% (of the rise)
• International Trade – 10%
• Decline in Real Minimum Wage – 10%
• Decline in Unionization – 10%
• Other (Institutions – Education) – 10%
• Immigration – 5%

27. Pre-Tax
12.5%
Post-Tax
19.3%
10%
15%
20%
25%
% of national
income
Bottom 50% national income share: pre-tax vs. post-tax
Source: Appendix Tables II-B1 and II-C1

28. Pre-tax
47.0%
Post-tax
38.8%
25%
30%
35%
40%
45%
50%
% of national
income
Top 10% national income share: pre-tax vs. post-tax
Source: Appendix Tables II-B1 and II-C1

29. Pre-Tax
20.2%
Post-tax
15.3%
5%
10%
15%
20%
% of national
income Top 1% national income share: pre-tax vs. post-tax
Source: Appendix Tables II-B1 and II-C1

30. 0%
5%
10%
15%
20%
25%
Share of total
income for each
group
Decomposing Top 10% into 3 Groups, 1913-2017
Top 1% (incomes above $460,000 in 2017)
Top 5-1% (incomes between $190,000 and $460,000)
Top 10-5% (incomes between $130,000 and $190,000)
Source: Piketty and Saez, 2003 updated to 2017. Series based on pre-tax cash market income including realized capital gains
and excluding government transfers.

31. Average adult
-1%
0%
1%
2%
3%
4%
5%
6%
Real average
annual growth,
1980-2014
Income percentile
Average annual growth by percentile, 1980-2014
Top 0.001%
Pre-tax
Post-tax
P99
P99.9
P99.99
Piketty, Saez and Zucman (2017)

32. But what about the American
Dream?
Can people move up the income
latter?
We are the country of
opportunity… right?

33. INHERITANCE OF STATUS

34. MOBILITY RATES

35. THE AMERICAN DREAM

36. BUT THERE ARE SOLUTIONS…

37. COLLEGE IS IMPORTANT

38. BUT…

39. WHY IS THIS A PROBLEM…

40. GDP AND INCOME
• GDP or national income can be divided into the following
• Wages
• Compensation
• Capital
• Proprietors’ income
• Rental, interest
• Profits
• Taxes and depreciation

41. WAGE SHARE

42. LABOR SHARE ACROSS COUNTRIES

43. LABOR SHARE ACROSS COUNTRIES

44. WAGES AND PRODUCTIVITY

45. WAGES BY INDUSTRY

46. GLOBAL WAGES AND PRODUCTIVITY

47. EXPLAINING THE DECLINING WAGE SHARE
• Technology/Automation
• Large firms dominating the industry
• Capital mobility (offshoring)
• More foreign competition
• More foreign inputs
• Decline in unionization
• Loss of bargaining (tied to globalization?)
• Capital replacing labor

48. UNION MEMBERSHIP

49. UK UNION MEMBERSHIP

50. 50

51. EXPLAINING THE DECLINE IN LABOR SHARE

52. SOLUTIONS TO INEQUALITY
• Income Inequality
• Redistribution tax policies,
• Universal basic income, higher minimum wages
• Wealth Inequality
• Increased competition
• Reduce corporate influence in politics (lobbying)
• Equality of Opportunity
• Access to education (universal pre-K, free college tuition, school choice)

53. SOLUTIONS TO INEQUALITY
• More general policies
• Fair trade
• Intellectual protections
• Universal health care
• Job training programs (skills gap?)

54. KEY LINKS
• Income Calculator
• Social Mobility Explained
• Opportunity Atlas
• Education Won’t Solve Inequality
• Drivers of Declining Labor Share of Income