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James Galbraith LBJ School UT Austin Levy Institute EPS thanks
 
(UTIP No.1)
Constructing Long and Dense Time-Series of Inequality Using the Theil Index

Year-to-year economy-wide measures of income distribution, such as the Gini coefficient, are rarely available for long periods except in a few developed countries, and as a result few analyses of year-to-year changes in inequality exist. But wage and earnings data by industrial sectors are readily available for many countries over long time frames. This paper proposes the application of the between-group component of the Theil index to data on wages, earnings and employment by industrial classification, in order to measure the evolution of wage or earnings inequality through time. We provide formal criteria under which such a between-group Theil statistic can reasonably be assumed to give results that also track the (unobserved) evolution of inequality within industries. While the evolution of inequality in manufacturing earnings cannot be taken as per se indicating the larger movements of inequality in household incomes, including those outside the manufacturing sector, we argue on theoretical grounds that the two will rarely move in opposite directions. We conclude with an empirical application to the case of Brazil, an important developing country for which economy-wide Gini coefficients are scarce, but for which a between-industries Theil statistic may be computed on a monthly basis as far back as 1976 [ Full Text ]

 
(UTIP No.2)
The Distribution of Income
Inequality has become perhaps the foremost preoccupation of modern empirical economics. Yet the conventional theoretical explanations of changing inequality rest on premises long ago demolished on logical grounds. This paper summarizes a Keynesian theory of income distribution. The theory integrates macroeconomic and distributive phenomena and so accounts for the empirical relationship between the changing shape of the distribution and major macroeconomic events. [ Full Text ]
 
(UTIP No.3)
Globalization and Pay: Remarks to the American Philosophical Society
My concern is with pay. It is with the distribution of pay, with the economic and social relationship between the well-paid and the poorly paid, between the working prosperous and the working poor. Since the early 1980 inequality of pay has risen sharply, both within nations and between them. Everyone knows this. The issue that divides the economics profession is: why? [ Full Text ]
 
(UTIP No.4)
Inequality and State Violence: A Preliminary Report

This preliminary report asks whether there exist systematic relationships between changes in economic inequality and levels of state violence in countries around the world. The question is, of course, quite natural. Entire lexicons exist that describe economic relationships in terms that evoke violence; such words and phrases as exploitation, dependency, unequal exchange and class struggle are but prominent examples. And the case histories of war, revolution, state terrorism and coups d are certainly loaded with analyses of what seem transparently to be efforts either to rectify gross inequalities, or else to impose them.

Yet from the standpoint of an empiricist, interested mainly in the search for patterns in data, substantial obstacles stand in the way of definite observations. There is first of all the difficulty that reliable measures of change in economic inequality, measures that are both consistent and consistently available, have not existed. Second, there is the problem of arriving at a consistent categorization of types of violence, so that one may predict the effect of each type on economic inequality and vice versa. Third, there is the problem of developing consistent and comparable data across countries and through time on levels and types of violence. [ Full Text ] [IIC*]

(UTIP No.5)
The Evolution of Industrial Earnings Inequality in Mexico and Brazil

We use industrial data to derive estimates of the pattern of change in wage inequality in Mexico and Brazil. Using the group decomposition of Theil's T statistic we present monthly series of measurements of change in the dispersion of industrial wages for Brazil (1976 through 1995) and for Mexico (1968 through 1997). Both countries show increases in wage dispersion over time, and we find a strong negative correlation with the rate of real economic growth, suggesting that real per capita income growth is important in the determination of movements in inequality. Heterodox plans seem to reduce inequality in the short-run. [ Full Text ] [IIC*]

(UTIP No.6)
Cluster and Discriminant Analysis on Time-Series as a Research Tool

This paper presents a procedure for studying industrial performance and related issues such as changes in the wage structure. This procedure combines cluster analysis and discriminant analysis as a package, and applies this package to time series data. This enables us to organize industrial data into groups with similar wage or performance histories and then to extract summary time-series showing the main pattern of variation in performance between groups. [ Full Text ]

 
 
(UTIP No.7)
Measuring the Evolution of Inequality in the Global Economy

This paper provides a summary of information in the UTIP data set on the evolution of industrial earnings inequality in the global economy. At present the data set covers 66 countries, with annual observations going back to 1972 in most cases and to 1963 in many. Our measure of changing inequality, based on the group-wise decomposition of the Theil statistic across industrial categories, appears to be a sensitive barometer of political and economic conditions in many countries, and the percentage change in this index appears to be meaningfully comparable across countries. We also measure and detect regional patterns of similarity in the movement of inequality through time. [ Full Text ] [IIC*]

 
 
(UTIP No.8)
Inequality in American Manufacturing Wages, 1920-1998: A Revised Estimate

In recent work one of us has presented measurements of the evolution of inequality in the U.S. manufacturing sector, from 1920 to 1992. This paper updates and revises those estimates, using a monthly data set for wages and employment of production workers in 18 sectors, for which continuous data are available back to January, 1947. The main findings of the previous study are confirmed: there is a close connection between the dispersion of hourly wage rates and unemployment. But the previous series erred in bridging a gap in the data between 1947 and 1958 by assuming that inequality in manufacturing in that period tracked the movement of a Gini coefficient for household incomes, which was fairly stable during this time. In fact, in the 1950s manufacturing wage rate inequality rose sharply, reaching the extreme levels of the 1930s. An implication is that inequality in manufacturing hourly wage rates in the late 1970s and 1980s, previously thought to be lower than during the Great Depression, was in fact much higher. The new series also shows that wage rate inequality began declining again in 1994, and has now fallen to just below the peaks of the inter-war period. The data are current to the end of 1998. [ Full Text ] [IIC*]

 
 
(UTIP No.9)
Inequality and Financial Crises: Some Early Findings

We employ the UTIP data set on the evolution of earnings inequality in manufacturing in the global economy to illuminate two questions. First, do regional patterns of similarity in the movement of large macroeconomic aggregates, such as real GDP, imply underlying similarities of industrial structure, so that knowledge of one national economy in a GDP cluster can reasonably be assumed to convey useful information about the others? We show that this is not generally the case. Particularly, regional co-movement of GDP in Asia, which is very strong, masks deep dissimilarities in underlying employment structures -- and, we argue, a range of potential sources of transmissible financial crisis. Second, what are the consequences of crisis for inequality? We show that crises typically generate increases in inequality, but more so in less developed countries, and more so in regions that are more liberal in their policy regimes. [ Full Text ] [IIC*]

 
(UTIP No.10)
Grading the Performance of the Latin American Regimes 1970-1995

For most of Latin America the 1970s were a decade of growth, though with political upheaval in Argentina and Chile. The 1980s were a disaster. The 1990s have seen economic reform, liberalization, a return to democracy and financial turmoil. This study attempts to explain the three decades as one piece, through an analysis of the evolution of earnings inequality from year to year in eight major Latin American countries and one Caribbean nation. We find that changes in earnings inequality are a sensitive indicator of slump, repression, political turmoil, civil war, natural disaster and -- on the positive side -- occasional periods of growth and stability in Latin America. Indeed almost the whole recent history of Latin America can be summarized in the movement of industrial inequality statistics. [ Full Text] [IIC*]

 
 
(UTIP No.11)
Inequality and Unemployment in Europe: The American Cure

In this paper we show that inequality and unemployment are related positively across the European continent, within countries, between countries and through time. This contradicts the often-repeated view that unemployment in Europe is attributable to rigid wage structures, high minimum wages and generous social welfare systems. In fact, countries that possess the low inequality such systems produce experience less unemployment than those that do not. Moreover, large inter-country inequalities across Europe aggravate the continental unemployment problem. There is no paradox in low American unemployment. It stems in part from that country’s continent-wide programs of redistribution, including the Social Security System, the Earned Income Tax Credit, the federal minimum wage, and a uniform regime of monetary policy geared toward full employment, all of which reduce inter-regional inequality and all of which we recommend for adoption by the European Union. [ Full Text ] [IIC*]

 
 
(UTIP No.12)
Inequality and Industrial Wage Change in Brazil

This paper focuses on two questions. First, how did inequality in the industrial wage structure of Brazil evolve from 1985 to 1995? Second, what is the relationship between these dynamics and economic policy? We display the evolution of wage inequality in Brazil and relate this evolution to changing macroeconomic conditions. Our analysis suggests that there is a strong relation between rising inequality and the restructuring of the Brazilian economy that occurred in the middle 1980’s. [ Full Text]

 
 
(UTIP No.13)
Inter-Industry Wage Structures: New Evidence from the OECD

This paper presents an analysis of the evolution of industrial wages in a selection of OECD countries, using data drawn from the Structural Analysis Database and a sequence of techniques that apply cluster and discriminant analysis to time-series of wage change by industry. The principal finding is that a small number of well defined groups of industries usually exist, whose cross-group differences account for almost all inter-industry wage variation. While the specific structure of groups varies according to patterns of natural resources, comparative advantage and trade union organization within each country, the between-group variation across time usually reflects the movement of macroeconomic variables, some of them internal and other external, such as inflation and exchange rates. In other words, individual countries appear to be able to control their internal institutional structures, perhaps best understood as pattern bargains, wage contours, or industrial sectors distinguished by type and degree of exposure to international trade. But they do not exercise internal control over the evolution of wage differentials across these groups, except insofar as they can manipulate the macro conditions to which the groups are differentially sensitive. [ Full Text ] [IIC*]

 
 
(UTIP No.14)
The Young Person’s Guide to the Theil Index: Suggesting Intuitive Interpretations and Exploring Analytical Applications
Growing interest in inequality has generated an outpouring of scholarly research and has brought many discussions on the subject into the public realm. Surprisingly, most of these studies and discussions rely on a narrow set of indicators to measure inequality. Most of the time a single summary measure of inequality is considered: the Gini coefficient. This is surprising not only because there are many ways to measure inequality, but mostly because the Gini coefficient has only limited success in its ability to generate the amount and type of data required to analyze the complex patterns and dynamics of inequality within and across countries. Often, in defense of the use of the Gini coefficient, it is argued that this popular indicator has a readily intuitive interpretation. While from a formal point of view most measures of inequality are closely interrelated, at an intuitive level this interrelationship is rarely highlighted. This paper suggests an intuitive interpretation for the Theil index, a measure of inequality with unique properties that makes it a powerful instrument to produce data and to analyze patterns and dynamics of inequality. Since the potential of the Theil index to generate rich data sets has been analyzed elsewhere (Conceição and Galbraith, 1998), here we will focus on the intuitive interpretation of the Theil index and on its potential for analytical work. The discussion will be accompanied throughout with empirical applications, and concludes with the description of a simple software application that can be used to compute the Theil index at different levels of aggregation of the individuals that compose the distribution. [ Full Text]
 
 
(UTIP No.15)
The Theil Index in Sequences of Nested and Hierarchic Grouping Structures

This paper discusses the implications of the decomposition property of the Theil index in sequences of nested and hierarchic grouping structures, formalizing general results applicable to a generic sequence of grouping structures. A specific application to data on wages and employment by industrial classification to measure the evolution of wage inequality through time will be explored, analyzing the links between Theil indexes computed at different levels of n-digit SIC codes. A dynamic analysis shows the extent to which a between group Theil statistic tracks the evolution of inequality within industries, and estimations are provided as to the amount of information gained by using ever more disaggregated grouping structures to assess the dynamics of overall inequality. The empirical illustration provides a monthly time-series for industrial earnings inequality in the US is computed at 2, 3 and 4-digit SIC codes from January of 1947 to March of 1999. [ Full Text]

 
 
(UTIP No.16)
Sustainable Development and the Open-Door Policy in China

We provide an historical survey of Chinese economic reform, a discussion of the current major problems, and measures of the evolution of inequality in China through time, 1979-1996.We argue that China's most pressing reform needs now are in the social sphere, specifically the creation of an adequate social security system. The paper concludes with maps showing measures of inequality within each province of China for the years 1989 and 1996, and the change over this period. The maps reveal a marked regional pattern of high and sharply rising inequality especially in North and West China, with a milder situation in the South. We suggest that this pattern is consistent with the Kuznets conjecture relating inequality to economic growth; the problem of rising inequality in China is in part the uneven character of growth and development across the country. [ Full Text]

 
 
(UTIP No.17)
Inequality and Growth Reconsidered Once Again: Some New Evidence from Old Data

In recent literature the famous Kuznets relationship between inequality and income has been reformulated in terms of levels of inequality and subsequent rates of growth. In this paper we criticize the World Bank data set on which these studies have been based, and present contrasting evidence on pay differentials derived from the 2000 release of the UNIDO Industrial Statistics, a rich source of information on inter-industry pay rates. Our evidence supports the original Kuznets formulation relating levels of inequality to levels of income (or changes in inequality to changes in income). We find that in modern data most countries are to be found on the downward-sloping portion of an inverted Kuznets U-Curve, and we find some support for an "augmented Kuznets curve" in which a few of the very highest-income countries experience rising inequality as their incomes rise. [ Full Text]

 
 
(UTIP No.18)
Wage Flexibility and Unemployment: A Panel Data Analysis of OECD Countries

This short paper revisits the relationship between wage flexibility and unemployment. The conventional view of a trade-off between equality and employment suggests that the relationship should be negative. Using a panel of data from ten OECD countries across a twenty-two year period, we find a positive relationship between unemployment, when the latter is measured both nationally and OECD-wide -- and wage flexibility, measured directly as the coefficient of variation of inter-industrial wage change. We suggest that the evidence available through the early 1990s never supported the conventional view. [ Full Text]

 
 
(UTIP No.19)
Inequality Dynamics: A Note on Time-wise Decomposition of Entropy-based
Measures of Inequality with a Special Focus on Theil Measures

This paper discusses the dynamic properties of generalized entropy measures of inequality, deriving an explicit expression linking changes in inequality with changes in the growth income. This establishes a time-wise decomposition for the family of generalized entropy measures of inequality, showing that the rate of change in the distribution of income can be divided into two parts. One is purely a function of the levels and rates of change of macroeconomic variables; a second part depends exclusively on the micro nature of the distribution process. We then focus on a subset of generalized entropy inequality indexes, focusing on Theil measures. By assuming that the distribution process follows a specific rule, we further simplify the time-wise decomposition formula, establishing a direct relationship between the rate of income growth and the rate of change in inequality as measured by Theil measures. A specific application of this formula to the simulation of an economy with a constant average positive growth rate produces behavior consistent with the Kuznets hypothesis. [ Full Text]

 
 
(UTIP No.20)
Increasing Inequality in China: Further Evidence from Official Sources, 1987-2000

This paper exploits the decomposability properties of the Theil index to present new evidence on the evolution of earnings inequality in China by sector and province, for the years 1987-2000. The official data sources have rich possibilities for interpreting China’s "Retreat from Equality." However careful attention must be paid to changes in category schemes and other matters that affect the interpretation of the data.[ Full Text]

 
 
(UTIP No.21)
Inequality and Economic Growth: Data Comparisons and Econometric Tests

This paper discusses two issues in the relationship between inequality and economic growth: the data and the econometrics. We first review the inequality data set of Deininger and Squire, which, we argue, fails to provide adequate or accurate longitudinal and cross-country coverage. We then introduce our own measures of the inequality of manufacturing pay, based on the UNIDO Industrial Statistics. In our view, these provide indicators of inequality that are more stable, more reliable, and more comparable across countries than those of Deininger and Squire. Turning to the relationship between inequality and development, we diagnose several common econometric problems in the literature, including measurement error, omitted variable bias, serial correlation in longitudinal data, and the possible persistence of lagged dependent variables. By taking steps to account for these problems, we seek more reliable inferences concerning the relationship between inequality, national income and economic growth. We find evidence that generally supports Kuznets’ specification for industrializing countries: inequality tends to decline as per capita income increases. However, after 1981 two problems emerge. First, per capita GDP growth slows dramatically in most countries. Second, there is a worldwide trend toward rising inequality in our data, independent of GDP or its changes. The timing and geographic pattern of these increases suggest a link to the high real interest rates and global debt crisis of the period beginning in 1982. [ Full Text]

 
 
(UTIP No.22 REVISED)
Estimating the Inequality of Household Incomes: A Statistical Approach to the Creation of a Dense and Consistent Global Data Set

The deficiencies of the Deininger and Squire data set on household income inequality are well known to include sparse coverage, problematic measurements, and the combination of diverse data types into a single data set. Yet many studies have relied on this data due to the lack of available alternatives. In this paper we show how the UTIP-UNIDO measures of manufacturing pay inequality can be used, with other information, to estimate measures of household income inequality. We take advantage of the systematic relationship between the UTIP-UNIDO estimates and those of Deininger and Squire. The residuals from this exercise provide a map to problematic estimates in the Deininger and Squire data, and the estimated coefficients provide a way to construct a new panel data set of estimated household income inequality. This new data set provides comparable and consistent measurements across space and through time that Deininger and Squire's data do not pass. [ Full Text]

 
 
(UTIP No.23)
The Experience of Rising Inequality in Russia and China during the Transition

The collapse of the Soviet Union and the acceleration of economic reforms in the People’s Republic of China were hallmark events of the 1990s. The Soviet collapse had adverse consequences for many parts of the post-Soviet population -- including sharply rising mortality rates -- even as the country underwent a transition to apparent multiparty democracy. Meanwhile the Chinese experience produced a continuing rise of average living standards, with political change (mainly at the local level) only within the framework of continuing rule by the Chinese Communist Party. Thus the experiences of the two countries are widely viewed as having been polar opposites. Nevertheless, in both Russia and China, economic inequality rose sharply. In both countries, regional inequalities rose more sharply than inequalities across sectors but within regions. In particular, major urban centers gained dramatically, relative to the hinterlands. In both countries, moreover, there was a considerable reorientation of sectoral advantage, in both cases toward those sectors exercising the largest degrees of monopoly power. In both countries, the relative position of finance improved sharply, while that of agriculture declined. However the decline of agriculture in China was not as precipitous in China as in Russia, and certain sectors, such as education and science, maintained their position in China in a way that was not possible for them in Russia. [ Full Text]

 
 
(UTIP No.24)
Military Expenditures and Inequality: Empirical Evidence from Global Data

A substantial body of literature has uncovered a robust relationship between institutions-including unionization, political democracy and economic inequality. This paper examines the effect of military spending on inequality controlling for the size of armed forces, GDP growth, per capita income and other possible determinants. Using a panel regression with country level observations from 1987-1997, we obtained consistent estimates that there is a positive effect of military expenditure on pay inequality. Given the close relationship between pay and income this result suggests that a country’s reduction in military spending could reduce income inequality. [ Full Text]

 
 
(UTIP No.25)
Unemployment Inequality and the Policy of Europe: 1984-2000

This paper reconsiders the problem of unemployment in Europe at multiple geographic levels and through time from 1984 to 2000. We employ a panel structure that permits us to separate regional, national and continental influences on European unemployment. Important local effects include the economic growth rate, relative wealth or poverty, and the proportion of young people in the labor force. As part of this analysis, we assess the relationship between pay inequality and unemployment in Europe, following the insight of Harris and Todaro (1970) that pay inequalities influence job search. With our own panel of inequality measures derived from Eurostat’s REGIO data set, we find that higher pay inequality in Europe is associated with more, not less, unemployment, and the effect is stronger for women and young workers. There are modest country fixed effects for the UK and Spain, but large effects are found only for small countries. These are all negative, a fact that may be due partly to large past emigration in some cases, and partly to strategic wage bargaining in others. Apart from this, distinctive effects at the national level are few, perhaps indicating that national labor market institutions are not the decisive factor in the determination of European unemployment. Changes in the European macro-environment are picked up by time fixed effects, and these show a striking pan-European rise in unemployment immediately following the introduction of the Maastricht Treaty, though with some encouraging recovery late in the decade. [ Full Text]

 
 
(UTIP No.26)
Measuring the relationship between ICT use and income inequality in Chile

This note explores the relationship between the penetration level of Information and Communication Technologies and earnings inequality in Chile. The purpose of the note is to check whether income distribution significantly differs among ICT users and non users. I find that in addition to having a higher average income, the group of ICT users presents a broader dispersion of earnings than the group of ICT non users. In addition I present the results of a logistic regression showing that the most important factors facilitating or inhibiting Internet access are income, education, area of residence and gender. [ Full Text]

 
 
(UTIP No.27)
Income Distribution and the Information Technology Bubble

This paper explores the relationship between the between-groups component of Theil’s T Statistic measured across U.S. counties using Local Area Personal Income Statistics, and the information technology bubble of the 1990s. Our examination yields a predictable result: the technology boom had a major effect on the distribution of income in the United States. The surprising fact is that higher incomes in a mere handful of counties influence aggregate measures so dramatically. [ Full Text]

 
 
(UTIP No.28)
Pay Inequality in the Indian Manufacturing Sector, 1979-1998

This paper presents the trend of changes in pay inequality in the manufacturing sector of India, by regions and sectors, for the years 1979-1998. The decomposability property of Theil index enables us to show that manufacturing pay inequality in India has risen both across sectors and across regions, though more strongly across sectors. We also show that the rise in inequality accelerates in the period following the introduction of reforms, after controlling for changes in the level of real per capita income. It appears that a large part of rising manufacturing pay inequality in the post-reform period can be attributed to rising relative pay in the electricity sector. [ Full Text]

 
 
(UTIP No.29)
Within-state Income Inequality and the Presidential Vote 1992-2004: A First Look at the Evidence
This note seeks to relate macroeconomic and sociological variables to the state-by-state election outcomes of the 1992, 1996, 2000, and 2004 presidential elections. Our main purpose is to examine the degree to which within-state income inequality is related to the results. We find that that the Democratic Party systematically performed better in high inequality states, after controlling for state average income, minority population share, and urbanization. Testing different inequality measures, we find that a “top-bottom ratio” emphasizing the range of incomes performs better as an electoral predictor than does the Gini coefficient measured across state taxable income. [ Full Text]
 
 

(UTIP No.30)
Pay Inequality in Europe 1995-2000: Convergence Between Countries and Stability Inside

This paper measures pay inequality in the EU during the convergence process to the Monetary Union. The decomposability property of Theil’s T statistic permits us to construct a three-level hierarchical panel data set of pay inequalities for the years 1995-2000: between and within regions, countries, and for the European continent as a whole. We find a marked pattern of declining pay inequality across Europe for this period, which is due mainly to the rising (initially, negative) position of the United Kingdom and decreasing positive position of Germany. [Full Text]
 
 
(UTIP No.31)
Equality and Employment in the European Service Sector Economy, 1995 - 2000

The decline in manufacturing employment relative to service sector employment in most OECD countries has reopened debate over the relationship of employment growth to pay inequality. A widely-held view presumes that a trade-off exists; in this view labor markets matching the supply and demand for skill will generate new jobs only at the expense of greater inequalities. This paper examines the actual relationship between employment growth and pay inequality in services at the regional level for 14 European countries from 1995 to 2000. Our evidence does not support the hypothesis of a tradeoff.
In this period, the most rapid employment expansion in services occurred in real estate, in renting and business activities, in wholesale and retail trade, and in repair of motor vehicles, motorcycles and personal and household goods. All of these sectors have average wages well above the bottom of the pay distribution. Almost twice as many jobs were created in these sectors than in all the others, with the result that pay inequalities in services declined as employment grew. Overall we find a striking pattern of declining pay inequality across Europe as employment expanded in the service sector during the period of the introduction of the euro. [Full Text]

 
 
(UTIP No.32)
Holy Owned Subsidiary: Globalization, Religion, and Politics in the 2004 Election

This paper examines the role of religion in the 2004 US election. Using data from a recent Pew survey and the University of Texas Inequality Project, the paper shows that inequality counterbalances the oft-remarked tendency for richer societies to become increasingly secular. The paper suggests that globalization, by increasing inequality, has contributed importantly to the recent worldwide resurgence of religion. The analysis also points up flaws in “market” models of religion developed by Barro and McCleary and others.
The paper then develops a model of state-level voting in the 2004 presidential election. Using spatial regression, the paper finds that states with high percentages of evangelicals and Mormons were indeed more likely to cast more votes for Bush and Cheney. But the results also show that worshipers of the Golden Calf (“Are you better off today than you were four years ago?”) were also highly influential in determining the outcome, as was the decay of voting turnout in states between 1968 and 2000. A particularly striking result is that states that witnessed lesser changes in inequality (as measured by Census Bureau Gini Coefficients) were far more likely to vote for Bush in 2004. In sharp contrast, states such as Massachusetts, California, New York, or Connecticut, which topped all others in their increases in income inequality, went almost monolithically for Kerry. The paper concludes with an analysis of the effects of campaign financing, and particularly the “527s”, on state-by-state outcomes.
[Full Text]

 
 
(UTIP No.33)
State Income Inequality and Presidential Election Turnout and Outcomes

In this paper we use a previously neglected, high-quality data source to generate consistent annual measures of income inequality by state, for the fifty United States and the District of Columbia from 1969 to 2004. We use the estimates in a model of presidential election turnout and outcomes at the state level from 1992 to 2004. In recent elections, we find that high state inequality is negatively correlated with turnout and a positively correlated with the Democratic vote share, after controlling for race and other factors.
[Full Text]


 
(UTIP No.34)
The Decline of Pay Inequality in Argentina and Brazil following the Crises and Retreat from the Neo-Liberal Model

In this paper we analyze the distribution of pay and changing trends of inequality in Argentina and Brazil, illuminating the specific winners and losers, by region and by economic activity (sector). In both countries we find that inequality rose in the neoliberal period, but that it declined following the severe crises of neoliberal policy, in 1993 in Brazil and in late 2001 in Argentina. This period of post-neoliberalism is characterized in both countries by a decline in the economic weight of the financial sector and a recovery of the position of the civil service. In both countries, the rise in inequality leading to the crisis produced an increase in the relative position of the major metropolitan centers; this positional advantage also declined modestly in the post-crisis recovery period.
[Full Text]

 

(UTIP No.35)
Structural Change, Inequality and Growth in Mexico

This paper examines the relationship between income inequality and economic growth in Mexico. We first review changes in industrial trade, production, and investment patterns over the liberalization period and how those changes led to the creation of a relatively high-wage, economic enclave of industries producing capital-goods for export. We then compare annual changes in manufacturing pay inequality and annual GDP growth, finding that the previously stable, negative relationship predicted by Kuznets broke down at the height of the period of structural reform in Mexico, giving way to a positive relationship after 1989. The paper finds that reform fundamentally altered the relationship between inequality and growth as benefits accrued to an increasingly small number of firms. The findings support the hypothesis of an “augmented” Kuznets Curve according to which some developed countries are found on an upward-sloping addendum to Kuznets’ original formulation.
[Full Text]

 

(UTIP No.36)
Patterns of Wage Inequality in Costa Rica During the Structural Change, 1976-2004

This paper presents new measures of inequality for Costa Rica for each year from 1976 to 2004, using data on payroll and number of salaried workers by sector and province, provided by the insurance records of the country’s social security offices. Overall, after a long period of decreasing inequality from 1976 to 1985, wage inequality in Costa Rica has been more volatile during the last two decades. The behavior of inequality and real wages during the period 1976-1985 reflects the wage policies of the time before the application of the free market model. Reforms in the financial and health sector seem to be among the important factors influencing wage inequality since that time. Unionization in activities controlled by the state, and electoral cycles are also apparently important. Finally, the successful attraction of high technology firms to Costa Rica has been a key factor accounting for increasing average wages in manufacturing industries in the last decade.
[Full Text]

 

(UTIP No.37)
Economic Equality and Victory in War: An Empirical Investigation

This paper tests a simple hypothesis: that given the occurrence of war between two countries, the country that is more egalitarian at the moment of military decision is likely to emerge the victor. First, we examine cases where comparative economic inequality can be measured directly, using the nearly comprehensive global data-sets of the University of Texas Inequality Project for the years 1963-1999. Second, we examine cases where reasonable inferences about comparative economic inequality may be drawn by analogy to UTIP measurements or from other political and economic evidence, including both bi-national wars and larger wars where there existed clear pair-wise fronts. Third, we discuss selected cases where inferences may be drawn from literary or historical sources. We find, all in all, that the evidence for an egalitarian victory proposition is remarkably strong. [Full Text]

 

(UTIP No.38)
Pay Inequality in Cuba: the Special Period and After

This paper analyzes the evolution of pay inequality in Cuba from the early 1990s through 2004, during what was known as the “Special Period in Times of Peace” and after. We measure pay inequality across sectors and regions, using the between-groups component of Theil’s T statistic, and we map the changing components of that statistic in order to provide a compact summary of structural change in Cuba. This method helps us to observe the transition of the Cuban economy from one based fundamentally on sugar to one based largely on services, especially tourism, but also others with greater growth potential, such as information technology, pharmaceuticals, and biotechnology. Regionally, we observe that a main dividing line between winners and losers is the presence of tourist attractions: the recent increase of regional pay inequality is associated primarily with changing incomes in the city of Havana and the province of Matanzas. [Full Text][Espanol]

 

(UTIP No.39)
Maastricht 2042 and the Fate of Europe: Toward Convergence and Full Employment

This paper presents a strategy of economic convergence for Europe . European principles and ideals require convergence, but the pan-European economic policy of “labor market reform” imposes divergence, in the hope that greater inequality in European pay will bring Europe closer to the dynamism and employment performance of the United States . We resolve this European paradox by showing that in fact the (inter-regional) pay structure of the United States is substantially more egalitarian than Europe ; convergence toward American inequality levels will therefore require the systematic reduction of inter-regional pay differentials across Europe . We present quantitative targets for a strategy of egalitarian growth and pay convergence across the regions of Europe through 2042, the fiftieth anniversary of the Maastricht treaty. A theoretical section explains why such a strategy, following the experience of the American New Deal, should work to reduce the scourge of European unemployment. [Full Text]

 
(UTIP No.40)
The Changing Geography of American Inequality: From IT Bust to Big Government Boom
In this note we report on the changing geographical dispersion of incomes in the United States following the information technology bust of 2001. We find that the IT bust produced a sharp deflation of incomes in counties most closely associated with that boom, while from 2001 to 2004 the largest gainers were in counties strongly affected by federal government and military spending, and by the ongoing housing boom. The winners especially included the federal capital at Washington DC, and its immediate surroundings.[Full Text]
 

(UTIP No. 41)

The European Wage Structure, 1980- 2005: How much flexibility do we have?

High unemployment has been a problem in Europe for three decades. The orthodox view points to the institutional rigidity of national labor markets in Europe as a principal cause of high unemployment, and to labor market ‘flexibilization’ as the cure. An alternative view argues that the problem of unemployment in Europe indicates macroeconomic policy failure – an insufficiency of aggregate effective demand, given the wage structure. Both of these perspectives accept that the European wage structure is inflexible. This paper examines the rigidity of the European wage structure at the continental level, using average wages by sectors within countries as the unit of observation. We analyze the variation in the movement of relative European wages from 1980 to 2005 with a combination of cluster and discriminant analysis, which permits us to isolate the largest variations, and then to focus in on progressively smaller one. We find that there is variability in the European wage structure, and that the variations we observe are mainly associated with differing rates of change of investment, consumption and overall GDP growth between countries. This source of flexibility is usually ignored in analyses of European labor markets, but as Europe has become an integrated continental economy, it deserves to be taken into account. Doing so casts doubt on the labor market flexibilization prescription for European unemployment, since there appear to be no cases where falling relative wages led to higher employment, as the LMF hypothesis would predict. [Full Text]
 

(UTIP No. 42)

The Fed’s Real Reaction Function: Monetary Policy, Inflation, Unemployment, Inequality – and Presidential Politics

Using a VAR model of the American economy from 1984 to 2003 we find that, contrary to official claims, the Federal Reserve does not target inflation or react to “inflation signals.” Rather, the Fed reacts to the very “real” signal sent by unemployment; in a way that suggests that a baseless fear of full employment is a principal force behind monetary policy. Tests of variations in the workings of a Taylor Rule, using dummy variable regressions, on data going back to 1969 suggest that after 1983 the Federal Reserve largely ceased reacting to inflation or high unemployment, but continued to react when unemployment fell “too low.” We further find that monetary policy (measured by the yield curve) has significant causal impact on pay inequality–a domain where the Federal Reserve refuses responsibility. Finally, we test whether Federal Reserve policy has exhibited a pattern of partisan bias in presidential election years, with results that suggest the presence of such bias, after controlling for the effects of inflation and unemployment. [Full Text]

 

(UTIP No. 43)

Between-Sector Earnings Inequality in the United States

In this note we report on the evolution of between-sector wage inequality in the United States from 1969 to 2006. Our calculations take advantage of new NAICS sectoral classification, merging these with the earlier SIC scheme to achieve a single unified series. We compare this measure to the standard CPS-based Gini coefficient of household income inequality, showing that the evolution of the two series is very close. We show that between-sector variations dominate between-state variations in determining the evolution of inequality. The high importance of between-sector variations in driving overall U.S. pay inequality raises important questions about the standard invocation of education and training as a remedy for inequality, since the choice of specialization has become a speculative decision, whose income prospects depend heavily on the ebb and flow of sectoral economic fortunes.[Full Text]

 

(UTIP No. 44)

Information Society and Inequality: Wage Polarization, Unemployment, and Occupation Transition in Taiwan since 1980

This paper examines whether Taiwan's economic inequality has worsened as Taiwan has evolved into an information society and an economy concentrated on information and communications technology (ICT), a transformation underway since about 1980. We investigate three specific research questions: first, has there been a rise in wage inequality in Taiwan since 1980; and if so, what are the sources of this rise in inequality? Second, has the transition to an information economy contributed to a rise in unemployment rates? Third, what transformations of the occupational structure occurred during this transition? The paper shows that both economic inequality and unemployment have severely deteriorated in Taiwan since 1980. Further, the reasons seem closely related to the relative growth of information-intensive and ICT-relevant industries. [Full Text]

 

(UTIP No. 45)

Is China Really Running a Trade Surplus?

We examine China's macroeconomic and trade accounts for simple, tell-tale signs that capital inflows are being disguised as export earnings. We find large reported increases in a calculated unit value of Chinese manufactured exports, which do not appear to correspond to increased unit prices in the accounts of countries importing from China. We therefore suspect that the legalization of dollar accounts by firms resident in China, as well as an increase in expectation of RMB appreciation which occurred in 2003, have led to large disguised capital inflows. The magnitudes could range up to $529 billion by 2006. If this is correct, then China is not running a $170 billion current account surplus as officially reported in 2006, but rather a much smaller surplus, or even a deficit, obscured and financed by illicit. [Full Text]

 

(UTIP No. 46)

Growth with Equity? Pay Inequality in Chile during the Democratic Era (1990-2006)

This paper explores the evolution of pay inequality in Chile between 1990 and 2006, disaggregated by economic sectors, occupational groups and regions. We use the between-groups component of Theil’s T Statistic to obtain decompositions along these lines that are not available in previous studies of economic inequality in Chile. Between- sectors pay inequality increased from 1990 to 1996, after which it decreased, returning to 1990 levels by 2006. This rise and fall is explained primarily by changes in the relative position of the financial sector. Pay inequality between occupational groups did not change significantly during the period of study. Finally, inequality decomposed by region varies mainly with the relative position of Santiago, the richest and largest economic region. [Full Text]

 

(UTIP No. 47)

After Years of (Economic) Solitude: Neoliberal Reforms and Pay Inequality in Colombia

This paper presents an analysis of the evolution of pay inequality in Colombia's manufacturing sector from 1992-2004. Colombia's implementation of economic reforms, including the opening of the economy and the financial liberalization that began in the early 1990s, were the main drivers of change in the structure of the manufacturing sector, provoking fluctuations in pay inequality. Changes in pay inequality appear intrinsically related to macroeconomic phenomena: while GDP and investment were growing, pay inequality in the manufacturing sector decreased; conversely, under recessionary conditions we observe increases in pay inequality in manufacturing. At the sectoral level, we observe the declining importance (in terms of employment, production, and value-added) of labor-intensive, low-wage industries, and the rise of production in the high-wage natural resource processing industries. [Full Text]

 

(UTIP No. 48)

Inequality, Unemployment and Growth: New Measures for Old Controversies

This essays surveys some of the work of the University of Texas Inequality Project, a small research group that for the past decade has worked primarily to develop new measures of economic inequality, using a method based on the between-groups component of Theil's T statistic. In this way, inequality statistics can be computed from many diverse and mundane sources of information, including regional tax collections, employment and earnings, census of manufacturing, and harmonized international industrial data sets. The rich data environment so constructed permits new analyses of patterns of economic change, by region, by sector, and by country, and broadly supports the idea that the movement of inequality is closely related to macroeconomic events at the national and the global level. [Full Text]

 

(UTIP No. 49)

Pay Inequality in Turkey in the Neo-Liberal Era: 1980-2001

This paper examines pay inequality in Turkish manufacturing annually from 1980 to 2001. Using the between-group component of Theil' s T statistic, we decompose the evolution of inequality by geographic region, province, sub-sector and by East-West distinction both for private and public sectors. The decompositions show that while inequality remains approximately the same between regions, it increases in the late 1980s in the private sector between provinces, between East and West, and as well as between manufacturing sub-sectors. [Full Text]

 

(UTIP No. 50)

The Beijing Bubble: Inequality, Trade and Captial Inflow into China

This paper explores the relationships between inequality, trade and capital flows into China since the early 1990s. We show that the rise in inequality in China since 2000 has more to do with the speculative activities associated with China’s building boom, notably in Beijing, than with the massive growth in manufacturing employment and in Chinese exports since China joined the WTO in 2001. The paper also reports further research on the likelihood of large speculative inflows of capital into China via the current account. An earlier argument for this phenomenon based on inspection of apparent export unit values by sector did not withstand scrutiny in more detailed data sets. Rather, it is the flow of profits from the export boom that has, most likely, fed the speculative fires in the capital and elsewhere. [Full Text]

 

(UTIP No. 51)

Inequality and Economic and Political Change

This paper was prepared for the United Nations Research Institute on Social Development. It describes the broad evolution of inequality in the world economy over the past four decades, and summarizes the relationship between inequality, economic development, political regimes and the functional distribution of income. The evidence on inequality comes from a series of data sets built by the University of Texas Inequality Project, freshly updated through 2003, showing a decline in global inequality after 2000. Data on the related factors is developed in background papers by Hyunsub Kum, Sara Hsu and Olivier Giovannoni, to be published shortly in the UTIP working paper series. [Full Text]

 

(UTIP No. 52)

Inequalities, Employment and Income Convergence in Europe: Evidence from Regional Data

This paper explores the relationship between pay inequality and unemployment rates for 187 European Regions from 1984-2003. We measure inequality within the regions -- between 16 industrial sectors in each region -- and also between the regions: thus the inequality measures are nested. Our model of unemployment employs a panel structure that permits us to separate regional, national and continental influences on European unemployment. This allows us to test whether a tradeoff exists between cohesion and competitiveness. We find no evidence of this tradeoff; instead lower pay inequality is generally associated with a lower regional unemployment rate. We find strong country effects lowering unemployment (relative to the model) in relatively smaller countries such as Ireland, Austria, Portugal and the Netherlands; on the other hand unemployment is high, relative to the model, in Spain and Poland. Time effects reveal the effects of European macro-environment on regional unemployment. We find an employment penalty associated with the Maastricht Treaty (1992) and its implementation of around four percentage points, lasting until 1998, when a general reduction in unemployment appears to coincide with the arrival of the Euro. Unfortunately, the pattern is again reversed in 2000, coinciding with the implementation of the Lisbon Treaty. [Full Text]

 

(UTIP No. 53)

The Effect of Political Regimes on Inequality, 1963-2002

This paper was prepared for the United Nations Research Institute on Social Development. It provides evidence on the relationship between economic inequality and political regime. Where much of the literature argues that democracy is egalitarian, we find that indeed it is not, and we suggest that the conventional argument is an artifact of the data scales commonly in use. Using the latest UTIP-UNIDO data set on economic inequality (Kum 2008) and an original, categorical data set on regimes, we find that particular regime types do influence the level of inequality. In particular, communist countries and Islamic republics are more equal than their economic characteristics would predict, while conservative (as distinct from social) democracies are somewhat less equal than otherwise expected. Further, within democratic countries with changing governments and policies, we find short-term shifts in the level of inequality. However, these are generally smaller than those associated with major differences of regime type. [Full Text]

 

(UTIP No. 54)

Inequality and Structural Change

This paper presents an updated data set on inequality in structures of manufacturing pay for the years 1963-2002, using the standard methods of the University of Texas Inequality Project (http://utip.gov.utexas.edu). The paper then compares these measures with evidence on structural change, taken as changing shares of agriculture, manufacturing and services in total employment. A key finding is that low inequality is closely associated with low variability in inequality through time, and that movement out of agriculture is associated with high variability in the inequality of manufacturing pay. Thus the level of inequality is a reasonable index of underdevelopment, and the change of the UTIP inequality measure is an indicator of overall structural change in the process of development. [Full Text]

 

(UTIP No. 55)

A Biophysical Approach to Production Theory

Most people agree that human activities are consistent with physical laws. One may naturally think that sensible economic theories can be derived from physical laws and evolutionary principles. This is indeed the case. In this paper, we present a newly-developed production theory of economics from biophysical principles. The theory is a compact analytical model that provides, in our view, a more realistic understanding of economic (as well as social and biological) phenomena than the neoclassical theory of production. [Full Text]

 

(UTIP No. 56)

The Generalized Minsky Moment

The cornerstone of Hyman Minsky’s work is the concept of systemic instability. His work showed how systemic dynamics inherent to capitalism bread systemic fragility and crisis, as stability spurs risky behavior. Like Minsky himself succinctly articulated, “stability is destabilizing” (Minsky 1985). Moreover, this key notion is not only based on a clear and detailed analysis of modern financial capitalism, but is also essentially rooted on human psychology and behavior. As such, it is astonishing how little has been done to expand Minsky’s basic conceptual framework to other fields of study of social science. This paper represents an effort to fill this vacuum, as it attempts to expand Minsky’s theory of financial fragility to the realm of international relations. The objective of this project is to analyze the cycles of international relations in the light of a modified version of Minsky’s famous analysis of hedge, speculative and Ponzi finance. [Full Text]

 

(UTIP No. 57)

The Evolution of Economic Inequality in the United States, 1969-2007

This paper presents measures of the evolution of inequality across sectors and regions in the United States through 2007, showing that the movement of inequality depends critically on the changing relative share of a very small, spatially-and sectorally-concentrated part of the income-earning population. We also show that the movement of income inequality has depended heavily on the movement of prices in the stock market and of incomes in the financial sector. Finally, we show that since the early 1980s the movement of inequality and of jobs available per capita have been closely and positively associated. [Full Text]

 

(UTIP No. 58)

Functional Distribution of Income, Inequality and the Incidence of Poverty: Stylized Facts and the Role of Macroeconomic Policy

Using two high-quality and homogeneous datasets we find evidence of a strong and persistent link between the functional and the personal distribution of income on an international scale. In a panel of 25 countries, with most data starting in 1970 or before, we document that: (1) the labor share fell or remained constant in 23 countries while wage inequality (in the manufacturing sector) rose or remained constant in 18 countries. A decreasing labor share and increasing inequality is observed simultaneously in 17 (possibly 19) of the 25 countries. (2) Both inequality and overall wage share exhibit a turning point in the early 1980s (or 90s for some countries). (3) The pattern of poverty is closely related to the pattern of inequality: available data shows that countries with larger redistributive systems tend to be more equal and tend to have lower poverty rates.

What factors likely caused those similar patterns in poverty, personal and functional distribution of income? As expected, we find evidence of an important role for purely economic considerations. But the simultaneous timing and the strong, downwards convergence of European labor shares during the early stages of the European construction imply that other factors are at play. We suggest that the widespread structural changes in institutions and economic policies since the start of the 1980s, in Europe and elsewhere, explains the bulk of the international pattern in poverty, personal and functional distributions. Our findings confirm those of the major OECD (2008) research program on inequality and poverty, while extending it on the role of functional distribution and stressing the importance of macroeconomic policies.[Full Text]

 

(UTIP No. 59)

Pay Inequality in the Turkish Manufacturing Sector by Statistical Regions: 1980-20011

This paper analyses pay inequality in the Turkish manufacturing sector annually from 1980 to 2001. Using the between-group component of Theil’s T statistic, the paper provides more information on pay inequality. It decomposes the evolution of inequality by statistical regions -The Nomenclature of Territorial Units for Statistics - (i.e. NUTS-1 and NUTS-2) . The decompositions show that inequality increases in the late 1980s in the private sector both between regions of NUTS-1 and NUTS-2.[Full Text]

 

(UTIP No. 60)

Source of Inequality in Selected Mena Countries

This paper deals with income inequality in selected MENA countries, focusing on the dynamics of domestic wage differentiation. The main aim is to identify the sources of inequalities. GDP per capita, share of manufacturing sector, urban share of population, gender participation in the labor force, education and openness may be possible factors. The paper analyzes pay inequalities using a panel regression model where the Theil index is used as the dependent variable. The results show that GDP per capita and female labor force participation have positive (increasing) effects, and openness has a negative (decreasing) effect on pay inequalities in these countries. [Full Text]

 

(UTIP No. 61)

Military Expenditures, Inequality, and Welfare and Political Regimes: A Dynamic Panel Data Analysis

The goal of this paper is to investigate the relationship between type of welfare regimes and military expenditures. There is a sizeable empirical literature on the development of the welfare state and on the typology of the welfare regimes. There appear to be, however, no empirical studies that examine welfare regimes with special attention to military spending. This study aims at providing a comprehensive analysis on the topic by considering several different welfare regime typologies. To do so, we use dynamic panel data analysis for 37 countries for the period of 1988-2003 by considering a wide range of control variables such as type of political regimes, inequality measures, number of terrorist events, and size of the armed forces. Our findings, in line with the literature, show that there is a positive relationship between income inequality and share of military expenditures in the central government budget, and that the number of terrorist events is a significant factor that affects both the level of military expenditure and inequality. Also, the paper reveals a significant negative relationship between social democratic welfare regimes and military expenditures. [Full Text]

 

(UTIP No. 62)

Deunionization and Pay Inequality in OECD Countries: A Panel Granger Causality Approach

The impact of unionization on wage inequality has been examined by a vast literature. Focusing mostly on the US and the UK in time series analyses or on OECD countries in panel data analyses, a bulk of these studies have found a negative impact of deunionization (i.e. decline in the union density rate) on distribution of wages. By utilizing two inequality data sets both provided by the University of Texas Inequality Project this paper contributes to the literature, analyzing the causality relationship between deunionization and pay inequality for 24 OECD countries for the 1963-2000 period within a panel Granger structure. Our findings show not only that there is causality from union density to income inequality but also, perhaps more importantly, point out that there is causality running from income inequality to union density for various set of countries and time periods. [Full Text]

 

(UTIP No. 63)

A Brief Note on Deunionization and Pay Inequality in Turkey

Utilizing cointegration and causality methods, this study reveals that there exists a negative relationship between union density and pay inequality and that causality runs from inequality to union density in Turkey during the 1963-2008 period. [Full Text]

 

(UTIP No. 64)

What do we know about the labor share and the profit share? Part I: Theories

In this series of working papers I explore a theme enjoying a tremendous resurgence: the functional distribution of income --the division of aggregate income by factor share. This first installment surveys some landmark theories of income distribution. Some provide a technology-based account of the relative shares while others provide a demand-driven explanation (Keynes, Kalecki, Kaldor, Goodwin). I find that two questions allow us to better understand the literature: “is income distribution assumed constant?” and “is income distribution endogenous or exogenous?” However and despite their insights, these theories alone fail to fully explain the current deterioration of income distribution. [Full Text]

 

(UTIP No. 65)

What do we know about the labor share and the profit share? Part II: Empirical Studies

In this second part of our study we survey the rapidly expanding empirical literature on the determinants of the functional distribution of income. Three major strands emerge: technological change did it, international trade did it, and financialization did it. All contribute to the fluctuations of the labor share and that there is a significant amount of self-reinforcement among those factors. For the case of the U.S. it seems that the factors listed above are by order of increasing importance. I conclude by noting that the falling U.S. wage shares cointegrates with rising inequality and a rising top 1% income share. Thus, all measures of income distribution provide the same picture. Liberalization and financialization worsen economic inequality by raising top incomes, unless institutions are strongly redistributive. [Full Text]

 

(UTIP No. 66)

What do we know about the labor share and the profit share? Part III: Measures and Structural Factors

Economic theory frequently assumes constant factor shares and often treats the topic as secondary. In this paper I show that this is a mistake by deriving the first high frequency measure of the U.S. labor share for the whole economy. I find that the labor share held remarkably steady indeed, but that the quasi-stability masks a sizable composition effect detrimental to labor. The wage component is falling fast and the stability is achieved by an increasing share of benefits and top incomes. Using NIPA and Piketty-Saez top income data, I estimate that the U.S. non top 1% labor share has fallen 15 points since 1980. This amounts to a transfer of $1.8 trillion from labor to capital in 2012 alone and brings the U.S. labor share to its 1920s level. The trend is similar in Europe and Japan. The decrease is even larger when the CPI is used instead of the GDP deflator in the calculation of the labor share.[Full Text]


IIC*. This paper has now been published as part of "Inequality and Industrial Change: A Global View," edited by James K. Galbraith and Maureen Berner and available now from Cambridge University Press. In order to protect the publisher's best interest, it is accordingly that certain features like printing, text selecting, etc. are disabled.

 
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