Session 1 Labor Market

Nicholas Bloom, Stanford University and NBER; Fatih Guvenen, University of Minnesota and NBER; David Price, Stanford University; Jae Song, Social Security Administration; and Till M. von Wachter, the University of California at Los Angeles and NBER

Firming up Inequality (NBER Working Paper No. 21199)

Using a massive, new, matched employer-employee database that Song, Price, Guvenen, Bloom and von Wachter construct for the United States, they show that the rise in earnings inequality between workers over the last three decades has primarily been a between-firm phenomenon. Over two-thirds of the increase in earnings inequality from 1981 to 2013 can be accounted for by the rising variance of earnings between firms and only one-third by the rising variance within firms. This rise in between-firm inequality was particularly strong in smaller and medium-sized firms (explaining 84% for firms with fewer than 10,000 employees). In contrast, in the very largest firms with 10,000+ employees, almost half of the increase in inequality took place within firms, driven by both declines in earnings for employees below the median and sharp rises for the top 50 or so best-paid employees. Finally, examining the mobility of employees across firms, the researchers find that the increase in between-firm inequality has been driven by increased employee segregation—high- and low-paid employees are increasingly clustering in different firms.

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Bo Chen, Shanghai University of Finance and Economics; Miaojie Yu, Peking University; and Zhihao Yu, Carleton University

Measured Skill Premium and Input Trade Liberalization: Evidence from Chinese Firms

Using Chinese firm-level production data, Chen, Yu, and Yu developed a Mincer (1974)-type approach to investigate the impact of input trade liberalization on firms' wage inequality between skilled and unskilled workers (or skill premium). After controlling for output trade liberalization, they find strong evidence that input trade liberalization increases firms' skill premium and the effect is more pronounced for ordinary (i.e. non-processing) firms. The ordinary importers respond more forcefully to input trade liberalization in their wage schedule. The findings are robust to different measures of wage inequality, as well as different empirical specifications and data spans.

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Pi Chen and Suling Peng, CIER

Wage Inequality in Taiwan and Its Causes

Using a household survey data from Taiwan's DGBAS, Chen and Peng found a trend of generally shrinking wage inequality from 1991 to 2015 between the top and the bottom labor earners, and between workers with high educational degree and those without. The wage inequality between different skill workers, however, generally remained flat. They, by using models adapted from the "skill-biased technological change" (SBTC) framework, proposed a formal test to untangle the potential demand side and supply side effects through trade, technological development, and human capital investment on wage behavior in Taiwan.

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Session 2 Money, Fiscal and Finance

Masayuki Inui and Nao Sudo, Bank of Japan, and Tomoaki Yamada, Meiji University

Effects of Monetary Policy Shocks on Inequality in Japan

Impacts of monetary easing on inequality have recently attracted increasing attention. In this paper, Inui, Sudo and Yamada use micro-level data of Japanese households to study the distributional effects of monetary policy. They construct quarterly series of income and consumption inequality measures from 1981 to 2008, and estimate their response to a monetary policy shock. They find that monetary policy shocks do not have statistically significant impacts on inequalities across Japanese households in a stable manner. The researchers find evidence, when considering inequality across households whose head is employed, an expansionary monetary policy shock increased income inequality through a rise in earnings inequality, in the period before the 2000s. Such procyclical responses are, however, scarcely observed when the current data is included in the sample period, or when earnings inequality across all households is considered. They also find that, transmission of income inequality to consumption inequality is minor even during the period when procyclicality of income inequality was pronounced. Using a two-sector dynamic general equilibrium model with attached labor inputs, the researchers show that labor market flexibility is central to the dynamics of income inequality after monetary policy shocks. They also use the micro-level data of households' balance sheet and show that distributions of households' financial assets and liabilities do not play a significant role in the distributional effects of monetary policy.

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Yukinobu Kitamura, Hitotsubashi University; Takeshi Miyazaki, Kyushu University; and Taro Ohno, Shinshu University

Income Tax Reforms and Intra-Generational Redistribution: Evidence from Japan

In the 1980s, tax policy changes mitigate the redistributive effect of income tax. Miyazaki, Kitamura and Ohno attempt to explore how different the redistributive effect of the income tax reforms in Japan is among age groups, using Japanese household microdata for the period 1984-2009. The following results are obtained. First, overall redistributive effect was greatest for the elderly group, followed by the middle-age group, and then the young group. Furthermore, this trend increased steadily over time. Second, the difference in total redistributive effects between the young and elderly increased owing to a large reduction in the base effect for the young.

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Session 3 Education and Structural Policy

Joshua Aizenman, the University of Southern California and NBER, and Yothin Jinjarak and Ilan Noy, Victoria University of Wellington

Vocational Education, Manufacturing, and Income Distribution: International Evidence and Case Studies

The lower growth rates characterizing the post Global Financial Crisis era, and the concerns about income inequality put to the fore the degree that better targeted investment in human capital may ameliorate the challenges facing the working poor. Using cross-country OEDC data, Aizenman, Jinjarak, and Noy confirm the association between the income shares of the working poor and the availability of vocational education. Improved access to better vocational education will probably contribute more than large increase in regular college attainment. Contrasting the US to Germany suggests that pushing more students to BA granting colleges may not be an efficient way to deal with the challenges caused by the decline in manufacturing employment and affecting in particular lower-income households.

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Ronald Mendoza and Miann Banaag, Ateneo School of Government

Political and Economic Inequality: Insights from Philippine Data on Political Dynasties

There is an extensive empirical literature on economic inequality, yet few studies examine its political underpinnings. Mendoza and Banaag contribute to the nascent literature in this area by developing and analyzing new measures of political inequality. They draw on a comprehensive provincial-level dataset on local government leadership in the Philippines, and develop a political inequality index based on the concentration of elective positions among political dynasties. The researchers empirically examine the possible links across economic inequality, political inequality and development outcomes across 84 Philippine provinces. They finds that economic inequality displays a nonlinear relationship with indicators of human development — there is a positive correlation at lower levels of human development, and a negative correlation at higher levels. On the other hand, unlike economic inequality, political inequality seems to be associated with weaker development outcomes, regardless of the level of human development the province is in. Their finding emphasizes how future research on political inequality could yield new insights into the persistence and depth of poverty, human development and other forms of inequality.

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Session 4 Long-Run Perspectives

Dan Liu, Shanghai University of Finance and Economics, and Christopher M. Meissner, the University of California at Davis and NBER

Geography, Income, and Trade when Income Inequality Matters

Liu and Meissner investigate the relationship between trade costs, the location of economic activity and global income inequality between 1996 and 2011. Specifically they apply the aggregate AIDS-based gravity model as developed in Fajgelbaum and Khandelwal (2016) to a panel of 38 countries to generate a new measure of market potential. They then relate this measure of market potential to country level GDP per capita and find a significant relationship. As a determinant of GDP per capita, this measure performs as well, if not better than, CES-based measures. The AIDS model allows for non-homotheticities in demand allowing for the possibility that nations produce different types and qualities of goods and that income inequality and GDP per capita matter for the direction of trade. These forces also matter for market access, unlike CES-based market potential measures which are typically a function of overall income and trade costs.

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Jakob B. Madsen, Monash University

Piketty's Third Law of Capitalist Economics and the Dynamics of Inequality in Britain, 1210-2013

Piketty argues that wealth inequality is sharply increasing in `r - g` and refers to `r > g` as 'the central contradiction of capitalist economics', where `r` is asset returns and `g` is real income growth. To assess whether inequality is increasing in the `(r-g)`-gap Madsen 1) constructs unique annual data for the UK on asset returns for a balanced portfolio and several other variables over the period 1210-2013 and 2) examines whether the dynamics in the wealth-income ratio, `W-Y`, and capital's income share, `S^K`, are governed by `(r-g)`. He shows that `r` and `g` are robust and significant determinants of wealth and income inequality and have been the major forces behind the large inequality waves over the past eight centuries.