Income Inequality: Economic Disparities and the Middle Class in Affluent Countries
540
Income Inequality: Economic Disparities and the Middle Class in Affluent Countries
540eBook
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Overview
This state-of-the-art volume presents comparative, empirical research on a topic that has long preoccupied scholars, politicians, and everyday citizens: economic inequality. While income and wealth inequality across all populations is the primary focus, the contributions to this book pay special attention to the middle class, a segment often not addressed in inequality literature.
Written by leading scholars in the field of economic inequality, all 17 chapters draw on microdata from the databases of LIS, an esteemed cross-national data center based in Luxembourg. Using LIS data to structure a comparative approach, the contributors paint a complex portrait of inequality across affluent countries at the beginning of the 21st century. The volume also trail-blazes new research into inequality in countries newly entering the LIS databases, including Japan, Iceland, India, and South Africa.
Product Details
| ISBN-13: | 9780804786751 |
|---|---|
| Publisher: | Stanford University Press |
| Publication date: | 08/01/2014 |
| Series: | Studies in Social Inequality |
| Sold by: | Barnes & Noble |
| Format: | eBook |
| Pages: | 540 |
| File size: | 18 MB |
| Note: | This product may take a few minutes to download. |
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INCOME INEQUALITY
Economic Disparities and the Middle Class in Affluent Countries
By Janet C. Gornick, Markus Jäntti
Stanford University Press
Copyright © 2013 Board of Trustees of the Leland Stanford Junior UniversityAll rights reserved.
ISBN: 978-0-8047-7824-4
CHAPTER 1
How Has Income Inequality Grown?
The Reshaping of the Income Distribution in LIS Countries
Arthur S. Alderson and Kevin Doran
Research on trends in inequality has cumulated to the point that many scholars conclude that income inequality has been growing in the typical society in recent decades (e.g., Cornia and Addison 2003). While this "U-turn" on inequality has received a great deal of social scientific attention in and of itself, it has also spawned growing concern over the status of the middle class. The idea that the middle class might be shrinking or declining began to receive popular attention in the United States in the early 1980s. That is, in the face of rising income inequality, concern about a particular pattern of change in the distribution of income—polarization, or the shift of individuals, households, and families from the middle of the distribution to both the upper and lower tails—began to grow. Noting the transition from an industrial to a service-based economy, Kuttner (1983), for instance, argued that the decline of well-paying manufacturing jobs and lack of unionization in the growing service sector were driving many formerly "middle-class" families into the bottom tail of the income distribution and were polarizing the workforce. In a similar vein, Thurow (1984) reported that between 1967 and 1982, the percentage of U.S. families with incomes between 75 and 125 percent of the median declined from 28.2 percent to 23.7 percent and that the percentage of families falling above and below those bounds grew by roughly equal proportions. Beyond the empirics, concern with income polarization has also been heavily informed by the classic vision of the middle class as a bulwark of political democracy and against social, political, and economic instability (Lipset 1963; see Thurow 1984 and Pressman 2007).
As highlighted by Pressman (2007), academic interest in the fate of the middle class grew across the 1980s and into the 1990s, before declining during the economic expansion of the latter 1990s. In the context of the economic downturn in 2008, the issue once again moved to the center of scholarly and public debate. How should one approach the question of the "hollowing of the middle"? It is clear that conclusions are sensitive to definitions and measurement (McMahon and Tschetter 1986; Horrigan and Haugen 1988). For instance, McMahon and Tschetter (1986), replicating conflicting studies by Lawrence (1984) and Rosenthal (1985) in the United States, demonstrate that, when defined in terms of occupation, no hollowing of the middle is seen from 1973 to 1985, but when it is defined in terms of personal earnings, there is ample evidence of polarization.
More recently, a rough consensus appears to be emerging in studies of income around a "literal" definition that focuses on the fate of the population falling within 75 and 125 percent of the median income (Pressman 2007; Ravallion 2010). However, as a number of commentators have noted (e.g., Wolfson 1994; Jenkins 1995; Foster and Wolfson 2010; Atkinson and Brandolini [see Chapter 2]), this definition often seems to raise as many questions as it answers. Critics have expressed concern regarding the rationale behind the cut points, the nature of the social groups encompassed (and not encompassed) by this income range, the implications of the definition for our understanding of groups above and below 75 to 125 percent of the median, and, ultimately, the sensitivity of the conclusions drawn in such research to the bounds applied.
While debate over conceptualization and operationalization continues, a sketch of recent work on the hollowing of the middle is instructive for the research we conduct in this chapter. While the scholarly debate initially focused nearly entirely on the case of the United States—with some finding empirical support for the hollowing of the middle (e.g., Lawrence 1984; McMahon and Tschetter 1986; Horrigan and Haugen 1988; Davis and Huston 1992) and others finding just the opposite (e.g., Rosenthal 1985; Levy 1987; Kosters and Ross 1988)—some scholars have turned, more recently, to examine the question in a broader, cross-national framework. For example, using data from the Luxembourg Income Study (LIS) Database and employing the 75 to 125 percent criterion, Pressman (2007) examines shifts in the size of the middle-income population in 11 countries, employing available data from between 1980 and 2000. Pressman notes that several countries experienced notable reductions in the proportion of their populations falling in the middle of the income distribution (e.g., Sweden, -7.1 percent; United Kingdom and Taiwan, -4.5 percent; Spain, -3.2 percent; and United States, -2.4 percent) and that, where this occurred, it proceeded via a process of polarization, with households shifting into both the upper and lower tails of the income distribution. Pooling data for all 11 countries and weighting by population size, he finds, overall, that downgrading—movement from the middle to the lower tail—exceeded upgrading—movement from the middle to the upper tail—by about a factor of 2 to 1.2
ACCOUNTS OF CONTEMPORARY TRENDS IN WITHIN-NATION INEQUALITY
In accounting for the hollowing of the middle, scholars draw on a range of explanations for trends in income inequality. In other cross-national research and research on trends in inequality in U.S. states and counties, we have worked to integrate three literatures that have emerged around this debate. Our aim is to combine attention to factors affecting the distribution of wages and earnings—which have tended to be the concern of economists—with a focus on a range of institutional, demographic, and compositional factors that both shape the aggregation of wages and earnings into the distribution of household and family income and affect inequality in ways that may be "independent" of the distribution of earnings. Given that we have reviewed these literatures in detail elsewhere (e.g., Moller, Alderson, and Nielsen 2009), we touch here on only the broadest outlines of each.
The first literature is centered in economics and takes as its object the simple fact of rising inequality. A central hypothesis is that wage inequality has risen in many countries because of skill-biased technological change. Technological advancements have increased the demand for highly educated and skilled workers; this demand has outpaced supply and created scarcity rents for the highly skilled (Levy and Murname 1992; Autor, Katz, and Krueger 1998).
The second literature, which is typically oriented toward cross-national comparison, takes as its object the persistent differences in levels of inequality across countries and regions and the heterogeneous inequality experience of different countries and regions. Here one finds a diversity of arguments regarding the role of labor market institutions (e.g., centralized wage-setting, unionization), the process of globalization (e.g., international trade, investment, and migration), and the wave of domestic and international liberalization (e.g., Alderson and Nielsen 2002; Moller et al. 2003; Kenworthy and Pontusson 2005; Brady 2009). This research has increased to such an extent that some scholars have begun to outline a "unified theory" that would explain recent trends in wage inequality, real wages, and unemployment across developed countries. This theory attributes recent inequality trends to the interplay of exogenous shocks—affecting labor supply and demand and the stability of earnings—with the marked differences in the institutional contexts of different countries and regions (Blank 1998; Blau and Kahn 2002; DiPrete et al. 2006). In this perspective, for instance, the effects of skill-biased technological change on inequality might vary substantially depending on the institutional context.
The third literature takes as its object household and family income inequality. While sharing many of the same concerns of the second (e.g., labor market institutions, globalization, etc.), this literature distinctly focuses, for instance, on how socio-demographic factors—the age distribution of the population, the composition of households, assortative mating, racial and ethnic cleavages—generate inequality among households and families that is independent of the distribution of wages and earnings (e.g., Cancian and Reed 2001; McCall 2001; Moller, Alderson, and Nielsen 2009; Blau, Ferber, and Winkler 2010). In the case of the United States, for example, while household and family income inequality rose measurably across the 1970s, the upswing in earnings inequality did not take off until the 1980s. And during the 1980s and early 1990s (when earnings inequality was rising), change in earnings inequality explains only about one-third of the change in family/household income inequality (Burtless 1999).
While research on the issues raised in these literatures has grown at a remarkable pace over the last two decades, we must consider that these explanations often imply very different patterns of distributional change while predicting the same outcome in terms of the behavior of standard summary measures of inequality (e.g., a rise in the Gini coefficient or in the Theil index). Morris, Bernhardt, and Handcock (1994, 206) noted this problem at the very outset of the revival of social scientific interest in income inequality, suggesting that "empirical investigation ... has been handicapped by methods that are insensitive to [patterns of distributional change]." What is at issue? Consider, for instance, now-standard accounts of the effects of globalization on income inequality in the Global North. They often suggest that globalization is producing an increasingly polarized job distribution, a growing upper tier with high wages and security, a growing bottom tier in low-wage and insecure service positions, and a "shrinking" middle (e.g., Wood 1994). Other accounts, however, imply a rather different pattern of distributional change. The skill-biased technological change explanation we mentioned previously suggests that inequality is rising as a result of upgrading—that is, growth in the upper tail of the distribution that has simply left less skilled workers behind. Similarly, scholars who emphasize the effects of the growth of autocatalytic, "winner-takeall" markets describe a process in which various technological and institutional changes have combined to produce an expanding number of markets in which rewards are concentrated in the hands of a small number of "winners" (Frank and Cook 1995). While implying very different patterns of distributional change—and while these patterns have distinct implications for both policy and distributive justice—these accounts of rising inequality effectively point to the same increase in summary inequality measures as prima facie evidence in support of their premises. As such—and in a world in which high-quality, comparable data on income are scarce—we believe it is useful to occasionally look "behind" the usual summary measures and closely examine the actual pattern of distributional change, attending to change at all points on the distribution and fully exploiting the available information. In short, it is important to examine how income inequality has grown.
In earlier research, we used the available high-quality data from the LIS Database to examine the experiences of 16 high-income countries across the period from the late 1960s to the late 1990s (Alderson, Beckfield, and Nielsen 2005). We next expanded our investigation to include seven transitional and middle-income countries (Alderson and Doran 2010). Most recently, we updated our earlier analyses, taking advantage of the latest wave of data from LIS centered around 2004, and began to look at households in interesting social locations (e.g., female-headed households). In investigating the inequality experience of these countries, we seek to understand how inequality grew and to what extent the observed patterns of distributional change are heterogeneous or homogeneous. In this chapter, we address the question "Has the middle hollowed out?"
RELATIVE DISTRIBUTION METHODS AND DATA
To address these questions, we use relative distribution methods. Developed by Handcock and Morris (1999), methods based on the relative distribution powerfully assist in the description of distributional change and enable counterfactual comparison of compositionally adjusted distributions. The basic idea underlying the relative distribution is to take the values of one distribution (the comparison distribution) and express them as positions in another (the reference distribution). Consider two distributions of household income, one measured at t - 1 and one at t. Treat the t - 1 distribution as the reference distribution and t as the comparison distribution. When there are no differences between the comparison and reference distributions, the relative distribution of the grade-transformed data will be uniform or "flat"—that is, the proportion of households falling within a given quantile's cut points of the reference distribution t - 1 at t is the same as at t - 1. When there are differences between comparison and reference distributions, the relative distribution will "rise" or "fall"—that is, the proportion of households falling within a given quantile's cut points of the reference distribution t - 1 at t will be larger or smaller than at t - 1. In this fashion, one can distinguish among growth, stability, and decline at all points on the distribution.
Another advantageous feature of these methods is that one can use the relative data to develop summary measures to characterize any pattern of change that one might be interested in exploring. Handcock and Morris (1999) developed a measure of polarization that captures the degree to which there is divergence from, or convergence toward, the center of the distribution and is thus ideally suited to addressing the question of the "hollowing of the middle." For quantile data Q, the median relative polarization index (MRP) takes the following form (Morris, Bernhardt, and Handcock 1994, 217):
MRPt(Q) = 4/[Q - 2]|[i - 1/2]/Q - [1/2]| × (gt(i) - Q/[Q - 2]),
where gt(i) is the relative distribution—the proportion of year t's households whose median-adjusted incomes fall between each pair of quantile cut points, divided by the proportion in the reference year i = 1, 2, ..., Q, and the adjustment by 1/2 establishes the mid-point for each quantile. The index varies between -1 and 1. It takes the value of 0 when there has been no change in the distribution of household income relative to the reference year. Positive values signify relative polarization (i.e., growth in the tails of the distribution), and negative values signify relative convergence toward the center of the distribution (i.e., less polarization).
The median relative polarization index can be decomposed into the contributions to distributional change made by the segments of the distribution above and below the median (Handcock and Morris 1999), enabling one to distinguish "upgrading" from "downgrading." For quantile data, the lower relative polarization index (LRP) and the upper relative polarization index (URP) are calculated as follows:
LRPt/URPt(Q) = 8/[Q - 2]|[i - 1/2]/Q - [1/2]| ×( gt(i) - Q/[Q - 2]).
They have the same theoretical range as the MRP and decompose the overall polarization index (Morris, Bernhardt, and Handcock 1994, 209): MRPt = LRPt/2 + URPt/2.
We apply these techniques to data drawn from the LIS Database (2010). For each country/year used in the analysis, we generate quantile boundaries for the distribution of household income (equivalent net disposable household income), adjusting for household size using a standard equivalence scale (i.e., the square root of the number of persons in the household).
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Table of Contents
Introduction1. How Has Income Inequality Grown? The Reshaping of the Income Distribution in LIS Countries
2. On the Identification of the Middle Class
3. Has Rising Inequality Reduced Middle-Class Income Growth?
4. Welfare Regimes, Cohorts and the Middle Classes
5. Political Sources of Government Redistribution in High-Income Countries
6. Income Distribution, Inequality Perception and Redistributive Preferences in
7. Women's Work, Inequality, and the Economic Status of Families
8. Women's Employment, Unpaid Work, and Economic Inequality
9. Women's Work, Family Earnings, and Public Policy
10. Wealth: The Distribution of Assets and Debt
11. The Joint Distribution of Income and Wealth
12. The Fourth Retirement Pillar in Rich Countries
13. Public Pension Entitlements and the Distribution of Wealth
14. Income and Wealth Inequality in Japan
15. Income and Wealth Inequality in Japan
16. Horizontal and Vertical Inequalities in India
17. Post-Apartheid Changes in South African Inequality
Conclusion