Robots don’t necessarily mean fewer jobs but can impact inequality.

With the onslaught of COVID one wondered whether the jobs lost during the pandemic would “come back”. Part of the logic was that since robots don’t fall ill, bosses would turn to them instead of to people and COVID would act as a catalyst towards automation.

For a number of years the rhetoric has been that robots will see the end of a lot of jobs and whilst that maybe the case for some occupations the number of people in work has risen to very high levels in developed economies. For instance countries that have the highest presence of robot use e.g. Japan and South Korea also have the lowest unemployment rate. However both those countries do have ageing populations which does make the supply of labour more scarce. A study by Daisuke Adachi of Yale University suggested that between 1978 and 2017 an increase of one robot per 1,000 workers boost firms’ employment by 2.2%. Other research done in Finland concluded that the adoption of advanced technologies led to increases in hiring. According to The Economist there are an estimated 30m unfilled vacancies across the OECD.

“a strong positive association with firm survival, and that greater initial automation was associated with increases in employment”.

Automation and Inequality

However although technology doesn’t necessarily mean a loss of jobs it may have helped to increase the widening gap between incomes. In November 2021 Daron Acemoglu Testified its the US Congress on Automation and Economic Disparity. He identified two types of evidence to show the impact of technology on inequality:

  1. In local labour markets (commuting zones) where there has been faster adoption of industrial robots, we see not just lower employment and wages, but also greater inequality between high-education and low-education workers and a bigger gap between those at the top and bottom of the income distribution.
  2. There is an interesting relationship between two groups of workers – those that had their jobs taken over by automation and those that have not experienced much direct automation. Acemoglu’s research showed that those employed in routine tasks that can automated in industries undergoing rapid automation — have almost uniformly experienced large declines in their real wages. These groups include all demographic categories with less than a college degree. However those workers that have not experienced much direct automation, including those with post-graduate degrees and women with college degrees, have seen their earnings increase rapidly over the last 40 years. The Figure below indicates that more than half, and perhaps as much as three quarters, of the surge in wage inequality in the US is related to automation.

For more on Inequality view the key notes (accompanied by fully coloured diagrams/models) on elearneconomics that will assist students to understand concepts and terms for external examinations, assignments or topic tests.


Economists are revising their views on robots and jobs. The Economist – January 22nd 2022

Daron Acemoglu – Written Testimony, House Select Committee on Economic Disparity and Fairness in Growth Hearing on Automation and Economic Disparity. November 3, 2021


Nordic equality and the bumblebee

Always been interested in the Nordic economies especially when you look at their standing in HDI and other indicators like happiness, trust and ease of doing business etc. There is a series of three books that looks at the fundamental features of these societies whether it be Equality, Economic Performance and Happiness – see image.

The Nordic countries rank amongst the best for equality in society. How is it possible that these economies are some of the richest and the most equal? Many people compare the Nordic model of equality to a bumblebee. The bumblebee tends to go against the laws of aerodynamics – a very big body with tiny wings. The Nordic countries model of inequality is very expensive but there is still economic growth in the economy. Carsten Jensen talks of 3 aspects of Nordic society that makes this possible.

  1. The flexicurity system – flexibility and security. This is where employment regulation is fairly lenient (ability to make employees redundant) combined with a generous welfare programme The welfare support has two main aims: to protect against loss of income that come with losing your job and ensuring that you have the right skills to better fit the labour market. Should be noted that the government play an important role in the provision of free education at the tertiary level in Nordic countries. This leads to the golden triangle of flexicurity – flexible labour markets, training and retraining, and unemployment protection – see fig below.
  2. The business friendly environment. The World Bank’s Ease of Doing Business Index ranks countries according to how conducive their regulatory environment is to establishing and running a company. In the 2020 Index Denmark were 4th, Norway 9th and Sweden 10th. However this does not imply that equality is somehow intrinsically good for a country’s commercial environment.
  3. Social trust – this is important for growth as it make cooperation between individual citizens and companies easier. The lower transaction costs from social trust mean the environment is more conducive to investment from entrepreneurs and banks. Those countries that have less social trust spend more time and money on monitoring employees, other companies and consumers.

Source: Equality in the Nordic world – Carsten Jensen – 2021

The topic Inequality on elearneconomics has fully integrated flash (cue) cards linked back to the key notes that assist students to understand economic vocabulary, improve their skills, develop knowledge and build their confidence.

Norway and income distribution

In Norway, people right across the income distribution have high living standards. In the UK, US and Germany, the rich fare well but the poorest rank low vs other countries. From the graph below Norway does very well in equal distribution of income. The top 10% rank second for living standards as do the median (50%). The poorest 5% in Norway are the most affluent compared to other countries. Therefore in looking at all the percentiles Norway is a good place to live no matter what your income is.

Source: FT Britain and the US are poor societies with some very rich people – 16-9-22

Gini Coefficient
The Gini coefficient is the best known measure to convey an impression of the overall level of inequality in a country. It ranges from 0 where everyone is equal to 1 where one person owns the whole income of a country. However there are two shortcomings:

There is no intuitive understanding of what a Gini coefficient implies. Although it might say that one country is has more equal distribution how big are the differences really?
It gives a single figure for an entire country but it tells us nothing about which parts of society are causing the inequality. Is it the higher incomes being much greater than the rest of the population or is it the middle income group pulling away from the lower income group.

Comparing the very rich to the very poor does not tell us all that much about the everyday experience of ordinary people and societies they live in. Therefore by calculating ratios based on the income of the 10th, 50th and 90th percentiles we get a clearer picture of inequality. These two rations of 90:50 and 50:10 enable us to see the distance between the lowest-ranked wage earners and middle-class, and between the middle class and upper middle class.

Nordic countries – most equal in disposable income
The graph below shows the two ratios for disposable income in Denmark, Norway, USA and Italy for 2018. Nordic countries Gini coefficient are characterised by the short distance from the middle class to the upper class, and from middle class to bottom. Although they still have inequality it is evident that affluence is largely shared compared to other countries.

Source: Equality in the Nordic World -2021

Noridic countries – disposable income
90th percentile make 1.5 times more than 50th percentile
50th percentile make 1.8 times more than 10th percentile

90th percentile make 2.3 times more than 50th percentile
50th percentile make 2.7 times more than 10th percentile

Universal Welfare State.
There are three elements to this definition:
1. Rights and unconditional benefits: if you are unemployed, sick or old you receive benefits to compensate for income loss. You also have access to free education, medical treatment and care homes for the elderly.
2. Benefits are paid for via general taxes therefore individuals don’t have job-based insurance or health programmes. All citizens are members of the same health coverage programme which is run by the government.
3. Universalism – no matter what your income because you belong to the same job-based insurance programme all citizens will be treated the same from a manual worker to a business manager/doctor. This means the number of deeply impoverished people is very small in the Nordic countries.

Nordic countries – equality kicks in before welfare support.
The welfare state and government taxation are important mechanisms for redistributing money from the higher incomes to the lower incomes. Below are figures for the rations of gross income – people’s income before taxation and welfare payments. Therefore at a gross income level Nordic countries have a more equal pay before government intervention.

Source: Equality in the Nordic World -2021

Noridic countries – gross income
90th percentile make 1.5 times more than 50th percentile
50th percentile make 1.8 times more than 10th percentile

90th percentile make 2.3 times more than 50th percentile
50th percentile make 2.7 times more than 10th percentile

This equality comes about mainly due to centralised wage negotiations. In Nordics countries collective bargaining normally takes place for entire sectors between unions representing employees and the employer associations representing businesses. The deals struck by the two parties then apply to all non union members. By 2015 the percentage of workers covered by collective bargaining were as follows:
Sweden – 90%
Denmark – 84%
Norway – 67%
US – 12%

Although this compress may compress wages people in the same occupation generally make the same although there has been an allowance for individual top-ups based on performance and qualifications.

Source: Equality in the Nordic World by Carsten Jensen – 2021

The topic inequality and gini coefficient on elearneconomics has fully integrated flash (cue) cards linked back to the key notes that assist students to understand economic vocabulary, improve their skills, develop knowledge and build their confidence.

Wealth tax – pros and cons

Another of Martin Sandbu’s ‘Free Lunch on Film’ videos from the FT. This one looks at the pros and cons of a wealth tax. A well-designed net wealth tax can raise revenue and tackle inequality but critics say a wealth tax is hard to value, unfair to savers and inefficient. Well worth a look.

For more on Inequality view the key notes (accompanied by fully coloured diagrams/models) on elearneconomics that will assist students to understand concepts and terms for external examinations, assignments or topic tests.

Global GDP per capita – income up but unequal

If you are studying the Growth unit at CIE or NCEA the image below – from the ‘Visual Capital’ site which is well worth a visit – is a good discussion starter for your class. It has an interactive chart where you can elect individual countries and look at the GDP per capita form 1820 to 2018. The graph below shows the major groups of countries with New Zealand added.

  • 1800 – 80% of global population lived in extreme poverty
  • 1975 – incomes were 10 times higher on average. Post WW2 growth was rapid as Europe etc rebuilt after the war.
  • 2015 – incomes rose faster in developing countries with many lifted out of poverty. Between 1975 and 2015 saw the fastest decline in poverty.

In the 19th Century there was much more equal distribution of income across regions of the world – $1,100 per capita. Many lived below the poverty line but the world had less wealth. Today the GDP global average is approximately $15,212 but although there is more wealth the distribution is less equal.

At the highest end of the spectrum are Western and European countries. Strong economic growth, greater industrial output, and sufficient legal institutions have helped underpin higher GDP per capita numbers. Meanwhile, countries with the lowest average incomes have not seen the same levels of growth. This highlights that poverty, and economic prosperity, is heavily influenced by where one lives.

Sign up to elearneconomics for multiple choice test questions (many with coloured diagrams and models) and the reasoned answers on Real GDP. Immediate feedback and tracked
results allow students to identify areas of strength and weakness vital for student-centred learning and understanding.

Global Inequality – 10% of population own 76% of wealth

The Lorenz curve is a useful tool used by those interested in statistics and economics to give a picture of income distribution. Its plots the % of household income on the vertical scale against the % of households on the horizontal. See opposite

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

Below is a graphic from the World Inequality Report 2022 published by the World Inequality Lab. Useful figures especially with the top 1% and 10% of world population and the distribution of wealth, income and carbon emissions. Much can be done about inequality and that it is always a political choice, with better policy design inevitably leading to fairer development pathways.

Source: IMF Blog

Sign up to elearneconomics for multiple choice test questions (many with coloured diagrams and models) and the reasoned answers on the Gini coefficient. Immediate feedback and tracked results allow students to identify areas of strength and weakness vital for student-centred learning and understanding.

Global Inequality – 1820-2020

Most secondary school economics syllabus include the topic of inequality and the gini-coefficient which has now become more prevalent in the minds of government policymakers. 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. 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 global Gini increased from 0.60 in 1820 to 0.72 in 1910, again 0.72 in 2000 and 0.67 in 2020 (see Figure 2.3). The decline in inequality was prevalent after the 2008 financial crisis. In all cases, global indicators indicate very high inequality levels in 2020 (close to those observed around 1900-1910, and substantially larger than those observed in 1820).

Source: World Inequality Report 2022

The graph below (Figure 2.1) gives the basic breakdown of the shares of world income going to the global top 10%, middle 40% and bottom 50% groups between 1820 and 2020. The main points are:

  • Global inequality has always been prevalent
  • Top 10% income approximately 50-60% of total income between 1820 and 2020
  • Bottom 50% share remained between 5-15%
Source: World Inequality Report 2022

Share of National Income by Country

Note that South Africa has the most unequal distribution of income whilst New Zealand is 142 out of 167 countries.

Source: World Inequality Report 2022

For more on Inequality view the key notes (accompanied by fully coloured diagrams/models) on elearneconomics that will assist students to understand concepts and terms for external examinations, assignments or topic tests.

Inequality Policies – Predistribution vs Redistribution

One of the main areas of concern from the COVID-19 is the increasing level of inequality. Low-skilled workers have lost jobs as the pandemic has been the catalyst for rapid automation which could make jobs obsolete. Policies need to focus not just on redistribution but also predistribution – see image.

Predistribution – government policies aimed at narrowing differences in market incomes at their source, e.g. education, health
Redistribution – public intervention through transfer payments and taxes related to unemployment, disability, sickness etc.

Source: IMF – Tackling Inequality on all fronts. March 2022

In order to tackle inequality a mix of these two policies is required to try and achieve a level playing field before people enter the labour market. Countries that spend more on social security an have a more redistributive tax system tend to be more successful on average in reducing inequality. Fiscal policy seems to be the most effective policy instrument to achieve this.

In many developing and developed countries there are big differences between income groups and their access to quality education. Also government spending can compensate lower income groups with better infrastructure – clean water, sanitation and basic health services. These policies can increase intergenerational mobility. Progressive taxation has potential to reduce inequality if countries have relatively low rates in terms of its overall burden. However, no government will have enough money to throw at the inequality problem and invariably there will be an opportunity cost – more money spent on education means less on healthcare etc. While fiscal policy has helped reduce inequality in countries it has come at the cost of very high debt levels which now need to be addressed by policies to bring deficits to sustainable levels.

Social Mobility and Education
Education is generally seen as one of the vehicles for increasing social mobility. Research has shown that public expenditure on school education is strongly linked to the degree of income equality. Norway – 97.8% of money spent on school education is part of public expenditure USA – 68.2% of money spent on school education is part of public expenditure. This is likely to have a substantial impact on social differences in access to higher education. America now has lower social mobility than Denmark, France and Germany – see graph below with spending on education, health, and social protection.

In unequal societies, young people from poor families are more likely to drop out of school. More parents struggle with mental health problems, long working hours and debt. Income inequality in the USA is 39 (100 is complete inequality – 1 person owns all the income of the country) Denmark is 25. New Zealand Gini Index is 35 with spending on education, health etc lower than Denmark as a % of GDP.

Source: IMF – Tackling Inequality on all fronts. March 2022

What does Denmark do?

  • University education is free and childcare is well funded
  • The biggest boost to social mobility is wealth distribution. The Personal Income Tax Rate in Denmark stands at 55.8%. It averaged 60.66 percent from 1995 until 201

Across the West rising inequality hampers innovation and entrepreneurship. A study of 21 countries showed that as inequality rose the number of patents fell. Reducing inequality is one of 17 of the United Nations Sustainable Development Goals.

Source: IMF – Tackling Inequality on all fronts. March 2022

For more on Inequality view the key notes (accompanied by fully coloured diagrams/models) on elearneconomics that will assist students to understand concepts and terms for external examinations, assignments or topic tests.

Externalities of Food

Informative video from the FT that looks at the externalities of food covering – environmental cost, health costs and social costs. It focuses on the ‘True Cost Accounting’ and uses the example of coffee where a 1 kilo bag from Brazil costs $2 but the real cost is around $5.17 when you include that farmers are underpaid, there is unsustainable water use, air pollution, climate changing energy supplies and land degradation.

To encourage greater sustainability Rabobank introduced ‘The Rabo Impact Loan’ which is a low-interest business loan created especially for farmers that have a high sustainability performance. Good introduction to market failure.

Is China becoming a more equal society?

The presence of technology in rural China is evidence that it is not just the booming cities that are the sources of growth. Furthermore, it suggests that inequality which has been symbolised by the ‘country versus city’ divide is now starting to decline.

Since the 1980’s China has gone through massive growth but it hasn’t been evenly shared. Income inequality is traditionally measured by using the Gini coefficient.

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:Lorenz 2

0 = perfect equality where say, 1% of the population = 1% of income, and

100 = 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.

In 2010 China’s Gini coefficient was 61 which was one of the world’s most unequal countries however officially it has been falling for seven years from 49 in 2008 to 046 in 2015. Rural incomes have grown more quickly that their urban counterparts – in 2009 the average urban income was 3.3 times that of a rural worker but now it is 2.7 times. Many of those living in rural areas actually work in cities but are prevented from living there because of the strict residency system. Also companies have now been looking to the rural areas for cheap labour. However, in 2019 China’s official Gini is 46.5 (see graph), meaning that the expected gap will be 93% (ie, twice the Gini) of China’s average disposable income. Since average disposable income was 30,733 yuan ($4,449) in 2019, the expected gap would be about $4,138.

Source: The Economist – 2nd October 2021. Just how Dickensian is China? Inequality is betterthan it was. But it doesn’t feel that way

Veblen goods and how to own part of a Birkin Bag

Online trading site Rally Rd has introduced an opportunity to part own various luxury items. For instance you could become part owner of a $61,500 Birkin Bag or top of the range Lamgourghini car. Rally Rd acquire the most noteworthy items from collections and individuals all over the world and make them into “a company”. They then split it into equity shares and open an “Initial Offering” where investors can purchase shares & build a portfolio. After 90 days, investors have the chance to sell shares in-app or add to their position on periodic trading days (through registered broker dealers).

The market for investing in fractions of items otherwise seen as collectibles — and largely reserved for the wealthiest people — has seen an uptick in interest during the pandemic as people spend more time at home. Although there is a potential return on the investment you never get to see your Birkin Bag or Lambourghini. Shares are traded until the owner of the marketplace sells the asset.

Are Birkin Bags Veblen Goods?

Conspicuous consumption was introduced by economist and sociologist Thorstein Veblen in his 1899 book The Theory of the Leisure Class. It is a term used to describe the lavish spending on goods and services acquired mainly for the purpose of displaying income or wealth. In the mind of a conspicuous consumer, such display serves as a means of attaining or maintaining social status.

Economists and sociologists often cite the 1980’s as a time of extreme conspicuous consumption. The yuppie materialised as the key agent of conspicuous consumption in the US. Yuppies didn’t need to purchase BMWs or Mercedes’ cars for example; they did so in order to show off their wealth. This period had its origins in the 1930’s with Austrian economists Ludwig von Mises and Fredrick von Hayek – the latter being the author of “The Road to Serfdom”, in which he said that social spending rather than private consumption would lead inevitably to tyranny. Margaret Thatcher (UK Prime Minister 1979-1990) and Ronald Reagan (US President 1981-1989) believed in this ideology and cut taxes and privatised the commanding heights in a move to a free market environment.

So-called Veblen goods (also as know as snob value goods) reverse the normal logic of economics in that the higher the price the more demand for the product – see graph below

Over the last three decades conspicuous consumption has accelerated at a phenomenal level in the industrial world. Self-gratification could no longer be delayed and an ever-increasing variety of branded products became firmly ingrained within our individuality. The myth that the more we have the happier we become is self-perpetuating: the more we consume, the less able we are to tackle the myth.

The Economist 1843 bi-monthly magazine had a very good article on Hermès’s Birkin handbag (named after Jane Birkin, an Anglo-French actress who spilled the contents of a overfull straw bag in front of Jean-Louis Dumas, Hermès’s chief executive) and how it has become one of the world’s most expensive – prices start at $7,000; in June Christie’s Hong Kong sold a matte Himalayan crocodile-skin Birkin with a ten-carat diamond-studded white-gold clasp and lock for $300,168. The rationale for its expense is that it is hand crafted and can take up to 18 hours to complete although the production cost is estimated to be around $800.

One would think that this would be a Veblen Good – a good in which the higher the price the more demanded. However there are a couple of ways that the Birkin handbag is not.

1. The bag is not all that conspicuous as although most people can identify Gucci, Louis Vuitton or Chanel, a Birkin is not so easy to find. In fact it is an inconspicuous but expensive bag. This theory was explained in the article “Signalling status with luxury goods: the role of brand prominence” from the Journal of Marketing (2010). It divided the high income earners into two groups;

Parvenus – who want to associate themselves with other high income groups and distinguish themselves from those who do not have material wealth.

Patricians –  who want to signal to other people in their high income bracket and not to the masses. They are of the belief that more expensive luxury goods aimed at them will have less obvious branding than cheaper products made by the same company. This was achieved with smaller logos for more expensive items and larger ones for cheaper goods which are aimed at the masses. People who cannot afford the luxury items will buy the big logo items (louder products) and this is where the counterfeiters have a field day.

2. Normally producers of Veblen goods should raise the price till the point where the demand curve starts to follow it normal shape – downward sloping from left to right. However with Birkin they maintain its exclusivity not by raising the price but by limiting the supply. Unlike other Veblen goods you just can’t walk into a shop and buy a Birkin bag – you have to place an order and wait for it to arrive. But you would wonder why they don’t sell more and make more money? It is a supply constraint – limited availability of high-quality skins and craftspeople to make them – it takes two years training. Hermès suggests, Birkins are mined, not simply made.

Commercial Reasons to limit supply of Birkins

Rationing by supply rather than price does make good commercial sense for the following reasons:

1. It gives Hermès a buffer as if demand drops, sales will not.

2. It creates excess demand for the bags, which overflows into demand for other Hermès products – wallets, belts, beach towels etc.

3. Profitability in the short run would reduce its exclusiveness as the main buyers of the bags would eventually be those concerned with social climbing. Therefore the rich may lose interest in the bags and so will those that aspire to be like them.

However I not sure Hermès actually want you to buy their amazingly expensive bag.

Should we stop consumption?

Geoffrey Miller is his book – Spent: Sex, Evolution, and Consumer Behaviour – examines conspicuous consumption in order to rectify marketing’s poor understanding of human spending behaviour and consumerist culture. His thesis is that marketing influences people—particularly the young—that the most effectual means to show that status is through consumption choices, rather than conveying such traits as intelligence and personality through more natural means of communication, such as simple conversation. He argues that marketers still tend to use naive models of human nature that are uninformed by advances in evolutionary psychology and behavioural ecology. As a result, marketers “still believe that premium products are bought to display wealth, status, and taste, and they miss the deeper mental traits that people are actually wired to display—traits such as kindness, intelligence, and creativity.

The recent global downturn with Coivd-19 has sent out a few mixed messages. Firstly there has been the reduction in consumption as people’s credit lines have dried up but there are those that believe that you should spend more to maintain growth and employment in the economy. With household budgets being very tight smarter consumption rather than less consumption has been advocated by Geoffrey Miller. He refers to this as more ethical consumption where the production of produce does not involve the abuse of natural resources or the exploitation of people or animals.

Does CEO pay equal their marginal revenue product?

One reason for the increasing inequality in society is the stagnant wages for the lower and middle income groups – in the USA the top 0.1% have as much wealth as the bottom 90%. Labour compensation at the very top has increased dramatically since the 1970’s.

1970’s – the top 0.1% took home less than 3% of all income
2010 – the top 0.1% took home more than 10% of all income

In the USA the top CEO’s average compensation has grown since the late 1970’s by over 900% to around $15 million a year. In contrast the lower income groups have gone up by only 10%. However when you look at hedge fund and private equity fund managers the salaries are astounding. In 2014 which was seen as not a great year for the industry 25 fund managers made at least $175 million each, and 3 made more than $1 billion.

Are CEO’s worth every cent?

In theory the demand for labour is determined by their marginal revenue product – that is the value of revenue generating by employing an additional worker. Labour markets are imperfect and a monopsony occurs in the labour market when there is a single or dominant buyer of labour. The buyer therefore is able to determine the price at which is paid for services. The monopsonist will hire workers where:

Marginal Cost of labour (MCL) = Marginal Revenue product of labour (MRPL)

Therefore it will use labour up to level of Eq which is where MCL=MRPL. In order to entice workers to supply this amount of labour, the firm need pay only the wage Wq. (Remember that ACL is the supply of labour). You can see, therefore, that a profit-maximising monopsonist will use less labour, and pay a lower wage, than a firm operating under perfect competition.

So if Goldman Sach’s CEO, Lloyd Blankfein, made $24 million in 2014, that’s because he is worth $24 million to his company. In short, you make what you deserve based on your skills, effort, and productivity, in this fairest of all possible worlds.

However this theory has little to do with how the world actually works. The idea that good CEO’s are entitled to enormous rewards is based on the belief that success or failure of the company depends on one person. According to historian Nancy Koehn, business is a team sport: not only is it impossible to quantify a single leader’s marginal revenue product; it is hard even to describe it clearly. Ultimately a CEO can appoint friends and place them on the compensation committee which recommends the CEO salary. The committee invariably proposes to pay at least as much as the median comparable company, because no board wants to admit that its company has a below-average leader. CEO’s do have key performance indicators (KPI’s) but the CEO can encourage the committee to select metrics that will be easy to satisfy. John Kenneth Galbraith describes CEO pay very succinctly – “The salary of the chief executive of a large corporation is not a market reward for achievement. It is frequently in the nature of a warm personal gesture by the individual to himself.”

Luck plays an important role in CEO’s pay. Heads of oil companies were paid more when profits increased, even when the profits were not due to their decision making but simply by a rise in the price of oil. On the contrary it is argued that some boards actually do a good job in firing under-performing leaders and that in the end, high compensation is simply the result of the market for talent – supply and demand. The financial sector tend to use the marginal revenue product of labour theory in their awarding of compensation for CEO’s. Bonuses of traders and investment bankers’ are based on the profitability of their own deals but because bonuses can never be negative, individual employees can generate enormous payouts on bets that turn out well while sticking shareholders with the losses on bets that go bad. Furthermore even if bankers do make money by buying low and selling high in the securities markets there is no value generation as there is no tangible output that anyone can consume.

In aristocratic societies such as 18th century France or 19th century Russia, wealthy noblemen who owed their riches to the accident of birth had to worry about the prospect of violent rebellion by the have-nots. By contrast in the US today the wealthy are protected by the widespread belief that their extraordinary incomes – and the inequality that they generate – are simply the product of inescapable economic necessity.

Source: Economism by James Kwak

Inequality and COVID-19

There has been some research into the correlation between inequality and deaths by covid-19.
Frank Elgar of McGill University co-authored a paper entitled The trouble with trust: Time-series analysis of social capital, income inequality, and COVID-19 deaths in 84 countries. They found that a 1% increase in the Gini-Coefficient is associated with a 0.67% increase in the mortality rate from covid-19.

What is the Gini-Coefficient?

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. This figure has recently changed to 100 so the range is 0-100.

* 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.

Higher Inequality = more deaths from Covid-19.

There are various reason why this could be a plausible justification:

1. There is some research to suggest that a higher income inequality leads to a lower life expectancy. Thus lower income groups cannot easily afford healthcare in that economy and therefore tend to suffer more from covid-19 as they are in poor health. Also inequality and pre-existing conditions may worsen the effects of the virus.

2. Workers in relatively egalitarian countries tend to have more bargaining power with employers and therefore air concerns about work conditions etc. Sweden’s front line workers have not on average faced a higher risk from covid-19 than other workers. This is in contrast to results from America, Britain and Canada, which are more lightly regulated.

3. Where there is distrust amongst the population – weak social capital – the willingness of people to comply with virus-control measures, such as self-isolation or masks on public transport etc, is disappointing. This is evident in New South Wales with the number of arrests for non-compliance around covid-19 rules.

4. Low wage workers are prevalent in retail, public transit, and health care settings who cannot easily practice physical distancing. This greater exposure to the virus and less access to health services among the poor could explain why more economically unequal countries – not necessarily the poorest countries – experienced significantly higher mortality rates. Countries with a larger gap between rich and poor, like the United States, Russia, and Brazil are experiencing a more deadly pandemic.

Final thought
High inequality is likely to continue to mean greater vulnerability to pandemics. Government’s have new challenges around inequality and pandemics including:

  • Vaccinating those that can’t book online / can’t get off work / have no form of transport
  • Economic incentives to stay at home if infectious
  • Investing more in children’s health which has long-term benefits.


The trouble with trust: Time-series analysis of social capital, income inequality, and COVID-19 deaths in 84 countries.

Why have some places suffered more covid-19 deaths than others? The Economist 31st July 2021

Can low inflation and financial stability reduce inequality?

Martin Wolf of the Financial Times wrote a piece on ‘Monetary Policy is not the solution to inequality’. In it he mentioned that as well as the traditional means of taxation and government welfare spending, can central banks also assist with reducing the level of inequality in an economy? In maintaining aggregate demand (C+I+G+(X-M)) and stimulating economic growth there runs the risk of higher prices and a business cycle that becomes a volatile series of booms and busts – see previous post.

With the housing sector coming under close scrutiny by central banks higher interest rates to reduce house prices would also impact AD and raise unemployment. With some lower income groups living from pay check to pay check this would make matters worse. The graph below shows the impact of taxation and welfare spending has on inequality levels – note China and India. You can see those economies that have a more left wing government policy objective.

Source: FT – Monetary Policy is not the solution to inequality.

Rising inequality had led government’s to choose between higher unemployment or increasing levels of debt by expansionary monetary policy from the central bank. Either you allow people to borrow excessive amounts of money to boost AD or the economy slows and unemployment rises. A better solution could be to reduce the incentive to fund housing etc by the accumulation of debt but with equity financing

The New Corporation – Documentary

Following on from the very successful documentary ‘The Corporation’ comes ‘The New Corporation’. The Corporation​ examined an institution within society. THE NEW CORPORATION reveals a society now fully remade in the corporation’s image, tracking devastating consequences and also inspiring movements for change. Click on the link below to view screening options – The New Corporation

Degrowth – is life better with less?

Most economics courses will include the topic of limitations of Gross Domestic Product as an indicator of standard of living. US senator Robert F Kennedy pointed out 50 years ago that GDP traditionally measures everything except those things that make life worthwhile. Increasing GDP has been the indicator of a healthy economy but is it time for degrowth? This CNBC video looks at whether degrowth is the way forward and should we priorities social and ecological well-being? Scotland, Iceland and New Zealand have focused on well-being rather than economic growth. New Zealand’s recent ‘well-being’ budget indicated this. Good video for the future direction of macro policies and where we are going as a society.

European Super League and so much for Joseph Schumpeter

Economist Joseph Schumpeter talked about creative destruction in that to survive capitalists continually seek more profits through the pursuit of new markets. With the presence of new markets this brings about more innovation removing the old businesses and opening opportunities for the new.

The free market, in which business is supposed to thrive, is based on weak barriers to entry, competition and less regulatory constraints. The extreme of this theory is perfect competition although in football we don’t have homogeneous products in that all teams are different. However the market does give teams the chance to gain promotion from lower divisions in English Football. Take for instance Leicester City winning the EPL and before them teams like Blackburn Rovers, Aston Villa, Nottingham Forest – the latter winning the league having just been promoted from the Second Division (in those days). These teams used innovation, coaching, strategically delving into the transfer market (not with the funds that some clubs have today) etc to form a successful team.

Nottingham Forest – Div 1 Champions 1977-78

The proposed ESL was all but free-market capitalism with an American style franchise system with 12 teams guaranteed a place in the competition – significant barriers to entry and not conducive to competition. So much for Joseph Schumpeter’s creative destruction with a group of elite clubs protecting their market and the owners being rentier capitalists. The ESL’s proposed move is similar to what has been happening in the market place – a structure of businesses taking huge debt and taking little interest in competition as long as they are making money. Manchester United, probably the most famous club in the world, got knocked out of the Champions League in the group stage but are still making a lot of money for the owners. It seems that the desire to win trophies has been superseded by profit – the proposed ESL avoids competition as member clubs are protected against the risk of failure. Not to say this is not already happening as the EPL and many other leagues in Europe are dominated by a small number of clubs which have significant funds available. This makes it near impossible for the other clubs to be competitive – remember Wimbledon winning the FA Cup in 1988 with the ‘crazy gang’. They had the worst stadium, poorly paid players and the lowest gates. It is hard to see supporters of less wealthy clubs being too enthusiastic about the excitement of victory.

The ESL has demonstrated that global capitalism operates on the basis of rigged markets not free markets, and those running the show are only interested in entrenching existing inequalities. It was a truly bad idea, but by providing a lesson in economics to millions of fans it may have performed a public service. Larry Elliott – The Guardian – 22-4-21

COVID-19 and a fairer economy

FT European Economics Commentary Martin Sandbu believes the COVID-19 pandemic is a once-in-a-lifetime chance to rebuild better economies that work for everyone. Sandbu author of ‘The Economics of Belonging’ – see previous post – talks here about the polarisation of rich societies since 1980. The main points of interest that he raises are below. Worth a look.

  • 1980 – large number of jobs available in factories start to disappear.
  • Globalisation – not the main cause of unemployment but technology has taken a lot of the manual and clerical jobs (structural unemployment) and retail has gone online.
  • Tax systems have not redistributed income – unions have been in decline.
  • Rural areas worst effected – good jobs more prevalent in cities so rural areas suffer.
  • Low paid service jobs have been impacted by COVID-19. Also as they involve contact with others there is more exposure to the disease.
  • Pandemic catalyst for change. History tells us – US Great Depression = New Deal, 2nd WW = postwar welfare state.
  • Technology change is with us so the need to find new ways of working. Do we have a Universal Basic Income (UBI)?
  • Lower burden of employing workers – less income tax, payroll tax and generally make it cheaper to hire people in to better jobs. Make up the shortfall in revenue elsewhere.
  • With the significant increase in inequality – introduction of a wealth tax. Also a tax on carbon emissions and redistribute to help the worse off.
  • Greater need to overcome regional inequality within countries
  • Need to the political will to make economies work better for everyone.

Minimal monetised societies and happiness

For less developed countries economic growth is often assumed to improve the happiness of the population although this relationship has come under a lot of scrutiny in recent times. A new study shows that people in societies where money plays a minimal role can have a level of happiness comparable to those living in Scandinavian countries which typically rate highest in the world. An interview with Eric Galbraith (McGill University, Canada) on Radio New Zealand’s ‘Sunday’ programme caught my attention in which he discusses the research undertaken in the Solomon Islands and Bangladesh. The paper is entitled:

Happy without money: Minimally monetized societies can exhibit high subjective well-being

Public policy that has focused on GDP growth fails to capture other aspects such as income inequality, the depletion of natural resources, environmental concerns etc. However subjective well-being (SWB) is an indicator that is more associated with the variables that matter to people. Galbraith et al question the role of money in determining SWB and reference the Easterlin Paradox (see below) which found that people don’t tend to get happier when their income goes up – see graph below.

What is the Easterlin Paradox?

Easterlin Paradox
  1. Within a society, rich people tend to be much happier than poor people.
  2. But, rich societies tend not to be happier than poor societies (or not by much).
  3. As countries get richer, they do not get happier. Easterlin argued that life satisfaction does rise with average incomes but only up to a point. One of Easterlin’s conclusions was that relative income can weigh heavily on people’s minds.

It is generally believed that people in less developed countries that have minimally-monetised economies have low that SWB. However the fact that happiness has a universal feeling suggest that income may be just a substitute for other sources of happiness, an assumption that is easier to notice in settings where money has little or no use. They used three independent measures to assess complementary but distinct psychological dimensions of SWB.

  1. Cognitive life evaluation – this asks about a person’s satisfaction with life and questions are phrased in a few different forms.
  2. Affect balance – asks what emotions they had experienced throughout the previous day, and calculated as the difference between positive and negative emotions.
  3. Momentary affect – data was obtained by querying subjects by telephone at random times about their emotional state.

Researchers selected four sites in two countries:

Solomon Islands – round 80% of the population live in rural subsistence communities and it has a Human Development Index (HDI) of 0.546 (rank 152 in the world). The sites were Roviana Lagoon (rural site) and Gizo (urban site)

Bangladesh – 35.9% of it being urban, and has an HDI of 0.608 (world rank 136). The sites were Nijhum Dwip (rural) and Chittagong (urban).

The graph below shows that the 4 sites, although are minimally monetised societies,
do experience high levels of SWB which challenge the prevailing view that economic growth is a reliable pathway to increase subjective well-being. While the data presented here were collected only in two countries and four sites this is the first study to that systematically compares standardised SWB measures in minimally monetised, very low-income societies.

Those left behind and the attacks on US Congress

Been reading an excellent book by Martin Sandbu (FT) entitled ‘The Economics of Belonging’. In it he addresses the problem that when an economy moves to more efficient ways of production new methods are established and old ones decline. For some who have been part of the old methods of doing things, the economic system has passed them by. He explains four ways how this has happened.

The plight of the uneducated. Economic value is now derived from cognitive skills and knowledge. The competitive nature of the global economy demands increased productivity which has streamlined production using technology and is cognitively demanding for the labour force. This results in the diminishing use of blue collar (manual) workers which tend to use little knowledge or initiative. As a result manual labour is not demanded like before and if there is any demand the wage is does not equate to what they received 10-20 years ago. As Sandbu states: If the world today offers much less than it once did to routine workers with only basic schooling or training, it is because they are less useful to the modern economy.

The triumph of cities. In most western economies poorer areas grew faster than richer ones therefore they were catching-up with the big cities. However at the start of the Thatcher and Reagan era the richer urban areas have pulled away from their rural counterparts. Deindustrialisation, especially in the UK, with the move from manufacturing to the service sector favouring urban areas where there is a concentration of people today’s most valuable skills and talent. If urban and rural areas go about different economic direction for long enough, inequality will increase as well as cultural separation which is turn leads to political separation. Sandbu points out that the strongest support of antiestablishment movements is found in the regions that have lost out in the competition to attract capital and skill.

The cost of staying put. If you stay in an area that is ‘the wrong side of the train tracks’ moving away from home will increase your chances of success. In the last 40 years those that have moved have reaped the benefits of higher incomes. One thinks about the UK and the North South divide with the migration flows south in search of opportunity. Regional inequality favours those who actually move, but also those capable of moving. Mobility reflects risk taking and a tolerance for what is new, different and uncomfortable whilst staying put comes with greater economic disadvantage than it did 40 years ago. From the 2016 US election: White Americans who still lived in the community where they were raised supported Donald Trump by 57% against only 31% for Hillary Clinton. Even those who lived two hours’ drive away preferred Trump. Among those who had moved further away, however, more supported Clinton.

Feminism is good for your wallet. The old blue collar work whether it be on production lines, oil rigs, truck driving, farming etc. were traditionally done by men. There was a macho image portrayed in these jobs but the new jobs were focused on the skills that create value in the new service and knowledge economy. It is estimated in the US that one in four jobs in the next decade are expected come in health care, social assistance, and education which tend to come with low status and lower pay. This means that more men (particularly unskilled) must be prepared to work in the service sector in jobs that are traditionally done by women. Soft skills are now increasingly rewarded and traditional manual work (mainly done by men) no longer attract much pay in the job market. Job roles must adapt in parallel with changing cultural expectations of gender roles in the home. Trump’s make America great again was a call to bring back the blue collar jobs but this was never going to happen with globalisation.

Sandbu points out that the one group which has been particularly effected by these four changes is low-skilled white men in small rural communities and subscribe to traditional cultural attitudes. Often blamed on globalisation, these consequences are the result of how we now produce output which has been driven by labour saving technology. Sandbu states that:

But we should recognise that much else of value was lost with jobs, and the dissatisfaction from these structural changes goes far beyond the financial.

It is only to be expected that these groups have become more visible within the populist insurgency and fresh in our memory is the attack on the US Congress on 6th January.

Source: The Economics of Belonging – Martin Sandbu 2020