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Global Inequality Lectureslides1
Agenda
• Inequalityacrosscountriesswampsinequalitywithincountries.• Inequalityofwhat:priceindices• Inequalityofwhat:theRawlslo;ery.• Therela=onshipbetweenwithin-countryinequalityandeconomicdevelopment.• Migra=onandmigrantlabormarkets.
Gratuitous CORE graph slide.
Country vs Class over =me (Milanovic 2005)
Our recent history.
How are Incomes Compared Across Countries
• Problem:Incomesindifferentcountriesarecomputedindifferentcurrencies.
• Solu=on1:Computeincomesinacommoncurrencybyconver=ngusingtheexchangerate.
• Example:SupposeImakeUS$40,000(USdollars).Howdoesthiscompareto€35,000(Euros)?OneEurosellsfor1.32dollars.So,theEuroincomeexpressedindollarsis:
1.32€/$*35,000=US$46,200
How are Incomes Compared Across Countries? • But…..Haveyoueverlivedinortraveledtoadevelopingcountry?• Goodsaremuchcheaper(par=cularlynon-tradablegoodslikehousingandtransporta=on).• So$40,000isworthmoreinRwandathanintheU.S.
• So,wecancompute‘purchasingpowerparity’adjustedincomes.Wetakeabasketofgoodsthatwouldbeconsumedbyanaverageconsumerandaskhowmuchcheaperthatbasketwouldbeinanothercountry.Supposeabasketofgoods(e.g.houseandfood)wouldcostUS$100butonly14PesosinMexico.Thenwemul=plyincomesinMexicoby100/14.• Surveydataradicallyundersamples“wherethemoneyis”.
Key point: the “data” do not speak alone.
• Whatbasketyoupickisnotaninnocentchoice.• Someworldaverage(Geary-Khamis)orapar=cularcountry.• Countryaverageorsomepar=cularpercen=leorpovertylines.• Basketsarenotindependentofprice:Subs=tu=onandqualitybiases
• Comparablepricedataisscarce:ICPproject.• Buthastomakelotsofassump=onsaboutwhatgoodsarecomparable.• Withincountrypricedifferencesveryimportant.
• DeatonandHeston2005:China’sGDPfellby40%ahernewICPprices.
• AlwynYoung(2012)MortenJervens(2013)Africanna=onalincomeaccountsareinawfulshape.
Beyond GDP
• Manythingsma;erbesidesGDP• Health,crime,environment,substan=vefreedoms,etc.
• Lotsofworkonthis,mostfamouslySenoncapabili=es.• Birthedthehumandevelopmentindex.
• Problem:adhoc,nodisciplinedwaytoreachadecisiononwhattoincludeinanindexandhowtoweightdifferentcomponents.
“Money isn’t everything, not having it is?”
• Anotherwaytorankcountriesintermsof“well-being”.• Supposeyouhadtoliveinacountryforayear,butyouhadtolivethelifeofarandompersoninthatcountry.• Whatcountrywouldyoupick?• Howmuchwouldyoupaytoplaythatlo;eryintheUS?
Jones and Klenow 2014
• Idea:UsetheRawlsianintui=ontoconstructa“theore=callyconsistent”measureofwell-being.• Youdon’tknowwhoyouaregoingtobeincountryX(randomoverageandconsump=on),withflowu=lityfromlivingu,logu=lityoverconsump=onandlinearu=lityinleisure.• Accountforlifeexpectancyatbirth,e,consump=onofgoodsandservicesc,leisurel,• Assumelognormalconsump=onwithmeanc,andinequalitymeasuredbythevarianceoflogconsump=on𝜎2
With these assump=ons.
• 𝑉(𝑒,𝑐,𝑙, 𝜎↑2 )=E[u+log(C)+l]=e(u+log(c)+l- 𝜎↑2 /2)• Cancalculatethisforeverycountry• USdatapindownu.(40yearoldinUSvaluesremaininglife6million)• useformulafromlognormaldistribu=onofincometoinvertGinicoefficienttoget𝜎2
• Thenask:howmuchextraconsump=onλdoyouneedtomakeyouindifferentbetweenlo;eryintheUSandcountryX(sayIndia)• 𝑉(𝑒↑𝑈𝑆 , 𝑐↑𝑈𝑆 , 𝑙↑𝑈𝑆 , 𝜎↑2𝑈𝑆↑ )=𝑉(𝑒↑𝐼𝑛𝑑𝑖𝑎 , 𝜆↑𝐼𝑛𝑑𝑖𝑎 𝑐↑𝐼𝑛𝑑𝑖𝑎 , 𝑙↑𝐼𝑛𝑑𝑖𝑎 , 𝜎↑2𝐼𝑛𝑑𝑖𝑎↑ )
Within-Country Inequality and Development
• KuznetsinvertedUhypothesis:• Newsector(e.g.industry)emerges,ini=alinequalityincreasesasearlyadoptersmakealotofmoney,butthenassectoraltransi=oncompletesinequalityfalls.• Poli=csanimportantcomponentofthereduc=onininequality.
Indeed very nice K-curve in cross-country data.
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Too many stories consistent with K-curves.
• Whydoesstructuralchangegoalongwithinequality,anyway?• EastAsiancounterexamples?• Focuson“poli=cal”vs“economic”storiesratherthanmalignandbenign.
• Economicstories:Lewis-isianturningpointsasasectoraltransi=oncompletes.• Equilibrium(eitherviatechchange,factoraccumula=on,ormarketforces)restoredbetweennewandoldsector,rentsgone.
• Poli=calstories:Polanyi’sdouble-movementreassertsitself.• (Social)DemocracyandWar.• EgalitarianPoli=calRevolu=onsatthepeakofKuznetscurves.
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A proposed synthesis…
• GeneralizedTechnologicalShihHappens(steam,gasolineengines,masselectrifica=on,computers,internet).• Ifbarrierstoadop=onlow,earlyadoptersmakeoutlikebandits,andusenewfoundwealthtotryto“pulluptheladder”,consolida=ngpoli=calandeconomicbarrierstoentry,loca=ngmonopoliesabroad,inheritance,etc.• Some=mesthisworks,some=mesitdoesn’t.
• Dependsonpoli=calins=tu=onsanddegreeofini=alincomeinequality.
• Whenitworks,getdelayed“poli=calKuznetsplateau”.• Otherwiserapidandendogenous“economicKuznetspeak”
• DifferentmechanismsimplydifferentK-cycleamplitudeandfrequency.
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Some evidence: never-democracies vs others and always-democracies vs others.
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Needinequalityforgrowth?Growthcausesinequality?
Inequality within and between Mostly bc of China
Migra=on and Development.
• Ifyoubelievethedeterminantsofunderdevelopmentaredurablecountry-specificthingslike“ins=tu=ons”,perhapsbestroutetowardsallevia=ngglobalinequalityisinterna=onalmigra=on.• But:countriesthatadmitmostimpoverishedmigrantsarealsomostrepressivetowardsthosemigrants.• Indenturedlaboroldformoffacilita=ngmigra=on.
Many people from poor countries want to come.
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Trade-off between internal and global inequality? (Weyl 2015)
One of the most dis=nc=ve things about the UAE • 89%ofthepopula=onismigrant.• 98%oftheprivateworkforce.• MigrantsareontheKafalasystem.• CommonintheGCCcountries(OriginsinBri=shPoli=calAuthority).• Tiedtopar=cularemployerson3-yearcontracts.• Whencontractexpires,workerhastorenewwithpreviousemployerorleavecountryforatleast6months.• RequireNo-Objec=oncer=ficate.
• RepealedinJan2011.
This system is a^acked a lot by ac=vists.
• HumanRightsWatch2014report:“IAlreadyBoughtYou”• “UndertheUAE’svisasponsorshipsystem(knownaskafala),aforeignworker’sabilitytoenter,live,andworklegallyintheUAEdependsonasingleemployerwhoalsoservesastheworker’svisa“sponsor.”[33]Notonlydoesthissystemgiveemployersinordinatecontrolovertheworker,butUAElawshavefewsafeguardsformigrantworkerstoescapefromthisdependencyincaseswheretherela=onshipbecomesexploita=veorabusive.”
A more economics-ish cri=cism
• Thisisaclearexampleofamonopsonis=clabormarket.• Employershavemarketpowerovertheirworkerswhentheircontractsexpire.• Alsomeansworkersaretechnicallyexploited,inaneoclassicalsense.• Wagesarebelowmarginalproduct.
• Paper:Uses2011reformtoes=matedegreeofmonopsonypowerandrateofneoclassicalexploita=on(wage=50%ofmarginalproductpre-reform).
Monopsony in labor markets is pervasive.
• Searchfric=ons,commu=ngcosts,ameni=esandsocialrela=onshipsonthejobmeanthatjobsareimperfectsubs=tutesforeachotherfromworkerPOV.• Explainsmanyempiricalpuzzlesineconomics(e.g.gendergaps),mostprominentlylackofminimumwageeffectsonemployment(CardandKrueger1995,Dube,Lester,ReichJOLE2015)• Butdirectes=matesoftheeffectoflabormarketcompe==onarefew.• Kafalasystemreformallowsonesuches=mate,inaclearlyuncompe==veenvironment.
Iden=fica=on strategy
• Nicefeatureofreform:workershadtostaywiththeiroldemployersun=ltheircontract/visasexpired.• Contractsuniversally3yearsinlength.• Workerswhosecontractsexpiredbeforethereformhadtostaywiththeiremployersorgobacktosourcecountry.• Workerswhosecontractsexpiredaherthereformcouldfindanewemployer.• Expecttoseejumpsinwagesaroundcontractsthatexpirepostreformrela=vetopre-reform.
Iden=fica=on strategy
~11% increase in earnings
Increase in probability of staying with firm.
Neoclassical Rates of Exploita=on
• AdaptLernercondi=onfromproductmarketsforfactormarkets.• MPL-w=w/elas=cityoflaborsupplyfacingthefirm• WefinddenominatorofRHS=10%fallinsepara=ons/10%earnings=1• ImpliesMPL/w=2,or50%rateofexploita=on.• Vedder1978:w=48%ofMPLforslaves.• Isen2014:w=75-80%ofMPLforworkers(iden=fiedusingsuddendeaths).
• Canusethistoimpute“repara=onsbill”ac=vistsaredemandingforNYUAbu-Dhabi,Guggenheim,etc.• Justdoubleactualwagebill.
A be^er class of models.
• Butmonopsonyisjustoneofageneralclassofmodelswithanoldanddis=nguishedvintage.• Mid-20thcenturyIns=tu=onalistlaboreconomistshadaviewthatlaborwas“notacommoditylikeanyother”.• 1946AERdebate:LesterarguingwithMachlupandS=glerovertheminimumwage.• Solow1979:Ifthewageenterstheshort-runproduc=onfunc=on..inalaboraugmen=ngway….thecostminimizingwageistheonethatminimizesthecostofaunitofeffortoreffec=velabor.
• Widevarietyofmodelswithtwocharacteris=cs:• Wagesarealabor-augmen=nginput,sooutput=f(w,l)• Employerssetwages,butdon’tnecessarilywantthelowestwagepossible.• Monopsony,efficiencywages,adverseselec=on,firm-specifichumancapitalandintra-firmbargainingbetweenworkersandfirmscanallbeshowntoyieldmodelslikethis.