Since income inequality seems to be one of the concerns of the #Occupy Wall Street protestors, I thought I’d dig up some research about it so that we may all have a more thorough, if not intelligent understanding of the matter…Be sure to read the whole article. I’ve included the conclusion here, because I’m sure it will stimulate your interest and challenge your assumptions.
Conclusion
The Census income distribution figures are the foundation of most class-warfare rhetoric. On the surface, these figures show a high level of inequality: The top fifth of households have $14.30 of income for every $1.00 at the bottom.
However, these figures are flawed by the exclusion of taxes and social safety net spending and by the fact that the “fifths” do not contain equal numbers of people. Adjustment for these factors radically alters the picture of income distribution: The top fifth of the population has $4.21 of income for every $1.00 at the bottom.
The remaining inequality in society is heavily influenced by the lack of work at the bottom. If working-age adults in the lower quintiles worked as much as their higher-income counterparts, the income disparity of the top to the bottom quintiles would fall to $2.91 to $1.00.
Still, the top fifth of U.S. households (with incomes above $84,000) remain perennial targets of class-warfare enmity. These families, however, perform a third of all labor in the economy. They contain the best educated and most productive workers, and they provide a disproportionate share of the investment needed to create jobs and spur economic growth. Nearly all are married-couple families, many with two or more earners. Far from shirking the tax burden, these families pay 82.5 percent of total federal income taxes and two-thirds of federal taxes overall. By contrast, the bottom quintile pays 1.1 percent of total federal taxes.12
In one sense, John Edwards is correct: There is one America that works a lot and pays a lot in taxes, and there is another America that works less and pays little. However, the reality is the opposite of what Edwards suggests. It is the higher-income families who work a lot and pay nearly all the taxes. Raising taxes even higher on hard-working families would be unfair and, by reducing future investments, would reduce economic growth, harming all Americans in the long run.
Read the research here.
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To characterise the income gap as being best assessed examining the income of the population based on quintiles is simply disingenuous and misrepresents the real issue, which is simply that too small a percentage of the population is taking too large of a percentage of total output.
Median income (or income per capita or GDP per capita) in countries like Qatar or the United Arab Emarites are also also fairly high, and yet this does not correlate at all to an equal or even close to equal income distribution.
CEO pay since 1990 in the USA has grown by 298.2% whereas average worker pay has grown by 4.3% (measured in 2005 dollars) (source: http://www.faireconomy.org/news/ceo_pay_charts).
This is by no means meant to be an attack on the rich, many have worked hard to earn the right to be in the income bracket they are in. However it is intended to be an acknowledgement that once you reach a certain level of wealth, it is possible to deploy that wealth in a way to simply generate more income without contributing more to output (for example: speculating in unregulated derivatives markets, HFT… etc).
TJWP- the point in posting this is that traditional ways of measuring the wealth gap (such as using census data) may be flawed.
The issues with using quintiles is addressed in the research.
“Stage 3: Adjustment of Quintiles to Contain Equal Numbers of Persons
When decision-makers, journalists, and the public view the government’s official income distribution figures, there is a common and implicit assumption that the quintiles contain equal shares of the population. After all, the notion that we should measure “inequality” by comparing the aggregate income of groups that are themselves unequal in size is at best confusing. However, as noted, the official Census income “quintiles” do not contain equal shares of the population, and this fact skews the Census’ measure of income distribution.
No one would think it valid to measure inequality between New York State and Delaware by simply comparing the aggregate incomes in the two states. In such a comparison, income differences would mainly reflect vast differences in state populations. But the Census makes precisely this sort of unbalanced comparison whenever it compares quintiles of unequal size.”
who the fuck cares what CEOs get paid? they’re private businesses. let them be paid whatever the hell they want, for poor business practices will lead to failure. Except of course in America, where the failures get bailed out…
Either way, the usage of this example to prove your point, TJWP, is quite inaccurate
though i don’t disagree with you.. as Buffet clearly explained, it’s possible to conceal income so that the taxes paid on the concealed income is less than his secretary’s …
@Woodshedder Sorry I should have clarified – I was not disagreeing with you nor claiming the paper asserted that. I was, in essence, dismantling the straw man fallacy I was sure would be posted in response to your post.
@Chivo I fail to see why it is a poor example, as how the practice of private business works in theory is quite irrelevant, the only relevant fact is how it works in practice, which is, as you said: do well, big bonus, do poorly, bailout, then big bonus.
Moreover you can see in the economic literature that income gaps are actually quite bad for economies in the long run, so it does matter what CEO’s are paid.
What I’m curious about is 1.)are we actually measuring the income gap accurately and 2.) how do we fix it?
I’ll get to posting articles about the 2nd point sometime soon.
Look forward to reading about the second. As for your first question, it is my understanding that it is very difficult to do so because a large proportion of the income of the very wealthy is “paper” income (i.e. equities and such) and therefore it is difficult to assign a fixed value to it even over a period like a quarter and additionally it is not always clear if the wealth will be recognized as income in a given period (i.e. shares sold for consumption).
I am sure there are models that try to approximate this wealth to figure out how the income gap should be calculated. I will do some digging this weekend for the methodology and post any papers I find.
Makes sense that it is very difficult. Odd that the difficulty of measuring is rarely mentioned when it is discussed in the media. I’ll keep checking back for any papers you might find. Thanks!
There a side of this that I’ve never seen much mention of in my time of surfing web blogs and reading news and opinion clips:
most americans really don’t work very hard. try employing a bunch of people, and get back to me on what percentage of them are on time + don’t steal + don’t take exorbitant number of smoke breaks + etc, etc. I would guess that at an umemployment rate of 5% we are overemployed, and a great steal of teh “structural unemployment” that we have now is the Great Recession providing companies with a blanket justification for releasing unproductive workers.
Decades of union influence have given the American workforce a strong belief that they are owed a great deal by their employers, but a very weak belief in what they owe.
Does the average American worker work out of any sense of responsibility to the people that pay them, or do they just focus on not getting fired?
How many hours a week, truly, does the average worker put in out of 40 at the office? 10? 20?
I remember this kid, of perhaps 25, that I employed at a business I used to own. AT his wedding he and his dad took me aside to thank me for all I’d done for him (the business was really good so we paid people far above local wages for comparable jobs), howe that job had changed his life. Lets call him Joe. Joe was almost in tears as he thanked me that saturday night a few years ago.
A current employee told me a month or so ago that “Joe said to say hi after he heard I was working for you, said he was the best boss he had ever had”.
Well guess what? We found out Joe was stealing from us on a fairly decent scale. We didn’t fire him, as we’d signed papers to sell the biz, but…
Try to think outside of a wall of liberal anger or whatever would lead people to take Joes side in this and think about the enormity of the disconnect in that mans brain.
I would say Joe is closer to typical than he is to being some extreme outlier in the American workforce, that workforce has an extraordinarily well developed sense of entitlement, and an aging sense of responsibility that approaches senility with each passing year.
America has become the land of excuses, and the constant talk in the news about how hard it is to get a job will enable an entire generation of college grads to not bother trying, armed with the socially acceptable excuse of “there are just no jobs”.
I am not condoning Wall Street, the problmes with it are well documented and pertinent, and ultimately they are a pile of self serving people who don’t care about the consequences of their actions on society at all.
But, so are labor unions. They are a pack of self serving people who don’t care one bit about the consequences of their actions on society. Heck, they killed an entire state (Michigan), or at least caused some significant blood loss. They openly condone doing less on the job, and I couldn’t begin to count the stories I’ve heard (some from them) about them chastising new workers for working too fast, as that will make the rest of them look bad, etc. UAW workers are paid about as well as doctors, no? Yet they nap on the job, openly hate their employers, and have the worst attitudes I can begin to think.
A night of hanigng out with union friends is never not a chore, all they do is complain, and they have it better than anybody.
OWS isn’t without points, but it is also extremely far from pure of heart or spirit, just in my humble opinion.
“evil corporations” are widely hated for “exporting jobs”. If you owned a business, would you
A) hire a bunch of Americans with bad attitudes for 20 bucks an hour
B) hire a bunch of Chinese guys who are thrilled to have the job for 2
Wall Street is quite possibly indefensible, but at the end of the day, the “poor oppressed American workforce” is not guiltless in the countries current predicament.
Great post Checklist…I have had similar thoughts. Just today, I was watching how many smoke breaks this one employee took and was thinking about the lost time…
back in the day it was two martini lunches and fucking the secretary. wtf are you sayin? now is the age of slave labor. you want to tell me how many times i can take a shit too?!?
once again, try employing some people.
at one of my bar/grilles, the daytime bartender averaged (I counted for 5 straight days) 7 smoke breaks (which he had to go outdoors to smoke) during the 90 minute period that does about 85% of the daytime business. The lunch rush.
At what point is the employee in the wrong? When they refuse to serve anybody a drink or soda or take a food order at all? Because those 7 breaks added up to about 40% of that time.
The kid smoked a pack and a half during the day shift.
If you find that justified, you are out of your mind.
lol, this was hilarious.
in otherwords. you would be the boss from hell. mr potter like shit.
in your view, what amount of stealing from an employer is “ok”?
100 bucks of product/money a week, is that “no big deal” or is that “well you owed the guy anyway”.
What about 1000 bucks a week, is that now “bad” of the employee?
Or could we agree that theft is a crime, and probably the acceptable level is “$0”?
no one is debating theft. at least im not. its called human decency. ive run a business too. i didnt go all fascist on my employees ever. they out numbered me and im not a born asshole.
your problem is the regulations and taxes. not the labor that just wont slave enough. if they steal fuck em. thieves are a cancer on any business.
Sorry, but I would have established ground rules from day 1. If those rules were ignored, the worker would be fired so that someone who really wants the job get it.
The issue of productivity lies in the hands of the employer. Many businesses fail because employers aren’t hiring the right people.
You may view firing someone as cold. However, I see it as giving someone else who wants the jobs more a shot.
Firing people was my favorite part of running the company
maybe i misunderstood the debate. obviously the employer can fire any unproductive or worthless employee. i was expressing the view that now cannot be diffrent from the past when dealing with employees because of the fucked up reality. it is regulation that has fucked business not the employee in general not bein enough of a slave. people get confused.
also, if we launched a $5 trillion infrastructure stimulus guaranteeing that every legitimately requested public structure (bridge, school, etc.) project was funded and guaranteeing a job for everybody…
what percentage of the down trodden OWS kids, with their iphones, would take such a job, or would that be “beneath them”
What percentage of the down trodden welfare class would take sucha job, or is that beneath them, too?
A huge problem of the “lower fifth” is that strong sense of entitlement combined with a low sense of duty and motivation.
The biggest problem with that strategy is the lack of available structural engineers.
You’d make them happy, tho, that’s for shit sure.
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Post resonates with me as well. I’ve been on the losing side of “They openly condone doing less on the job, and I couldn’t begin to count the stories I’ve heard (some from them) about them chastising new workers for working too fast, as that will make the rest of them look bad, etc.” far too many times.
like the UAW recently railing at Ford for making profits and demanding “their share”
its sickening
a significant contributor to income gaps in this country is probably government handouts.
Try a simple thought experiment: imagine that we were a small country of, say, 1000 people that just happened to find a huge cache of gold. We licensed the rights to mine the gold off for enough for each of us to make $100k a year…
That’s enough to buy a house and relax and sit in the pub all day and eat enormous amounts of boneless wings at our local BWW.
What happens? Enormous wealth disparity arises. Because while Tim, Tom, and Tammy just sit at that pub, and eat at that BWW, and live in their houses… Joe started a BWW, John opened a pub, and Jessie started a homebuilding company.
Its an extremely easy (and self righteous) view to take, and one that several posters on this board have (and which I have had most of my life) to think that government handouts don’t benefit them at all, and then to feel a bit smited or indignant about it all.
Why do they get to live for free when I go out and work this hard?
But the fact is all the handout expenditures of government do filter back to the motivated, just rather indirectly.
Bob has a company that installs home theaters. Joe has a grocery store. Tom works at a pub, wihch Aaron owns. Marc works at a mens clothing store. Jim is completely lazy and just skates by on the welfare system.
Well the money Jim gets from the government gets blown at the grocery store and (largely) at the pub. So Tom gets a bit more tips, Aaron makes a bit more cash. Aaron and the owner of that grocery store become a bit more likely to buy a home theater from Bob, and so forth.
But Jim, always, winds up with no money. So he becomes a “damn the man” hippie and hates “the suits” of the world.
Handouts enable a fair chunk of the population do subsist unproductiely, and the money they spend DOES wind up in the hands of the rest of us, but they stay poor as long as they stay on the system.
Creating wealth disparity, or contributing to its creation, rather.
It also promotes inflation, in the long run. Mobilizing that component of the population would lead to the production of more goods and services in the US. As only dollars can be spent in the US and taking a super simple look at pricing in the economy as “this many dollars chasing this many goods and services” or “#$/#G&S” increasing the #G&S would lower prices.
Welfare payments and so forth DO enrich americans, even americans who really hate their very existence and get emotional about it and rant self righteously (I have done those things many, many times, trust me)…
But they probably contribute to inflation and almost without a doubt contribute to unemployment (by training people to be unemployed and enabling them to not seek work) and wealth disparity.
Check, my quick survey of the literature earlier tonight found that handouts do not do a lot to decrease the wealth gap. Here is just one example abstract:
Effects of Taxes and other Government
Policies on Income Distribution and
Welfare
Ximing Wu*, Jeffrey M. Perloff**, and Amos Golan***
May 2006
Abstract
Marginal tax rates have larger income redistribution and equilibrating welfare effects than do social insurance or direct transfer programs. The Earned Income Tax Credit has smaller but still statistically significant desirable effects. Social insurance programs have little effect except for Supplemental Security Income, which increases equality. The minimum wage and transfer programs (AFDC/TANF and food stamps) either have no statistically significant effect or negative distributional impacts. These effects are
qualitatively the same regardless of the inequality measure used: Gini, standard deviation of logarithms, relative mean deviation, coefficient of variation, and various Atkinson indexes.
http://are.berkeley.edu/~perloff/PDF/tax.pdf
I am arguing they outright increase it, through the mechanism above.
I have no study to support my view, just that thought experiment, but … a social science study is available to support any cause you wish to support… for the right price.
The study above just suggests that gov’t handouts don’t decrease inequality. It didn’t look for handouts to increase inequality, but I suppose they could. Your example makes sense.
Handouts are also inefficient, because of the waste between hand changes. The Welfare state has some considerable overhead.
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I suggest that, instead of conducting thought experiments, however enlightening they may be you spend some time reading the ample literature written on this topic. I would further contend that your experiment is flawed because you assume your result (i.e. A welfare state, as well as people exploiting it) when you set up your experiment.
With regards to your bartender example, I would argue that is your failure as an employer to properly set limits. Simply warn the gentleman in question that his behaviour is unacceptable and if it continues, replace him. Bartending is not a high skill job, and you will surely have little problem finding a replacement even on fairly short notice.
I certainly agree with your points about unions, however I acknowledge labour needs a seat at the table to prevent exploitation.
Nowhere in profit maximizing behaviour does it benefit you to pay the average worker more, in fact even the most basic models demonstrate unambiguously that a monopoly of either labour demand (monopolistic employers – i.e. FOXCONN) or labour supply (monopolistic unions – i.e. UAW) will cause wage distortions that are strictly in their favour. The best real life model I have encountered is the German (go figure) way of unions, where there are no national unions (in the sense that you cannot lockout factories all over the country) and the union reps have a seat on the board of the company so they understand fully the circumstances. This was why German labour market was so flexible in 2008 and why they were able to ramp production up again so fast.
With regards to WoodShedder’s comment on welfare programs not widening the income gap, this is certainly supported in the literature I have read as well. Furthermore, even if it did, I feel there is a basic level of morality that should dictate that should society have the means to do so, everyone should eat, regardless of their skills/motivations/talents. If we abandon this philosophy then we are on a very slippery slope and may as well begin killing babies with birth defects so they don’t burden our healthcare system later in life (an extreme case I agree, not unheard of in past societies, and certainly intended to shock and illustrate an extreme here). A final comment on food stamp usage is it would behove you to consider that having a record 45.8 million Americans on food stamps as of August 4, 2011 is probably indicative of inflation and some form of structural problem in the labour markets. Furthermore, continuing along this line of reasoning it may be in societies best interest to continue feeding these people as 45.8 million starving people in a country where guns are VERY easy to get is probably in no ones best interest. There is an old Roman saying that comes to mind: “Men with swords never go hungry, but they do die.”
… i have never seen a piece written on this topic that didn’t appear to intend to prove a point, for one. and, for two, I think we’d all be better off if we strived to understand things a bit rather than just repeating what we read, with feeling, as though it was our own opinion.
I accept that downsides to those strategies exist.
I would offer that labor is extremely far from being exploited in this country. There is a regulation for essentially everything an employer wishes to do.
I would put it to you that the large number of people on food stamps is the result of an aggressive bureaucracy seeking to enlarge its budget by finding “new markets” to “service.”
46 million people on food stamps is ridiculous in an society more stricken with obesity problems than those of malnutrition.
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Wood:
Heritage’s methodology reminds me of the joke about asking the boss for a day off:
http://www.recruitersnetwork.com/jokes/dayoff.htm
It’s nowhere near that ridiculous, and there is some value to helping people understand that there is more to the gap than just compensation per hour worked, but Heritage ends up with something that does as much to misinform as to inform.
Details in next comment.
To avoid getting into the weeds on this (and the Heritage synopsis doesn’t give enough detail on sources and definitions for a really thorough going-through), I’ll just point out the 2 worst errors in the methodology.
The 2nd worst error, in my opinion, was the failure to include the value of public education as income to each quintile. I believe that Heritage should have counted it because:
–Heritage added school lunch subsidies to income
–Heritage subtracted property taxes from income
–Heritage set a precedent by counting the government cost of providing healthcare to the poor and elderly as income
Because the average household size was much larger (3.2 persons versus 1.8) for the high-income quintile, it is clear that the education “income” added back would have been much greater for the high-$ quintile than for the low-$ group.
Next comment, the #1 problem with Heritage’s methodology.
The biggest error comes in Stage 4, where Heritage explains:
“In many respects, economic inequalities between the quintiles are a direct reflection of disparities in work performed.
…The stage 4 analysis shows what the distribution of income would be if working-age adults in the bottom quintile worked as many hours as those in higher-income families. In contrast to the adjustments in stages 2 and 3, stage 4 represents a hypothetical rather than an actual condition, since the non-elderly adults in the bottom quintile clearly do not work as much as higher-income adults.
The stage 4 figures incorporate the adjustments made in stages 2 and 3 before making the hypothetical adjustments in hours of work.”
So here’s the problem with the Stage 4 adjustment: when Heritage makes the hypothetical adjustment to working hours, it credits the lowest quintile for the additional income, but doesn’t revisit Stage 2 and take into account the fact that this hypothetical lowest quintile would now be paying more taxes and getting fewer benefits.
If you are working a lot of hours, many of the means-tested benefits go away.
If you have the ability to work a lot of hours, many of the benefits related to disability or medical care would go away.
In Stage 4, Heritage is essentially making the assumption that lowest-quintile adults could boost their earning without having to pay any additional taxes, without having to give up any means-tested benefits, and without having to give up the value of disability or medical services/benefits even though they are now able to work as many hours as a healthy person.
I don’t intend to go into this any further, as I’ve feel I’ve presented the points I wanted to make. I’ll read any responses, but don’t intend to enter into a debate on this.
I don’t disagree with you Ottnot. I think the rubs you present are valid.
However, I’m not sure that to consider what you have presented would change the results/conclusions significantly.
fly, thats why I was out watching him for that week. he’s popular with the customers, but I wanted some solid grounds upon which to talk about it.
beyond that, you are only right in very specific situations. an employer possesses, obviously, zero ability to have an employee focused on work rather than on the cute blonde, not doddling for way to long chatting, etc, etc. An employer can literally not watch everybody all the time, or even a fraction of the time.
And in the case of many small businesses, you cannot even be on site most of the time as you are probably the one that needs to travel. It can take literally years to collect the quality personnel you need to have htings run if you aren’t there doing it with everybody, and for a small business that is an eon.
Your retort is too blanket and I’m going to guess not based on “one boss many employee” situations. What percentage of the time can any one employee realistically be monitored? Beyond that (taking the smoke break thing literally) there is the question of labor/management or owner/employee relations, which need to be kept positive to avoid creeping issues stemming from general dissent.
Its just not that simple, man.
Nice post Woody and enjoyed the thread.
I worked a lot less when I made over 85,000 then I did when I worked for min wage. Two hour lunches and skipping out in the afternoon when court was done is something I never could have done when I was a grunt worker.
Yes, but how much did you invest in time and money in law school?
Capital + Labor = output.
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I’m pretty sure that instead of using 20% blocks, if you divide the population into 10% chunks then the top 10% will have an income that’s far higher than 5x the lowest 10%. 20% blocks is in some ways too big (especially at the top end) to capture the income inequality that is there.
Its very easy to slice and dice the numbers to present the picture you want people to see.
1) Don’t look at the top 1% look at the top 20% to dilute the income numbers.
2) Include medicare but don’t segment by age. Is an OWS participant getting a hip replacement next week?
3) Assume they can work more hours to increase their imaginary income.
At the end of the day the unemployed and poor still have to pay over $3 gallon for gas while the former CEO of ML walked away with a package of $164M after running the company into the ground. The OWS don’t care about a study from the Heritage foundation (funded by the 1%).
That’s because the former CEO of ML took the stock he’d earned over twenty years w. the company with him when he left.
And guess what? It was worth shit soon thereafter.
Ask anyone who worked for Merrill at that time. Equity holders got schtupped.
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In the end he got what he deserved NOTHING.
He should have subscribed to the PPT
Mr. Woodshedder will hopefully be back shortly to respond to all comments. At the moment, he is being detained for ‘questioning’ as to why his fingerprints were found on a certain white cargo van in the area. Also on the list of questions is exactly how a couple of very expensive teleprompters came into his possession. Developing…