Peterson Institute for International Economics 17 October 2019
Ten facts about inequality in advanced economies
Lucas Chancel Co-director and Senior Economist World Inequality Lab, Paris School of Economics This presentation: the inequality landscape in advanced economies
Survey paper « Ten key facts about inequality in advanced economies »
1. Inequality data remains scarce in the digital age 2. Income inequality is on the rise after a historical decline 3. Nations became richer but govts. became poorer 4. Capital is back, for a few 5. No sign of a new normal since the Great Recession
2 This presentation: the inequality landscape in advanced economies
Survey paper « Ten key facts about inequality in advanced economies »
6. Global inequality is now more about class than nationality 7. Higher inequality is associated with less social mobility 8. Gender and racial inequalities remain high, particularly at the top 9. Predistribution policies drive US/EU growth differentials at the bottom 10. Progressive taxation is key to curb extreme inequality at the top
3 Inequality data remains scarce in the digital age
4 Reconciling national capital income and A significantcapital share of capital income income is reportednot recorded onon tax taxrecords returns
Composition of capital income in the US, 1916-2012 From taxable to total capital income
30%
25% Non-filers & Retained earnings other 20% 2/3 not Corporate income tax reported on 15% Income paid to pensions & tax data insurance
% of national income 10% Imputed rents + property tax
5% Didivends, interest, rents & profits reported on tax returns 0% 1916 1920 1924 1928 1932 1936 1940 1944 1948 1952 1956 1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008 2012 Source: Appendix Table I-S.A8.
Source: Piketty, Saez, Zucman (2018) 5 Distributional national accounts: systematic combination of survey, tax and national accounts data to distribute 100% of macroeconomic growth
Top 10% income share in Germany and France, 1995-2015: Survey vs. tax vs. Distributional National Accounts (DINA) Germany France
Top 10% DINA Survey+Tax+Nat. Acc. Top 10% DINA Survey+Tax+Nat. Acc.
Top 10% Tax Top 10% Tax
Top 10% Top 10% Survey Survey
Source: Author based on Blanchet, Chancel and Gethin (2019) 6 Income inequality is on the rise after a historical decline
7 After a historical decline, income inequality rose at different speeds
Top 1% income share across the world, 1900-2018 (decennial averages) 2525
2020
1515
1010 % national income % national income
55
00 19001900 1910 1920 1930 1940 1950 1960 1970 1980 1980 1990 1990 2000 2000 2010 2010
India RussiaUSA USA Western Europe China 8 Source: Author based on WID.world (2019) After a historical decline, income inequality rose at different speeds
Top 1% income share across the world, 1900-2018 (decennial averages)
2525
2020
1515
% total income 1010 % national income % national income
55
00 19001900 1910 1920 1930 1940 1950 1960 1970 1980 1980 1990 1990 2000 2000 2010 2010
IndiaUSA RussiaWesternUSA EuropeUSA WesternJapan EuropeAU-NZ China 9 Source: Author based on WID.world (2019) 52 How Unequal Is Europe?
In the US, the bottom 50% income share collapsed. The fall was much more contained in Europe. Figure 26: Income inequality trends in Europe and the US, 1980-2017
Top 1% and bottom 50%(a) pretax Bottomincome 50%shares vs. Topin Europe 1% income and the EU, shares 1980-2017
United States Europe 25 25
22.5 22.5
20 20
17.5 17.5
15 15
12.5 12.5
Share of national income (%) 10 10
7.5 7.5
5 5 1980 1985 1990 1995 2000 2005 2010 2015 1980 1985 1990 1995 2000 2005 2010 2015
Bottom 50% Top 1%
Source: Author based Blanchet, Chancel and Gethin (2019) and Piketty, Saez and Zucman (2018) 10 (b) Growth Incidence Curves
700
600
500
400
300
200 Total income growth (%) Total 100
0
10 20 30 40 50 60 70 80 90 99 99.9 99.99 99.999 Income group (percentile)
United States Europe
Source: authors’ computations combining surveys, tax data and national accounts for Europe; Piketty, Saez, and Zucman (2018) for the United States.
WID.world Working Paper 2019–6 Capital is back, for a few
11 Wealth inequality has been rising at different speeds since the 1980s
Top 1% wealth share in the US and Europe, 1910-2014
70%
60% France United Kingdom
50% USA Sweden
40%
30%
20% Top 1% personal wealth share Top
10%
0% 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010
Source: Author using WID.world data. Distribution of per adult personal wealth. 12 The return of wealth inequality in the US is mainly driven by the very top of the distribution. Dynamic of savings rate played a huge role in driving these trends.
Wealth inequality in the US, 1913-2012 30%
25%
Top 1-0.1% 20%
15%
10% Top 0.1%
Share of household wealth (%) 5%
0% 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010
Source: Saez and Zucman (2016) 13 Wealth at the top grew 3x faster than avg. wealth, 9x faster than avg. income
Annual real wealth growth per adult, 1987-2017 Wealth group US + EU
Top 1/100 million (Forbes) 8.9%
Top 1/20 million (Forbes) 8.8%
Top 0.01% (WID.world) 6.1%
Top 0.1% (WID.world) 4.9%
Top 1% (WID.world) 4.0%
Average wealth 2.7%
Average income 1.0% Source: Author based on WID.world (2019) and Blanchet (2018) 14 Nations have become richer but governments have become poor
15 exeCutIve summary
iii. w hy does the eVolution of PriVate and PubliC CaPital ownershiP matter for inequality?
Economic inequality is largely driven by the unequal ownership of capital, which can be either privately or public owned. We show that since 1980, very large transfers of public to private wealth occurred in nearly all countries, whether rich or emerging. While national wealth has substantially increased, public wealth is now negative or close to zero in rich countries. Arguably this limits the ability of governments to tackle inequality; certainly, it has important implica- tions for wealth inequality among individuals.
over the past decades, countries have ▶ the ratio of net private wealth to net become richer but governments have national income gives insight into the total become poor. value of wealth commanded by individuals in Net private wealth has risen since the 1970s while public wealth collapsed Figure e6 thePrivate rise of privateand public capital andcapital the fall in of rich publiccountries, capital in rich 1970 countries,-2015 1970–2016 800%
700% Private capital
600% Spain UK
500% Japan France
400% US Germany 300%
200% Public capital 100%
0% Value of net public and private wealth (% of national income) -100% 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 16 Source: Alvaredo, Chancel, Piketty, Saez and Zucman (2018) Source: WID.world (2017). See wir2018.wid.world for data series and notes. In 2015, the value of net public wealth (or public capital) in the US was negative (-17% of net national income) while the value of net private wealth or private capital as o national income In , net public ealth amounted to o national income hile the fgure as or net private wealth. Net private wealth is equal to new private assets minus net private debt. Net public wealth is equal to public assets minus public debt.
14 World inequality report 2018 Higher inequality is associated with lower social mobility Absolute mobility (% children earning more than their parents) declined in the US since the 1970s while relative mobility (% low income individuals making it to the top) was broadly stable.
Absolute income mobility in the US, 1970-2014
In 1970, 92% of 100% Americans aged 30 earned more than 90% their parents.
80%
70%
60% In 2014, 50% of Percentage of children earning
more than their parents at age 30 Americans aged 50% 30 earned more than their parents.
40% 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 Birth cohort Source: based on data from Chetty et al., 2017. 18 Gender and racial inequalities remain high after a historical decline
19 Gender inequality declined since the 1960s thanks to the rise of female participation & reduction of gender pay gap, but the gap remains high.
Gender inequality in the US, 1962-2014 (average pretax labor income of men aged 20-64 / of women aged 20-64)
In 2014, men earned 75% more than women
Source: Piketty, Saez and Zucman, 2018. Men and women aged 20-64. 20 Gender inequality remains particularly high at the top of the distribution in rich countries
Share of women by income group in France, 1970-2012
Source: Garbinti, Goupille and Piketty, 2018 21 Equal access to education, health and well-paid jobs are key to lift pretax income at the bottom of the distribution
22 Growth divergence at the bottom in EU and US is pretax not posttax: key role of « predistribution »
Bottom 50% pretax income growth in Europe and the EU, 1980-2017
Source: Blanchet, Chancel and Gethin (2019). US data from Piketty et al. (2018).
23 Part v taCklinG eConomiC inequality
Inequality in access to higher education is particularly strong in the US Figure 5.4.1 CollegeCollege attendance attendance rates and rate parent and incomeparent rankincome in the rank us infor the children US for born children in 1980–1982 born in 1980-1982
100%
~90% of children 80% from the top 10% US attend college
60% between age 18-21 (%) 18-21 age between 40% ~30% of children Share of children who attend college college attend who children of Share from the bot. 20% US attend college 20% 0 10 20 30 40 50 60 70 80 90 100 Parent income rank
Source: Chetty, Hendren, Kline and Saez (2014). See wir2018.wid.world for data series and notes. 30% of children whose parents are in the Bottom 10% of the income distribution attend college between age 18 and 21. Almost 90% of children whose parents are in 24 the Top 10% of the income distribution attend college between age 18 and 21.
intergenerational mobility is lo er in areas viduals is associated with lower mobility.15 ith larger A rican-American populations Mean hile, a larger middle class stimulates o ever, in areas ith large A rican-Amer- upwards mobility.16 igher public school ican populations, both blacks and whites have e penditures per student along ith lo er lower rates of upward income mobility, indi- class si es signi icantly increase social cating that social and environmental causes mobility igher social capital also avors other than race, such as differences in history mobility or e ample, areas ith high involve- and institutions, may play a role. spatial and ment in community organi ations 17 finally, social segregation is also negatively associ- amily structure is also a ey determinant ated with upward mobility. in particular, upward mobility is substantially lower in areas longer commuting time decreases opportuni- here the raction o children living in single- ties to climb the social ladder, and spatial parent households, or the share of divorced segregation o the poorest individuals has a parents, or the share of non-married adults stronger negative impact on mobility his is higher suggests that the isolation o lo er-income amilies and the di fculties they e perience hat is remar able is that combining these in reaching ob sites are important drivers o actors e plains very e ectively social social immobility. mobility patterns a en together, ive actors commuting time, income ine uality income inequality at the local level, school among the poorest individuals, high- quality, social capital, and family structure school dropout rates, social capital, and the are also important actors igher income raction o children ith single parents ine uality among the poorest o indi- e plain o ine ualities in up ard mobility
270 World inequality report 2018 Anglo-Saxon countries largely rely on private higher eductation funding. Central EU + Scandinavian countries essentially rely on public.
Share of private funding in higher education, 2014 70%
60%
50% Higher education Primary-secondary 40% (%)
30%
20%
10% Share of private funding in total expenditures
0% United States UK/Canada/AU/NZ France/Italy/Spain Germany/Austria/Scandinavia
Source: Piketty, 2019 based on OECD (2014) 25 taCklinG eConomiC inequality Part v
Minimum wage reduced by 30% in the US since the 1970s, multiplied by x3 in France, introduced in Germany, UK. Scandinavian countries: branch agreements + high union density. Figure 5.4.3 minimumMinimum wage in wage France inand France the us, 1950–2016and the US, 1950-2016
12 12
US (2016 $) 10 10
8 8
6 6
4 4
2 2 France (2016 €) French hourly minimum wage (2016 € PPP) US hourly minimum wage (Constant 2016 $) 2016 (Constant wage minimum hourly US 0 0 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
Source: Piketty (2014) and updates. See wir2018.wid.world for data series and notes. Between 2000 and 2016, the hourly minimum wage rose from €7.9 to €9.7 in France, while it rose from $7.13 to $7.25 in the US. Income estimates are calculated using Purchasing Power Parity (PPP) euros for France and dollars for the US. For comparison, €1 = $1.3 = ¥4.4 at PPP. PPP accounts for differences in the cost of living bet een countries Values are net o infation
26
World inequality report 2018 277 Shifts in progressive taxation fueled inequality at the top
27 Part v taCklinG eConomiC inequality Progressive taxation was reduced since the 1980s, different patterns across countries.
Figure 5.2.2 top income tax rates in rich countries, 1900–2017
100%
80%
60%
40% US UK Top marginalTop tax rate (%) Germany 20% France Japan
0% 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010
Sources: Piketty (2014) and updates. See wir2018.wid.world for data series and notes. Between 1963 and 2017, the top marginal tax rate of income tax (applying to the highest incomes) in the US fell from 91% to 40%. 28
Figure 5.2.3 top inheritance tax rates in rich countries, 1900–2017
100%
US UK 80% Germany France Japan 60%
40% Top marginal tax rate (%)
20%
0% 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010
Source: Piketty (2014) and updates. See wir2018.wid.world for data series and notes. Between 1980 and 2017, the top marginal tax rate of inheritance tax (applying to the highest inheritances) in the UK fell from 75% to 40%.
260 World inequality report 2018 Changes in top tax rates relatively associated to changestaC inklin topG eC incomeonomiC inequalityshares . Part v
Figure 5.2.1 Changes in top marginal tax rates and top income shares in rich countries since the 1970s
10 USA
8 UK 6 Norway Australia 4 Portugal Ireland Canada Finland Italy NZ 2
(percentage points) Sweden Japan Spain Denmark France Change in Top 1% income1% Change share in Top 0 Germany Netherlands Switzerland
-40 -30 -20 -10 0 10 Change in top marginal tax rate (percentage points)
Source: Piketty, Saez and Stantcheva (2014). See wir2018.wid.world for data series and notes. In the US, the top marginal income tax rate was reduced by 33 percentage points between the early 1970s and the early 2010s. During the same period of time, the Top 1% income share increased by 9.5 percentage points. 29
suggests that top ta rates play a ey role in o to account or these movements p moderating pre-ta top incomes In addition, until the 1970s, policymakers and public there as no signifcant impact on gro th, opinion probably considered rightly or suggesting again that bargaining elasticities rongly that at the very top o the income are more important than incentive effects. ladder, compensation increases refected mostly greed or other socially aste ul activ- a window of opportunity for tax ities rather than productive work effort. this progressivity? is why the united states and uk were able to set marginal ta rates as high as More Figure 5.2.2 presents in detail the evolution recently, the eagan/ hatcher revolution o top marginal income ta rates in the nited succeeded in ma ing such top ta rate levels states, the uk, Germany, france, and Japan unthinkable, at least for a while. but after since In the fve countries, there as decades o increasing income concentration either no personal income ta ation or there that has brought about mediocre gro th was a very modest of it at the turn of the since the s, and a Great ecession trig- t entieth century Income ta as then intro- gered by inancial sector e cesses, a duced, partly to fnance the irst orld ar, rethin ing o the eagan and hatcher poli- and top marginal ta rates ere brought to cies is perhaps underway—at least in some very high levels in the s op ta countries. rates rose up to 94% in the united states, 98% in the uk.) top rates were then drasti- op marginal income ta increased in the cally reduced from the 1970s onwards (from united states, uk, Germany, france, and on average in these countries to on Japan over the past ten years. the united average in the mid- s Kingdom, or instance, increased its top
World inequality report 2018 259 Concluding remarks
§ Return of inequality since the 1980s, no clear trend inversion after 2008 crisis
§ Large divergence across countries: policies matter a lot beyond trade and tech
§ US/Europe growth differentials at the bottom: importance of « predistribution » policies (e.g. education, health, high-paid jobs)
§ Growth at the top: role of progressive taxation
§ Education, health need to be financed: need to reconsider role of « pre » and « re » distribution as complementary tools, not substitutes 30