Inequality Over Time
These empirical measures are then used by empirical researchers, who have provided
a series of facts about the correlates of inequality. Perhaps the most famous
relationship is the Kuznets (1955) curve shown in Figure 34.1. Income inequality first
rises and then falls as countries get richer. This curve points to the initial period of
industrialization as the point of development where inequality is maximizedIndeed,
US history shows a “great compression” during the middle decades of the twentieth
century (Goldin and Margo 1992) as the relatively equal period between 1950 and
1975 followed the far greater inequality of the Gilded age and pre-depression America.
Figure 34.1 also illustrates American exceptionalism as the USA ismuch more unequal
than other countries of comparable income.
The Kuznets curve is not just an economic phenomenon; it also reflects political
factors. The general pattern in industrializing nations is that there are few public
efforts to redistribute during early industrialization. During this period, traditional
private providers of charity (churches, charities, families) are expected to look after
the bottom end of the income distribution. As industrialization proceeds, governments
almost universally started taking a more active role in redistribution, which
is one reason why inequality declines with development. Development increases redistribution for at least three reasons: development is generally associated with
greater government size, probably due to increasing governmental competence;
development is associated with greater education and political skill on the part of
poorer citizens; and development transforms a dispersed agrarian workforce into
clustered industrial workers who can readily be organized.
Somewhat surprisingly, given the Kuznets curve, the great compression was followed
within the United States, and elsewhere, by a significant increase in inequality
since 1975. Katz andMurphy (1992) conclude that the period of rising inequality in the
USA appears to have been driven by rising demand for more skilled workers.
The rise
in demand for the skilled might be the result of a number of different changes including
skill-biased technological change, increasing trade and globalization, the decline
of manufacturing, and unions. Pride of place appears now to be given to changing
technology (Autor, Katz, and Krueger 1998) as the cause of greater inequality, but
other factors also matter.
While most authors seem to believe that rising inequality within the USA is the
result of economic as opposed to political changes, the impact of these economic
changes is determined in part by a political filter. Technological changes and increases
in world trade should impact most developed countries in similar ways. Yet the
USA has experienced a much more striking increase in inequality than most other
comparable countries (Picketty and Saez 2003; Blau and Kahn 1996; Hanratty and
Blank 1992), and economic forces alone do not appear to explain why inequality rose
so much more within the USA.
Political factors surely played some role in the greater increase in inequality within
the USA. At the top of the income distribution, less progressive taxation in the
USA made it easier for Americans to become rich and increased the incentives for
Americans to acquire large fortunes (Picketty and Saez 2003). Stronger unions in
Europe increased equality there among the many European workers whose salaries
are determined by collective bargaining (Blau and Kahn 1996).
Unions have generally
fought inequality among their members, perhaps because heterogeneity breaks down
union cohesion or because of the quasi-democratic nature of most unions. At the
bottom of the income distribution, general unemployment benefits and restrictive
labor market regulations ensure that more of the less productive European workers
leave the workforce and are therefore excluded from measures of wage inequality..
If changes in inequality within the USA and other countries are primarily the result
of changing returns to skills and government responses to those changing returns to
skill, then differences in inequality across countries reflect differences in the distribution
of skills. In particularly egalitari...
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Inequality might impact political outcomes in three different ways. First, rising
economic inequality should impact the level of post-tax inequality because of an
increased preference for redistribution by themedian voter. Second, higher inequality
might reduce redistribution and public good provisi...
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Few topics in the political economy of inequality have as rich a heritage as the study of
American exceptionalism, which in the context of inequality means why the USA is
less equal than Europe and why the USA never developed a full-fledged European
welfare state. Although de Tocqueville (1835) is r...
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This discussion still leaves one final puzzle: why do Americans and European have
such different beliefs about the nature of inequality in their countries? One thing
is clear. Differences across countries in beliefs about the nature of inequality don’t
reflect reality. As mentioned above, the avai...
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The first critique of governments’ abilities to engage in successful demand management
emerged from the rational expectations revolution in economics. Building on
the work of Friedman (1968) it was argued that, in a monetary policy game between
governments and rational economic agents, governments...
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