Long-Run Inequality Determinants from Top Income Data

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Explore the long-term determinants of inequality through top income data analysis, addressing questions on economic growth, trade openness, financial development, and the role of the state. Delve into theories explaining top income shares and differences across income groups, highlighting the impact on various countries and the distribution of income sources.

  • Inequality
  • Economic Growth
  • Trade Openness
  • Financial Development
  • Top Incomes
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  1. The Long-Run Determinants of Inequality: What Can We Learn From Top Income Data? Jesper Roine, Jonas Vlachos and Daniel Waldenstr m (paper at: www.anst.uu.se/danwa175 ) XXIV International Conference of the Giordano Dell Amore Observatory on the relationship between law and economics, October 27, 2011 1 Waldenstr m: Long-run determinants of inequality

  2. The issues Does economic growth benefit everyone? How does trade openness influence inequality? Is it really the poor that mainly gain from financial development or is it the rich? What is the role of the state in all this? 2 Waldenstr m: Long-run determinants of inequality

  3. This presentation 1. A long-run perspective New inequality dataset covering most of 20th C. 2. What accounts for changes in inequality? Trade, Finance, Growth, Redistribution? 3. Are patterns same for all? High-income vs Low-income countries 4. Specific issues Role of financial crises 3 Waldenstr m: Long-run determinants of inequality

  4. Theories explaining top income shares Economic growth Top incomes closely attached to economy (bonuses) Trade openness Standard story: Capitalists in rich countries gain Superstars gain from globalized labor markets Financial development Typically regarded as pro-poor (reduced barriers) But it can be pro-rich (power, early stages) Redistribution May or may not reduce top income shares 4 Waldenstr m: Long-run determinants of inequality

  5. Top income shares a new source Traditional lack of long-run inequality evidence A solution: historical tax data Available since early 20th C. Long-run series Available in most countries cross-country comp. Primarily observations of the highest incomes We focus on three groups in the distribution: "The Rich" (Top 1 percentile) "The Upper Middle Class" (Top10 1 percentiles) "The Rest" (Bottom 90 percentiles) 5 Waldenstr m: Long-run determinants of inequality

  6. Differences across groups (Sweden 2008) 2,500,000 2,000,000 Average income 1,500,000 Capital income 1,000,000 Labor income 500,000 0 The Rest The Upper Middle Class The Rich 6 Waldenstr m: Long-run determinants of inequality

  7. Top decile share over time: Sweden 55 50 45 Share of income (%) 40 35 30 25 20 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 7 Waldenstr m: Long-run determinants of inequality

  8. "Upper Middle Class" (Top10-1%) and "Rich" (Top 1%) in Sweden 32 28 Top 10-1% 24 Share of income (%) 20 16 12 8 Top 1% 4 0 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 Source: Roine and Waldenstr m (2008, updates) 8 Waldenstr m: Long-run determinants of inequality

  9. Top 10-1% and Top 1% in the U.S. 35 30 Top 10-1% 25 20 15 Top 1% 10 5 1900 1920 1940 1960 1980 2000 Source: Piketty and Saez (2003, updates) 9 Waldenstr m: Long-run determinants of inequality

  10. Data on income inequality Income data Gross market income bef. most taxes and transfers Includes labor, capital, business income Source: Past studies (cf Atkinson/Piketty 2007, 2010) Computation of top income shares The share of total income that goes to the top 10, 5, 1, 0.1, etc % of all potential income earners. Three variables:Top 1%, Top 10-1%, Bottom 90% 10 Waldenstr m: Long-run determinants of inequality

  11. Top 1%: The rich 30 25 Total income share of Top1 (%) 20 15 10 5 0 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 Argentina India Sweden Australia Ireland Switzerland Canada Japan United Kingdom Finland Netherlands United States France New Zealand Germany Spain 11 Waldenstr m: Long-run determinants of inequality

  12. Top 10-1%: Upper middle class 35 30 Total income share of Top10-1 (%) 25 20 15 10 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 Argentina India Sweden Australia Ireland Switzerland Canada Japan United Kingdom Finland Netherlands United States France New Zealand Germany Spain 12 Waldenstr m: Long-run determinants of inequality

  13. Potential determinants GDP/capita and Population Source: Maddison Financial development: Bank deposits + Stock market Sources: Mitchell, IFS, FSD, Bordo, Rajan & Zingales Trade openness: (Exports+Imports)/GDP Sources: Mitchell, L pez-C rdoba & Meissner, Bordo Robustness: De jure openness (Clemens/Williamson; IMF) Central government spending Sources: Mitchell, Rousseau & Sylla, Bordo, IFS, FSD Top marginal tax rates Sources: Top inc studies, OECD, Rydqvist et al., Bach et al. 13 Waldenstr m: Long-run determinants of inequality

  14. Potential inequality determinants 4.5 30000 GDP/cap Financial development 4 25000 Total capitalization as share of GDP 3.5 GDP per capita (1990 G-K USD) 3 20000 2.5 15000 2 1.5 10000 1 5000 0.5 0 1900 0 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 Argentina India Sweden Australia Ireland Switzerland Canada Japan United Kingdom Finland Netherlands United States France New Zealand Germany Spain Argentina India Sweden Australia Ireland Switzerland Canada Japan United Kingdom Finland Netherlands United States France New Zealand Germany Spain 400 0.50 Gov. spending 0.45 350 Trade openness Central government spending as share of GDP 0.40 Trade openness (trade share in GDP) 300 0.35 250 0.30 200 0.25 0.20 150 0.15 100 0.10 50 0.05 0 1900 0.00 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 Argentina India Sweden Australia Ireland Switzerland Canada Japan United Kingdom Finland Netherlands United States France New Zealand Germany Spain Argentina India Sweden Australia Ireland Switzerland Canada Japan United Kingdom Finland Netherlands United States France New Zealand Germany Spain 14 Waldenstr m: Long-run determinants of inequality

  15. Income tax rates (top rates) 100 90 80 Top marginal income tax (%) 70 60 50 40 30 20 10 0 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 Argentina India Sweden Australia Ireland Switzerland Canada Japan United Kingdom Finland Netherlands United States France New Zealand Germany Spain 15 Waldenstr m: Long-run determinants of inequality

  16. Empirical methodology Log-linear regression model: Income shares (Top1, Top10-1,Bot90) are regressed on the potential determinants + controls No firm claims on causal relationships Technicalities: Two estimators: Dynamic first-difference (DFD) First-difference GLS (FDGLS) Control for unobserved time-invariant effects and country-specific trends 16 Waldenstr m: Long-run determinants of inequality

  17. Baseline results Top 1% Top 10-1% Bottom 90% Finance 0.98*** 1.27*** 0.17 0.18 0.53 1.87*** Trade 8.80*** 2.31 0.20 0.35 3.15 0.32 Growth 5.81*** 6.56*** 8.82*** 7.02*** 5.53** 1.65 Gov.Spend 5.98 3.62 16.51*** 24.05*** 22.52*** 23.94*** Taxation 4.39*** 3.18** 10.18*** Obs Controls N countries 126 Yes 14 92 Yes 12 99 Yes 12 77 Yes 10 99 Yes 12 77 Yes 10 17 Waldenstr m: Long-run determinants of inequality

  18. Level of development Top 1% Top 10-1% Bottom 90% Growth Low Growth Med Growth High Finance Low Finance Med Finance High F: Low=Med F: Low=High F: Med=High Obs N countries 5.07*** 6.41*** 2.62 9.03*** 7.34*** 9.84*** 4.53 5.98 8.26* 1.65* 0.88* 0.86* 0.45 0.42 0.98 126 14 3.26** 0.33 0.40 0.02 0.01 0.94 99 12 2.08 1.02 0.88 0.18 0.18 0.9 99 12 0.31 0.25 0.07 126 14 0.52 0.8 0.34 99 12 0.74 0.45 0.59 99 12 18 Waldenstr m: Long-run determinants of inequality

  19. Do financial crises matter? Top 1% Top 10-1% 0.33 Bank crisis 0.35 1.07*** 1.08*** Currency crisis Obs Controls N countries Crisis data from Bordo et al. (2001) and Laeven and Valencia (2008) 0.06 171 Yes 16 0.31 132 Yes 14 171 Yes 16 132 Yes 14 19 Waldenstr m: Long-run determinants of inequality

  20. Extensions and robustness Extensions Role of democracy (Polity IV - No role) Role of technology (Patents - No role; Share of GDP in agriculture- No role) Robustness We use top shares within the top Ex: Top1/Top10 and Top0.1/Top1 Restrict analysis to postwar period Rules out influence from Great Depression Results in line with main analysis 20 Waldenstr m: Long-run determinants of inequality

  21. Conclusions 1. Finance is strongly pro-rich Financial crises associated with reduced top shares 2. Trade openness has no clear impact on inequality 3. Economic growth pos. correlated with top shares; neg. correlated with upper middle class share Extends Dew-Becker & Gordon (2005, 2007) No sign of global labor market for elites 4. Mixed results for public sector influence Taxation (negative), Government spending (no effect) 21 Waldenstr m: Long-run determinants of inequality

  22. 22 Waldenstr m: Long-run determinants of inequality

  23. Main findings in top income literature Similarities across countries (mostly) 1900-1980: Substantially reduced inequality After 1980, Anglo-Saxon and Cont. Eur. Potential determinants: Shocks to capital income/wealth (pre-WWII) Progressive taxation (postwar period) Globalized labor markets (1980- , esp. Anglo-Saxon) 23

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