Causes of the withincountry inequality rises observed since 1980

1

• Causes of the within-country inequality rises
  observed since 1980
• by
• Arthur S. Alderson
• Department of Sociology
• Indiana University, Bloomington
• Email aralders_at_indiana.edu
• Presented at the
  
  2nd Summer School on Development
  Inequality, Growth and Human Development
• Civita Castellana, Italy, 1-7 July 2007

2

• Context
• Global income inequality the sum of between-
  and within-nation inequality has declined in
  the last few decades.

3

• Context
• Global income inequality the sum of between-
  and within-nation inequality has declined in
  the last few decades.
• Why? Not due to declining within-nation
  inequality. (Income inequality appears to have
  been increasing in the average society in recent
  decades.) Rather, it is due to declining
  between-nation inequality.

4

• Context
• Why is between-nation inequality declining?
  Short answer China and India

5

• Figure 1. The Kuznets Curve (cross-sectional)
• Source Nielsen, François. 1994. Income
  Inequality and Industrial Development Dualism
  Revisited American Sociological Review 59
  654-677

6

• Figure 2. The Kuznets Curve (longitudinal)
• Source Lindert, Peter H. and Jeffrey G.
  Williamson. 1985. Growth, Equality, and
  History. Explorations in Economic History 22
  341-377.

7

• Figure 3. The Great U-Turn

8

• Figure 4. The LIS Data Multiple Observations
  on 16 Advanced Industrial Countries
• Note Includes all data available on these
  societies from Luxembourg Income Study. Gini
  coefficient of income inequality (equivalent
  disposable income) calculated from the micro-data
  using a standard equivalence scale (e.g.,
  Gustafsson and Johansson 1999).

9

• Table 1. An inclusive overview of explanations
  of the recent upswing in inequality
• A. Trends related to the distribution of wages
  and earnings
• 1) Institutional Mechanisms de-unionization,
  declining minimum wage, changes in tax law,
  deregulation
• 2) Changes Affecting Labor Supply population
  growth and the baby boom cohort, trends in
  education, immigration, female labor force
  participation (supply side), government transfers
  (supply side effects)
• 3) Changes Affecting Labor Demand inequality
  and the business cycle, de-industrialization,
  globalization, technological change, cognitive
  partitioning and the value of cognitive skills,
  unequal returns to factors (winner-take-all
  markets)
• 4) Changes Affecting the Stability of Earnings
  rise of part-time labor, contingent labor,
  turnover
• B. Trends related to the distribution of income
  of households and families
• Changing living arrangements (e.g.,
  female-headed households), female labor-force
  participation, assortative mating, shifting
  location of the retired

10

• Relative distribution (see Handcock and Morris
  1999 Morris, Bernhardt, and Handcock 1994) The
  ratio of the fraction of households in the
  reference year to the fraction of households in
  the comparison year in each decile of the
  distribution of household income.

11

• Example
• There are eight observations for Italy available
  in the LIS data set, 1986-2000. To see how the
  distribution of income changed across this
  period, we calculate relative distributions for
  yearsgt1986, using 1986 as the reference year, as
  follows
• Partition households in 1986 into deciles
• Deflate income in later years by the ratio of the
  1986 median to the comparison-year medians
• Fit the 1986 decile boundaries to the
  comparison-year distribution of households

12

• Figure 5. The relative distribution of household
  income in Italy, 1986-2000
• This is the pattern of distributional change
  that lies behind the increase in inequality
  experienced in Italy across the 1986-2000 period
  (the Gini for Italy rose from 0.312 in 1986 to
  0.339 in 2000).

13

• Figure 6. Relative distributions, U.S.
  1974-2000 and U.K. 1969-1999

14

• Figure 7. Relative distributions, U.K.
  1969-1999 and U.S. 1974-2000

15

• Figure 7. Relative distributions, U.K.
  1969-1999 and U.S. 1974-2000

16

• Figure 7. Relative distributions, U.K.
  1969-1999 and U.S. 1974-2000

17

• Summing up thus far
• Faster-than-world-average income growth in China
  and South Asia has driven declining
  between-nation inequality which, in turn, has
  resulted in declining global income inequality in
  the last few decades
• In the average country, within-nation inequality
  has probably grown since 1980 and within-nation
  inequality is now, for the first time in 200
  years, a growing component of global income
  inequality
• In the OECD countries, descriptions of historical
  trends in within-nation inequality have been
  dominated by two images the Kuznets Curve and
  the Great U-Turn
• Where it has risen, the growth of within-nation
  inequality has occurred via a process of
  polarization, rather than upgrading (or
  downgrading) alone, with upgrading generally
  taking precedence over downgrading in the course
  of such polarization

18

• Explaining within-nation inequality
• In the second paper distributed for the Summer
  School (Alderson and Nielsen 2002), we develop
  and test a model that combines an attention to
  the relationship between inequality and
  development (i.e., the Kuznets problematic) with
  a focus on globalization and the role of
  institutions

19

• The Kuznets Problematic
• The core model (see Alderson and Nielsen (1995)
  in reading list)
• incorporates three major features of development
  labor force shifts and
• sector dualism, the demographic transition and
  generalized dualism, and
• skills deepening and the spread of education
  represented by four
• variables
• Sector dualism () (inequality due to the average
  income difference between agricultural and
  non-agricultural sectors)
• Percent labor force in agriculture (-) (as
  agricultural sector is assumed more equal)
• Natural rate of population increase () (more
  people at bottom of pay scale, proxy for
  generalized dualism)
• Secondary school enrollment (-) (increasing
  supply of skilled workers, reducing educational
  premium)

20

• Explaining within-nation inequality
• In the second paper distributed for the Summer
  School (Alderson and Nielsen 2002), we develop
  and test a model that combines an attention to
  the relationship between inequality and
  development (i.e., the Kuznets problematic) with
  a focus on globalization and the role of
  institutions

21

• The Globalization Thesis
• Direct Investment Outflow
• DI may contribute to increasing inequality in 3
  ways
• DI contributes to de-industrialization (thus
  shifting labor force from less unequal
  manufacturing sector to more unequal services
  sector)
• DI undermines the bargaining position of labor
  (as labor is weaker vis-à-vis multinational firms
  than it is in relation to national firms)
• DI contributes to the cheapening of domestic
  labor by altering the distribution of income
  between capital and labor and the demand for
  low-skill labor (as jobs are exported through
  international relocation of manufacturing
  activity)

22

• The Globalization Thesis
• North-South Trade
• Southern Import Penetration (SI) may contribute
  to increased inequality in 2 ways
• SI decreases the average wage of Northern workers
  (by placing them in direct competition with
  Southern workers) unlikely
• SI reduces demand for unskilled relative to
  skilled labor (thus increasing the disparity in
  returns to skilled versus unskilled labor (e.g.,
  Wood 1994 c.f., Cline 1997)

23

• The Globalization Thesis
• Immigration
• Immigration may contribute to income inequality
  in 2 ways (depending on situation)
• immigrant population may have lower average
  skills than native population
• immigrant population may have bifurcated (i.e.,
  more heterogeneous) skills relative to native
  population

24

• Institutional Factors
• Union density (-) (unionization should reduce
  wage differential between blue- and white-collar
  workers)
• Wage setting coordination (-) (centralized
  bargaining should reduce wage dispersion)
• De-commodification (-) (to the degree to which
  workers can opt out of work while maintaining
  socially acceptable standard of living, pressures
  for wider wage differentials will express
  themselves in a fashion other than rising
  inequality)

25

• Table 2. The Kuznets Problematic, Globalization,
  and Institutions
• Semi-Standardized
• Coefficient
• __________________________________________________
  __
• Percent labor force in agriculture 3.568
• Union density -1.785
• De-commodification -0.820
• Southern import penetration/GDP 0.645
• Direct investment outflow/labor force 0.508
• Wage setting coordination -0.435
• Secondary school enrollment ratio -0.430
• Net migration rate 0.401
• __________________________________________________
  __
• Note Semi-standardized coefficient is the
  unstandardized regression
• coefficient multiplied by the sample standard
  deviation of the independent

26

• Table 3. The Kuznets Problematic, Globalization,
  and Institutions
• Maximum Longitudinal
  Impact
• __________________________________________________
  __
• Percent labor force in agriculture 3.523
• Southern import penetration/GDP 1.374
• Direct investment outflow/labor force 1.141
• Union density -0.919
• Secondary school enrollment ratio -0.871
• Net migration rate 0.835
• Wage setting coordination -0.510
• De-commodification -0.480
• __________________________________________________
  __
• Note Maximum longitudinal impact is the
  unstandardized regression coefficient
• multiplied by the average within-country range in
  X. Represents the maximum
• possible longitudinal (over time) impact of X on
  Y within a typical country.

27

• Conclusions
• On the one hand, if one wants to address the
  cross-national/ comparative question, Which
  countries have more or less inequality in the
  contemporary period?, one would look first to
  structural and institutional factors
• Level-differences in inequality are principally
  associated with
• - percent labor force in agriculture ()
• - then institutional factors, union density (-)
  and de-commodification (-)
• - and then aspects of globalization, Southern
  import penetration () and
• direct investment outflow ()

28

• Conclusions
• On the other hand, If one wants to understand the
  inequality trajectories traced out by rich
  countries in the contemporary period, one would
  look first to structural factors and factors
  associated with globalization
• Over-time changes in inequality are principally
  associated with
• - percent labor force in agriculture ()
• - then aspects of globalization, Southern import
  penetration () and
• direct investment outflow ()
• - and then institutional changes, union density
  (-)