In early August this year fast-food workers across the US staged a walkout in protest about their levels of pay – they were demanding an increase from $7.25 (Federal Minimum Wage) to $15 an hour. Under the current minimum wage a worker’s income is $15,000 per annum which is below poverty level pay. Although the minimum wage has increased it is still below its peak in 1968 when it was worth approximately $10.70 an hour in today’s dollars. As well as the low pay, workers in the fast food industry get few benefits and also prospects for full-time work are limited. Add to that a weak job market and ultimately bargaining position, the prospects for these workers look bleak. Although this low pay has been prevalent for many years why is it that is has become such a political issue?
Why are older workers in fast-food and retail jobs?
Historically these part-time jobs have been filled by students or parents looking for work to supplement the family income. However with the downturn in the US economy and increasing unemployment, many in the labour force have had no choice but to try and pick-up any available work. This includes major income earners for families and today low-wage workers provide up to 46% of their family’s income. This is in contrast to forty years ago where there was no expectation that fast-food or retail jobs would provide the living wage as they were not the jobs that the main breadwinner in the household was employed in. In the 1980s profitable companies like Ford, General Motors and other manufacturing industries were big employers in the US economy. Workers were well paid and also had the benefit of pension plans and medical cover. However globalisation and the drive for lower costs have seen a number of US firms looking to locate overseas in countries such as Mexico and China.
The above is a brief extract from an article published in this month’s econoMAX – click below to subscribe to econoMAX the online magazine of Tutor2u. Each month there are 8 articles of around 600 words on current economic issues.
Another article by James Surowiecki in the New Yorker came up with some interesting statistics about the New York economy. The financial industry accounts for approximately 40% of all wages paid in Manhattan and 25% of the city’s GDP – that doesn’t include the legal industry which services the financial hub. Wall Street’s dominance curtails what can be done to reduce inequality but it is noteworthy that the top 1% of earners pay 43% of the NYC’s income tax.
Bill de Blasio, who won the Democratic mayoral primary in September, argued that to reduce inequality you need to increase the New York’s middle class which has fallen dramatically in the past few decades.
Where did the middle class jobs go?
For 30 years between 1969-99, NYC lost 400,000 jobs and ultimately workers. This was due to improved infrastructure and cheaper labour being enticed to the Sun Belt (a region of the United States generally considered to stretch across the South and Southwest) – latterly jobs in the manufacturing industry have gone overseas. Also with city policies designed to focus more on the financial sector and real estate, 51% of the remaining manufacturing jobs were lost in the last decade.
What does constrain the creation of middle income jobs is the cost of living – energy costs, taxes are steep, and rent is three times the national average. 30% of New Yorkers pay more than 50% of their income in housing costs.
Read the full article by clicking link below:
Below is an image from a website that shows how the heights of the buildings reflect the net worth of the people that are in them. There are a lot more images like this on the website below:.
Princeton economist Angus Deaton talks to the FT about his new book “The Great Escape”. He discusses a number charts including “Life Expectancy and GDP in 1960 and 2010″ which shows the significant increase in Inequality in 2010. Another shows the “height of women against national income” – it stresses the importance of health care in the early years. One of Deaton’s main themes is that economic growth does not necessarily produce improved quality of life, especially when income is distributed very unequally – as is the case in today’s United States. So for example, in spite of lower economic growth in France than in the United States, because of a less unequal distribution of income, “all but the top 1 percent of the French population did better than all but the top 1 percent of the American population”.
The Lorenz curve is a useful tool used by those interested in statistics and economics to give a picture of distribution. Its plots the % of household income on the vertical scale against the % of households on the horizontal. An example is shown right.
The Gini Coefficient is derived from the same information used to create a Lorenz Curve. The co-efficient indicates the gap between two percentages: the percentage of population, and the percentage of income received by each percentage of the population. In order to calculate this you divide the area between the Lorenz Curve and the 45° line by the total area below the 45° line eg.
Area between the Lorenz Curve and the 45° line / Total area below the 45° line
The resulting number ranges between:
0 = perfect equality where say, 1% of the population = 1% of income, and
1 = maximum inequality where all the income of the economy is acquired by a single recipient.
* The straight line (45° line) shows absolute equality of income. That is, 10% of the households earn 10% of income, 50% of households earn 50% of income.
* The Lorenz Curve itself shows actual distribution of income. The further the Lorenz Curve is away from the 45° line, the more unequal is the distribution of income.
* Lorenz Curves are typically drawn from gross income. Once disposable income is taken into account, the Lorenz Curve will most likely move inwards. This is because, as we shall see, the net effect of taxes and other distributional measures of government is to bring everyone’s disposable incomes closer together.
* Those countries where the wealth is in the hands of a few, such as oil sheikdoms, will have Lorenz Curves extremely bowed.
Lorenz curves may also be drawn to show the extent of inequality in the distribution of wealth. Such curves are likely to be even further away from the line of complete equality than are those of the distribution of income. This is because most people have some disposable income while not everyone has assets.
Tools of Redistribution
If we are concerned with how well-off people are and how much inequality there is, looking only at individual or household disposable income is not enough. It is not simply a matter of how much cash income the government leaves us with. The use of taxes and transfers may be the main way of directly redistributing income, but this is not the only way by which government can influence well-being. A combination of approaches can better tackle the problem. In general we may consider that government influences the extent of inequality by:
• The way in which it raises taxes to pay for public goods that everyone has such as defence and parks. The tax system may be designed to take more from the higher income groups, while everyone gets similar benefits from the public goods.
• Giving transfers, such as family support and the sickness benefit, to those whose income is very low or who cannot earn.
• Providing collective goods mainly to the lower income groups.
• Providing targeted subsidies or subsidies received only by those with low incomes&emdash; e.g., housing loans and education grants.
• Providing general subsidies on basic goods such as bread, milk, GP services and electricity. These used to be far more important than they are today. Subsidies have the problem that they encourage waste.
• Ensuring that all employers pay a fair wage under minimum pay, equal pay and pay equity legislation.
• Ensuring that everyone has equality of opportunity. Those who wish to proceed to tertiary education, for example, should be given the opportunity.
• Encouraging training and acquisition of skills by all school leavers.
PBS Newshour Economics correspondent Paul Solman talks to Robert Reich about “Inequality for All,” a documentary about the former labour secretary’s personal crusade to explain to Americans why everyone should care about the nation’s growing economic disparity and divisiveness. Here is part of the interview in which Reich states what is bad about inequality.
Well it’s a bad thing in two regards, even if you don’t particularly worry about issues of fairness or public morality. It’s bad, number one, because no economy can continue to function when the vast middle class and everybody else don’t have enough purchasing power to buy what the economy is capable of producing without going deeper and deeper into debt. Seventy percent of the entire economy is basically consumer spending. And if consumers don’t have the wherewithal to spend because all the money’s going to the top, and the people at the top only spend a very small fraction of what they earn, then the economy is almost inevitably destined to slow.
Since the GFC in 2008 the world seems a happier place to be than it was before the event. This is according to a Ipsos a research company which completed a poll of 19,000 adults in 24 countries. However the term happiness is self-reported and the term means different things to different people. According to The Economist two conclusions have emerged from the data:
1. Large, fast-growing emerging markets do not share share rich industrialised pessimism. The happy countries got even happier – Turkey, Mexico, and India. Incidently even considering the tsunami and the nuclear accidents Japan’s ‘very happy’ category increased.
2. Happiness levels tend to rise with wealth and then plateau – The Easterlin Paradox. This usually happens when a country’s national income per head reaches around $25,000 per annum. But the highest levels of reported happiness are in the poor and middle income countries – Indonesia, India, and Mexico. In rich countries the levels range from 28% in Australia to 13% in Italy and 11% in Spain. Most Europeans are gloomier than the world average.
Levels of income seem to be inversely related to happiness and one can see that happiness depends on a lot more than material welfare. One just has to look at the Bangladeshi cricket supporters in the recent test with the Black Caps. Plenty of happy faces with an average income of $1,883 per annum and ranked 151 by the World Bank.
In the book “Inequality: A New Zealand Crisis” there is mention of another book entitled “The Spirit Level” by Richard Wilkinson and Kate Pickett which I blogged on last year. The Spirit Level argues that high levels of income inequality increase what is know as psychosocial stress: the psychological and physical effects of comparing oursleves to others and feeling inferior. Wilkinson and Pickett suggest that psychological stress is a powerful and insidious force, worseneing problems like mental health and obesity throughout society. When added to the effects of material poverty, psychological stress is likely to have a greater repercussions forthose on low incomes. From the garph below countries with low inequality have less health and social problems – Finaland, Norway, Sweden, Japan. Countries with high inequality do badly – USA, Portugal, UK.
Here is some introductory information and another image from the book Inequality: A New Zealand Crisis by Max Rashbrooke.
* New Zealand now has the widest income gaps since detailed records began in the early 1980s.
* From the mid-1980s to the mid-2000s, the gap between the rich and the rest has widened faster in New Zealand than in any other developed country.
* The average household in the top 10 per cent of New Zealand has nine times the income of one in the bottom 10 per cent.
* The top 1 per cent of adults own 16 per cent of the country’s total wealth, while the bottom half put together have just over 5 per cent.
Although U.S. GDP has grown over the last 35 years, average happiness has not. According to researchers at the University of California at Berkeley, the reason may lie in growing economic inequality. Paul Solman of PBS reports as part of his Making Sense of Financial News. Some good references to the book ‘The Spirit Level’ and an interview with Robert Frank of Economic Naturalist fame and the Darwin Economy.
A new book entitled Inequality: A New Zealand Crisis by Max Rashbrooke was recently launched and it traces New Zealand from being one of the most equal to unequal societies. Since 1982 real GDP has grown by about 35% but about 50% of that extra income has been acquired by the top 10% of income earners – their average incomes increased from $56,300 to $100,200. The lowest 10% of earners saw their incomes grow from $9,700 to $11,000 – see graph – Source Inequality: A New Zealand Crisis. The lost share of the national income with the lower income groups is indicative of economic conditions in the early 1990‘s and the 1991 Employment Contracts Act which acted as a catalyst to the loss of union power. The top 1% earn approximately 18% of New Zealand’s net wealth whilst the bottom 50% earn approximately 5% – see graph below for distribution of income – Source Inequality: A New Zealand Crisis
Rashbrooke does mention a quote of the late Margaret Thatcher in which she said that “It is our job to glory in inequality and to see that talents and abilities are given vent and expression for the benefit of us all.” However in the long run it is how much inequality that we feel is acceptable. According to New Zealander Robert Wade (LSE) inequality in the US caused the GFC and that after a certain level of inequality the economy enters into a bubble phase. As bank balances become greater they take more risks and lend to consumers who realistically cannot afford a mortgage but like to feel that they are catching up with the higher income groups. Ultimately it is about power and you only have to look at the lobby groups in the US to see the influence that they have over policy. In order to have a more equal society there must be a policy of integration and all citizens must have a pathway to follow whether this is access to education, healthcare and social assistance.
Here is a quote from Development Economist – Hernando De Soto from the PBS series ‘Commanding Heights’.
Oliver Twist has come to town, and he’s poor, and he’s got a TV set, and he’s able to see how you live as compared to how he lives, and he’s going to get very angry. So either you show him a capitalist route to do it and integrate him, or he’s going to find another ideology. And the fact that today there is no more Kremlin that is organizing a revolt doesn’t mean that they’re not going to find another capital, because when these things happen, when people are unhappy and rebel against a system, they’ll find another locus of power very, very quickly.
Here is a recent chart from The Economist. This is the first data on inequality to come out of China for 12 years – remember 0=perfect equality and 1=perfect inequality (all the income is earned by one person). It seems that poorer countries like South Africa, Nigeria and Brazil have benefitted from growth over the last few years but it hasn’t trickled down to lower income groups. As well as being better off Japan and Sweden seems to be more equal societies as opposed to India and China where most people are equally poor.
The Economist last year did a special report on the ‘World Economy’ focusing on the growing inequality. An area that was addressed was the trade-off between inequality and efficiency.
Last century inequality was seen as essential for investment and growth because rich people save more.
John Maynard Keynes – “precisely the inequality of the distribution of wealth which made possible those vast accumulations of fixed wealth and of capital improvements which distinguished [the Gilded Age] from all others”
Milton Friedman – stated that greater inequality would encourage people to work harder and improve productivity.
Gary Becker – inequality encourages people to invest in their education. Redistribution, in contrast, brings inefficiencies as higher taxes and government handouts deter hard work. The bigger the state, the greater the distortion of private incentives.
In China and India it has been freedom and better incentives that have been integral to economic growth, however some of the inequality that is apparent today is inefficient rather that growth promoting. The Economist came up with various reasons:
1. Countries with the biggest income gaps, increasing inequality is partly a function of rigidities and rent-seeking—be it labour laws in India, the hukou system and state monopolies in China or too-big-to-fail finance in America. Such distortions reduce economies’ efficiency.
2. Rising inequality has not, by and large, been accompanied by a smaller (and hence less distortive) state. In many rich countries government spending has risen since the 1970s. The composition has changed, with more money spent on the health care of older, richer folk, and relatively less invested in poorer kids. Modern transfers are both less progressive and less growth-promoting.
3. Recent experience from China to America suggests that high and growing levels of income inequality can translate into growing inequality of opportunity for the next generation and hence declining social mobility. That link seems strongest in countries with low levels of public services and decentralised funding of education. Bigger gaps in opportunity, in turn, mean fewer people with skills and hence slower growth in the future.
The area of inequality and social mobility showed that the USA’s GDP growth was inversely correlated with their inequality of opportunity, but not with overall inequality. Known as the “Great Gatsby Curve” (see below) this suggests that countries with higher Gini coefficients tend to have lower inter-generational social mobility.
Here is a trailer to a new series from the BBC World Debate programme on poverty.
Why is that despite all our advancements, technological progress and increasing wealth, the twin scourges of extreme poverty and inequality still blight the lives of vast numbers of people in the 21st Century?
Joined by the former British prime minister Tony Blair, Oby Ezekwesili, a former Nigerian government minister, Vandana Shiva, a scientist and grassroots activist from India and the South African author Moeletsi Mbeki, Zeinab Badawi hosts the BBC World Debate from Johannesburg.
There are 5 parts to the series which cover the following:
Part 1 The causes of poverty
Part 2 The need for opportunity
Part 3 The prospects for Africa
Part 4 The importance of agriculture
Part 5 Possible solutions
Click the link below to go to the BBC webpage and view the debate.
BBC World Debate – Why Poverty?
Robert Frank, author of the Economic Naturalist and The Darwin Economy, wrote a piece in the New York Times on the influence money has on determining the outcome of political decisions. Wealthy donors to political causes will want to make sure that policies implemented by the authorities will mean lower taxes for them and less regulation for their businesses. As their income goes up this will only increase the monetary contribution they can give to demand greater favours.
This invariably leads to greater inequality and eventually may become so acute that even those politicians who have large funding from the corporate sector won’t succeed against opponents who seek major reforms. However, lower tax rates can have both positive and negative impacts on wealthy donors:
Positive - lower taxes mean greater disposable income and more consumption in the private sector.
Negative – budget deficits and the reduced quality and quantity of public services e.g. roads, schools, hospitals etc.
Those on higher incomes have been insulated from the declining quality of public sector goods and services by being able to pay for the equivalent in the private sector – schools, hospitals etc. But with a declining middle class it might be harder to recruit productive workers in addition to a reduction in demand for goods and services. Furthermore there are consequences of poor public goods/services that cut across the inequality of income and affect everyone:
* poor roads, bridges and general infrastructure
* electricity shortages/ blackouts (remember ENRON in California)
* effects of reduced investment in nuclear power that could be detrimental to safety
Frank asks which country would be happier? As improvements to cars are quite costly above a certain value and can be viewed as only minor, most people think that the BMW drivers are better off, not to mention safer. Furthermore the BMW drivers are less likely to feel deprived as societies don’t often mingle.
Frank concludes by saying:
So if regulation promotes a safer, cleaner environment whose benefits exceed those broadly shared costs, everyone – even the business owner – is ahead in the long run.
Here is a clip from Nial Ferguson’s Ascent of Money that I used in my AS class today. It explains the hyperinflation problem that Argentina experienced in the late 1980′s – early 1990′s and reminds us of the dangers of inflation. Anyone who thinks that you can solve a financial crisis by printing money might be interested in the Argentinian experience.
Former IMF Chief Economist and the person who saw the financial crisis coming, Raghuram Rajan, has argued that inequality caused the crisis and the US government helped in the process. Since the days of the Reagan Administration wages of the working class American have been falling behind. Reagan, as with Thatcher in the UK, introduced pro market reforms in the 1980’s but recent presidents have addressed the problem of stagnant wages by making access to mortgage finance a lot easier.
In 2007 – 23.5% of all American income went to the top 1% of earners – the highest percentage since 1929. Research has shown that the behaviour of the richest 20% has affected the spending of the bottom 80% – the more the rich spend the more the lower incomes want to keep up with them. It is commonly know as ‘trickle-down consumption’.
Less equitable distribution of wealth can boost demand for government borrowing to provide for the lower income. In the last decade this borrowing would have occurred with financial globalisation that allowed many governments to rack up debt cheaply. It seems that the ease of credit drives inequality.
Till van Treeck in the Guardian talks about higher inequality and easy access to credit being a reason for consumers to borrow beyond their means. There is mention of Rgahuram Rajan’s book “Fault Lines” which argues that lower and middle-class consumers in the US have saved less and borrowed more in order to increase their real incomes. This obviously kept aggregate demand and employment high but meant there was a huge amount of debt which contributed to the financial crisis of 2009-10. Rajan criticises the textbook theory of consumption as he believes that there is a link between income inequality and overall private consumption. Most would tend to agree with this statement as consumers tend not to be rational about their long-term income.
In 1996, Alan Greenspan, then chairman of the Federal Reserve Bank, noted in response to growing concerns about rising inequality that “wellbeing is determined by things people consume [and] disparities in consumption … do not appear to have widened nearly as much as income disparities”. In a similar vein, Fabrizio Perri and Dirk Krueger suggested in an influential scholarly article published in 2006 that “consumers could, and in fact did, make stronger use of credit markets exactly when they needed to (starting in the mid-1970s), in order to insulate consumption from bigger income fluctuations”.
Recent research has shown that the rise in inequality over the last few decades has been due to many households living beyond their means and being attracted into suspect credit they couldn’t pay back.
Bring back Keynes!
Keynesian economists believe that consumers care about their consumption relative to others as an indication of their social status. Therefore the further you get behind in your ability to purchase goods and services – in relation to others – the more pressure there is for you to borrow money.
Similarly, the basic Keynesian insight that middle-class incomes need to grow in line with productivity in order to sustain robust aggregate demand appears today more relevant than ever.
In the US the increase in inequality has meant that household have worked longer hours, saved less, and borrowed more in order to maintain a social status. Till van Treeck alludes to the fact that the dominant textbook economic theories of consumption look almost as toxic as some of the credit products that ultimately caused the crisis.
I like this graphic from The Economist as not only does it display the significant increase in inequality but also the changes in economic systems that were prevalent during the time period. Notice after 1930 the drop in the income levels of the top 10% and 1% earners. This can be partly explained by a return to a more dominant role of government. However after 1980 we see the impact of Reagan and Thatcher and the policy of less government and deregulation. This was especially evident with the repeal of the Glass Steagal Act in the US and Big Bang in the City of London.
Some key statistics from The Economist:
The top 10% of American earners brought in 46% of the nation’s salary income in 2007.
2007 – 2009 the inflation-adjusted income of the bottom 99% dropped by 11.6
2007 – 2009 the inflation-adjusted income of the top 1% dropped by 36.3%
However since 2009:
Top 1% of earners income has increased by 11.6% – bailout packages and bonuses?
The other 99% of earners income has increased by just 0.2%.
Obama intends to tackle this problem with increasing the top marginal tax rate to 39.6% of the late 1990’s. Between 1932 and 1944 the tax rate on top incomes rose from 25% to 94%. I think there is little chance of that happening especially with the impending election.
The Week magazine produced a very informative article on the German Labour market which focused on the creation of mini-jobs and their impact on the German economy. The German economy is racing ahead of the pack in the eurozone area and when you look at its fundamentals you wonder if it is going lap its counterparts. With unemployment in the eurozone reaching an all-time high of 10.7% the level in Germany is at its lowest for for 20 years at 6.7%. The German success is due in part to the weakness of the euro which has fallen 15% against the US$ since 2008. The weaker euro makes all European exports cheaper and Germany has been very well placed to take advantage of this. – in 2011 it recorded a trade surplus of €158bn. However Germany wouldn’t be in this position if it hadn’t been for some major reforms in its economy 10 years previous. As the other EU countries relaxed labour laws Germany used the global boom to tighten its regulations.
By early 2000, and 10 years after reunification, Germany was seen as the sick man of Europe. Unemployment had reached 10.5% by 2003 and then Chancellor Gerhard Schroder asked Peter Hartz (Head of HR at Volkswagen) to look at the labour market. He concluded that German work practices were outdated when a single earner could support households with 9 to 5 jobs at the same time there were generous unemployment benefits. In its place he proposed “mini-jobs” and 2007 10 million Germans had a mini-job with 7 million relying on them as their only source of income.
What are the benefits?
The main idea was to create as much flexibility as possible. The main characteristics are as follows:
1. Mini-jobs pay up €400 a month
2. Employers must assist another €100 to the state for social security benefits.
3. As long as the €400 limits not breached, workers pay no tax
4. They can do as many mini-jobs as they like.
5. The jobs are designed to be picked up and dropped at short notice.
This flexibility meant that during the major recession of 2009 Germany did not experience mass lay-offs. In fact the government implemented a programme which allowed employers to cut the hours of employees and the government would subsidise the remainder of the employees pay.
Although a very competitive low-wage economy was built it has widen the divide between the income levels in the labour market. In fact after the US and South Korea, Germany has one of the most unequal labour markets in the developed world. As there is no set minimum wage for “mini-jobs” a person can earn €4 a hour to under €1 per hour. With around 50% of the labour force in “mini-jobs” there is a free market in which wages have been falling. Between 2000-2010 average salaries rose, but low incomes – those below €960 a month – fell by 10%. Almost 1.5 million people with “mini-jobs” now rely on the state for benefits, including 358,000 who work full time but can’t live off their pay. See video clip below from Deutsche Welle.
The strait of Hormuz, in the Persian Gulf, is 21 miles across at its narrowest point and connects the world’s major oil producers with their markets overseas. Approximately 14 huge oil tankers pass through the strait per day carrying on average 17 million barrels of oil which equates to 20% of the world’s supply. Since the oil crisis years of 1973 (oil price up 400%) and 1979 (up 200%) the straight has been know as the most vulnerable economic ‘chokepoint’.
Iran has threatened to close the straight if any further sanctions were imposed on them (due to its contentious nuclear programme). They can easily follow through on their threat by deploying a stockpile of 2,000 mines.
So what would be the economic impacts if Iran did close the strait:
- It is predicted that oil prices will rise by 50% in a matter of days – US$160/barrel
- Fuel prices would follow suit and industrial economies would be hit hard by cost-push inflation- see graph below.
- China, which gets 50% of its oil imports from the area, would find it difficult to adjust to oil shortages
- Iran rely on oil revenue for 50% of its national budget. Oil is 80% of its export revenue.
Will it close?
For Iran to close the Strait would be like ‘shooting themselves in the foot’ – the Iranian economy would go through a major downturn with no doubt increasing inequality and levels of poverty. From 1st July this year the EU will put an embargo on Iranian oil imports to Europe worth about €13bn to Iran. The West know that Iran can’t do without oil revenue.