File 23: rising earning inequalities

Question 1

Explain the economic state of the United States and Canada in the late 1970s to the early 2000’s. (3)

Answer 1

1. Since the late 1970s GDP per capita has grown much quicker than the median household income in the United States
2. in the 2000s employment growth has been slower nonexistent (the decline that is found after 2008 is associated with the financial crisis)
3. inequality of earnings and income have risen

Question 2

Why has earnings inequality in the US risen? (6)

Answer 2

1. Skilled bias technological change
2. The freezing of the minimum wage in the 1980s
3. the effects of trade and foreign investment
4. immigration
5. change in social norms: accept ability of Gordon gecko
6. arise in the importance of performance related pay

Question 3

What is the evidence for skilled biased technological change? (3)

Answer 3

1. Rising earning inequalities
2. Rise in skill premium (earning of avg college grad/earning of avg seconddary school grad)
3. People who use computers get paid more than those who dont (pay rises w skill)

Question 4

What are examples of the evidence for skilled biased technological change.

Answer 4

1.The rise in inequality varies across countries(some countries like France not risen). But all countries have adopted ICT.
2. Outsourcing and its effects on the
earnings the poorly educated. Baldwin argues:
i) From 1820 to 1990 technological innovation (steam engine and subsequent very considerable improvements in it ) caused transportation costs to fall and trade to increase => comparative advantage operated: rich countries imported raw materials from poor countries, turned them into products and sold them to both rich and poor countries. This causes rising earnings in rich countries and, more generally, living standards that rose more rapidly in rich than poor countries.
ii) Somewhere around 1990 the ICT revolution gathered speed. It made possible the coordination of production and distribution at a world scale. Consequently, value chains were created involving both rich and poor countries - but, increasingly (because of wage costs) for poor countries
iii) This shift of production to poor countries: put pressure on rich country wages and growth accelerated in a subset of poorer countries: China, Korea, India, Poland, Indonesia, Thailand. Baldwin calls this the SECOND UNBUNDLING and it rests on the use of ICT to monitor production and distribution processat great distances. Modern outsourcing depends to some substantial extent on ICT.
3. Immigration (argued by George Borjas). US has a disproportionate
share of immigration (legal and illegal) is made up of Hispanics whose education levels are generally low. They compete with the poorly educated=> competition forces down earnings in the lower part of the distribution => increase inequality. (The points system means that immigration to Canada favours the highly educated. Aydemir and Borjas present some evidence that this has put pressure on earnings in the upper part of the Canadian distribution which would tend to reduce inequality.)
4. There are problems with association between computer use and pay.
i) When the kind of computer use associated with high pay was examined it turned out that the largest premium was for e-mail use (rather than design, use of spread sheets, or word processing).
ii) Panel data shows that average pay does not rise in plants that switch to introduce new technology (including ICT). In fact, what seems to be happening is that firms with higher pay have been more likely to adopt new technology.
iii) DiNardo and Pischke analysed data that showed that the pay premium associated with the use of a pencil is almost as high as the premium associated with the use of a computer! There is some reason to interpret this to mean that computers tend to be given to those with higher skills and pay.

Question 5

What proves that computers had effect on the demand for more highly skilled labour (wages)?

Answer 5

pay of electrical and computer scientist rose quickly: looking at the median wage relative to the GDP per capita and looking and some falls in male labour force participation does suggest thay some poorly educated males have had difficulty adjusting to changes in the character of the demand for labour.

Question 6

What explains hoe increase in earning have risen most at the top (for individuals at the top)?

Answer 6

1. There is the social norms/Gordon Gecko argument. (There is, as far as I know, no direct evidence for this.)
2. But there is strong evidence for a winner-take-all pay determination process, a process that is associated with new technology.

Question 7

How is The winner-take-all process is sometimes illustrated with classical music?

Answer 7

1. Before the development of recording, listening to music required attending concerts with audiences at each concert of some number of hundreds - going up to, perhaps a thousand.That meant that many singers could make an adequate living by providing concerts.
2. when recorded music became available, everyone could then listen to the performances if the best sopranos
3. The best sopranos get paid more than the second-best sopranos. But the marginal cost of printing an additional CD is very low. So the cost of a CD featuring the best soprano can be spread over a very large number of CDs. This means that the cost of a CD featuring the best soprano may be not much higher than the cost of the CD featuring the second best one even if the best soprano commands a higher fee. Indeed, with large enough sales it may be lower. (Compare the amount of revenue that a performance of the best soprano can generate when it has to be delivered in a local theatre.)
4. Buyers buy the best soprano’s CD. She dominates the market.
5. Consequently, all the recording companies bid for the very best soprano.
6. The result is that the pay gap between the best and other sopranos expands. It is much
   larger than it was before the spread of recorded music in the first part of the 20th century when access to operatic singing mostly involved going to a concert, and the best soprano could not be the sole performer across towns!

Question 8

Give two examples of how in winner-take-all markets, small differences in talent translate into large differences in earnings.

Answer 8

1. In professional sports - the rewards to winning the World Series as opposed to coming
   second are so great that owners will pay large amounts for small increases in
   performance.
2. Tax software (e.g., Qicken tax software) can be burned into disks at a low cost. Lots of
   people buy it. Less moderately well-paid accountants are hired and the designers of the software get very large incomes indeed.

Question 9

the basis for rising earnings at the top of the distribution in winner-take-all markets is: (4)

Answer 9

1. growth in the relative and absolute productivity of the top performers;
2. caused by broader bidding for services (markets are national or international rather than local
3. which, in turn, is made possible by technology - recorded music, televised professional sports, home computers;
4. and, in each case there is an increase in the earnings gap between the top earner and the
   average earner.