Human Capital Archives

The economic and fiscal consequences of improving U.S. educational outcomes

Posted on February 2, 2015April 18, 2018 by David Evans

This new study addresses a key challenge confronting the United States—how to promote both widely shared and faster economic growth. It does so by analyzing and describing the effects of raising educational achievement, especially for those not at the top of the economic ladder. The results of the analysis demonstrate that improving the education of future workers accelerates economic growth and can promote more equal opportunity over the long run. This interactive below enables readers to explore the ramifications of the study swiftly and tellingly.

• Download a pdf of the overview.
• Download a pdf of the “Fast Facts”.
• Download a pdf of the methodology.
• Download a pdf of the full report.

Methodology

The results of the literature on the effects of cognitive skills on economic growth are used to estimate the increase in the U.S. gross domestic product and tax revenues that would result from narrowing or closing the educational achievement gap between children from advantaged and disadvantaged family backgrounds.

A growing body of research uses cognitive skills, as reflected in international test scores, as a measure of human capital. This research suggests that human capital accounts for a significant portion of the economic growth of economically advanced nations. The results of regression analyses conducted by Eric A. Hanushek and Ludger Woessmann found statistically significant and strong effects of cognitive skills—as measured by the internationally administered PISA test scores—on the economic growth of 24 nations in the Organization for Economic Co-Operation and Development from 1960 to 2000. Specifically, Hanushek and Woessmann (2010) found that “an increase of one standard deviation in education achievement (i.e., 100 test-score points on the PISA scale) yields an average annual growth rate over 40 years that is 1.86 percentage points higher.”

Three simulations using the Hanushek and Woessmann regression estimate, one for each of three scenarios, are done to project the economic impact of closing or narrowing the educational achievement gaps between children from socioeconomically advantaged and disadvantaged families. The projection models follow closely the model developed by Hanushek and Woessmann in 2010, though several adjustments are made to account for factors specific to this study, such as the incorporation of estimates of future impacts on federal, state, and local government revenues. For all three scenarios, the 2012 U.S. PISA test scores in math and science are used as the baseline in the analysis.

We assume that the estimated impact of the PISA test scores on economic growth is causal, meaning that any policy that increases the test scores of students will result in faster economic growth. For the interested reader, Hanushek and Woesmann (2009) provide evidence that the association between cognitive skills—as measured by the PISA test scores—and economic growth is indeed casual and reflects the effects of cognitive skills on growth. They use a variety of instrumental variables to test causality, use a difference-in-differences approach to compare country of origin-educated to U.S.-educated immigrants, and test whether countries that have improved their test scores have experienced commensurate growth rate improvements.

All three of our simulation scenarios use the PISA index of economic, social, and cultural status, or ESCS, to differentiate advantaged from disadvantaged families. The PISA index of economic, social and cultural status is based on the highest level of parental education, parental occupation, an index of home possessions related to family wealth, educational resources available in the home such as the number of books, and possessions related to culture such as works of art in the home. We follow the OECD practice of defining students as socioeconomically advantaged if they are among the 25 percent of students from families with the highest PISA index of social, economic, and cultural status in their country. The parents of socioeconomically advantaged students have higher educational attainment and work in higher skilled jobs than do the parents of other children. More advantaged students have more books and educational resources, such as desks, dictionaries, computers, and Internet connections at home. Their homes also have more material possessions such as cars or rooms with a bath or shower.

Children from the most advantaged quartile of families scored an average of 532 on the math test, while children from the most disadvantaged three quartiles of families scored (in descending order by quartile) 494, 462, and 442, respectively. On the science test, children from the most advantaged top quartile of families scored 548 while children from the most disadvantaged bottom three quartiles scored 511, 480, and 456.

The first scenario assumes that the scores of children from the most disadvantaged bottom 3 quartiles of families are increased only enough to raise the average U.S. math and science scores to match the OECD average scores. Specifically, the difference between the average OECD math and science scores and the U.S. average math and science scores is calculated. For both math and science, the OECD-U.S. average score difference is divided by three quarters and the result is then added to the average score of students in each of the bottom three quartiles of the ESCS index. The math and science scores of the top quartile are assumed to remain constant.

The national average PISA math and science test scores are then recalculated for the nation as a whole. Aside from raising the combined math and science average U.S. score from 978 to 995 so that it matches the OECD average score, this scenario also narrows the achievement gaps between children from the most advantaged and most disadvantaged quartiles by approximately 13 percent. The average test score for the nation rises by 13 points in math and 4 points in science. The 13-point improvement in math and the 4-point improvement in science represent an increase of 0.09 standard deviations on the combined average score.

The second scenario raises the math and science scores of each quartile (by socioeconomic status) of U.S. students to match the math and science scores of Canadian students. This raises the combined average U.S. math and science scores from 978 to 1,044. It also improves the scores of the bottom three quartiles of students more so than for the top quartile of U.S. students, thereby narrowing gaps. The 66-point improvement in the combined math and science average test score is roughly an increase of 0.37 standard deviations on the combined score.

The third scenario assumes that the PISA test scores for children from the most disadvantaged bottom 3 quartiles of families are raised to equal the scores of children from the most advantaged quartile of families. In other words, the achievement gap between advantaged and relatively disadvantaged children is completely eliminated. The average PISA math and science test scores are then recalculated for the nation as a whole. This raises the combined average math and science score to 1080, which represents an increase of 0.54 standard deviations on the combined average score.

To assess the “reasonableness” of PISA test score increases of the sizes assumed in the three scenarios, the history of PISA test score increases was reviewed. Unfortunately, the PISA tests have only been administered at three-year intervals for a dozen years starting in 2000, and tests results have only been standardized and made comparable for the nine-year period between 2003 and 2012. This makes it difficult to compare actual increases in PISA scores to those in the three scenarios which take place over a longer time period: 20 years.

Nonetheless, several nations have experienced PISA test score increases that exceeded those of scenario one and roughly equaled those of scenario two. Germany and Italy, for example, experienced 33 and 27 point increases, respectively, in their combined average math and science score between 2003 and 2012, far exceeding the 17-point increase assumed in scenario one and roughly matching the annual 3.3 point-increase assumed in scenario two, although short of the 66-point total increase. Poland’s 6.3-point annual increase in its combined average math and science score between 2003 and 2012 is greater than the 5.1-point annual increase assumed in scenario three, although Poland’s total increase over the nine years of 56 points is less than the 66 and 102 total point increases over twenty years of scenario’s two and three. Thus, the cognitive ability increase assumed in scenario one is clearly achievable, while those of scenarios two and three may require an unprecedented sustained national effort.

All three simulations calculate the annual GDP growth-rate increases as the educational improvements are phased in fully. The cause of the educational improvement is not specified. In general, however, improvements in cognitive skills are not necessarily a function of educational reforms but, instead, could be the function of a variety of non-education and education policies. For instance, as explained in the paper, enhancements in educational achievement could result from the adoption of high-quality, universal pre-Kindergarten, class size reductions, improvement in the education of teachers, higher wages for teachers, child health and nutrition policies, better prenatal and post-natal care, criminal justice reforms that help lessen the detrimental effects of incarceration on the children of prisoners, reductions in racial and housing segregation, changes in work place policies such as those related to family leave or schedules or vacation time, or combinations of these and many other policies.

Whatever the source of the improvement in cognitive skills, the achievement gains are not assumed to be immediate but, instead, they are phased in linearly over a 20-year period. Thus, the cognitive skills improvements are assumed to be very small after one year, but they grow steadily year after year so that after 20 years, the achievement improvements are fully phased in.

Similarly, it is assumed that the economic impacts of enhanced cognitive skills are not felt until students with better skills enter the labor force. As these new, higher-skilled workers replace older, retiring workers, the average skill of the workforce progressively improves, productivity increases, and economic growth accelerates.

It is assumed that the average laborer works for 40 years. This means that it will take 60 years to feel the full economic effects of policies to improve cognitive skills—20 years to phase in the achievement improvements and 40 years until the full workforce reaches the higher skill level.

The simulations indicate the average annual increase in economic growth that results from the narrowing (scenarios 1 and 2) or gradual closing (scenario 3) of the educational achievement gap between children from more and less advantaged families and the subsequent upgrade in the skill level of the workforce. The annual estimated growth increase is then multiplied by Congressional Budget Office’s long-term projections of real U.S. GDP to derive the annual increases in GDP over the years from 2015 to 2075 that result from closing or narrowing achievement gaps.

The Congressional Budget Office’s long-term projections of real U.S. GDP do not already assume the cognitive achievement improvements built into scenarios one, two, and three. Nor should they. The results of the National Assessment of Educational Progress (NAEP), the largest nationally representative and continuing assessment of the educational achievement of children in U.S. schools, indicate little or no progress in the educational achievement of 17-year olds over the past forty years. For example, the NAEP math score for 17-year olds was essentially unchanged over the past forty years, varying slightly from 304 in 1973 to 306 in 2010.

To estimate the federal tax revenue impacts of GDP increases that are induced by closing education achievement gaps, the Congressional Budget Office’s long-term projections of federal tax revenues as a percentage of GDP between 2015 and 2075 are used. For other revenue projections, the historical record on state and local, Social Security, and Medicare revenues as a percentage of GDP over the past 30 years is reviewed and used as a guide. Except for during the recession-affected years of 2002 and 2009, state and local revenues typically varied between 14 percent and 18 percent of GDP. It is assumed that state and local revenues derived from future increases in GDP would sum to the middle of the historical range, or 16 percent of GDP. It is further assumed that additional Social Security taxes and Medicare revenues—among the most significant subcomponents of federal revenues—would equal 4.3 percent and 1.3 percent, respectively, of annual increases in GDP, which is consistent with their current levels. These rates are applied to the calculated increases in GDP to determine increases in revenues.

To compare the worth of these future increases in GDP and tax revenues to the current value of GDP and revenues, the common practice of discounting the future increases in GDP is followed to recognize that each dollar of GDP acquired in the future is less valuable than each dollar of GDP secured today. In general, a dollar earned sometime in the future is less valuable than a dollar earned today because of the interest-earning capacity of money. For instance, if the current interest rate is 3 percent, then 97 cents earned today and put aside in an interest-bearing account would be worth approximately $1 a year from now. This is equivalent to saying that a dollar earned a year from now would be worth only 97 cents today. The discounted future value, known as the present value, allows us to state the value of future benefits in present dollars so that they can be more easily compared to current values. Thus, we calculate the present value of these future GDP and tax revenue increases by assuming a standard 3 percent discount rate. All calculations are in real (inflation-adjusted) numbers, with 2015 as the base year.

To calculate the increases in lifetime earnings for children who complete their schooling 20 years from the start of the policy reforms, we used the OECD’s estimate that 41 score points on the PISA math test is equivalent to about one year of schooling in the typical OECD country. Consistent with the literature on the relationship between schooling attainment and lifetime earnings, we then assumed that for each year of additional schooling, students would experience a 10 percent increase in lifetime earnings. Thus, for example, under scenario three a student in the bottom quartile of socioeconomic status experiences a 90 point increase in their PISA math score, which is the equivalent to 2.2 years of additional schooling or a 22 percent increase in lifetime earnings.

The Economic and Fiscal Consequences of Improving U.S. Educational Outcomes

Posted on February 2, 2015April 18, 2018 by David Evans

• Download a pdf of the overview.
• Download a pdf of the “Fast Facts”.
• Download a pdf of the methodology.
• Download a pdf of the full report.

Methodology

The Economic and Fiscal Consequences of Improving U.S. Educational Outcomes

Posted on February 2, 2015April 18, 2018 by David Evans

This study addresses a key challenge confronting the United States—how to promote both widely shared and faster economic growth. It does so by analyzing and describing the effects of raising educational achievement, especially for those not at the top of the economic ladder. The results of this analysis, which are consistent with a large body of research across a variety of academic disciplines, demonstrate that improving the education of future workers accelerates economic growth and can promote more equal opportunity over the long run. The result: stronger, more broadly shared economic growth, which in turn raises national income and increases government revenue, providing the means by which to invest in improving our economic future.

Click for our interactive graphic.
Download a full pdf of the report.
Download the “Fast Facts” pdf.

Since the early 1970s, economic growth in the United States has been relatively slow and income inequality has risen rapidly. Over this same period, income growth has been so sluggish and unevenly distributed that families on the bottom and middle rungs of the income ladder experienced stagnating or declining incomes even as earnings among those at the top increased sharply. In contrast, the years immediately following World War II and continuing into the early 1970s were characterized by relatively rapid and broadly shared growth. Those at the top earned substantially more than those across the middle and bottom of the income spectrum, but high, middle, and low-income earners all saw their incomes grow at about the same rate.

A restoration, then, of the economic growth pattern that characterized the first three post-war decades would result in both greater and more widely shared economic growth—equitable growth. In order to address this key challenge confronting the United States, this study empirically quantifies the economic and tax benefits of raising the educational achievement of children from less advantaged socioeconomic backgrounds. In general, there are large gaps in the educational outcomes among children from families with lower and higher socioeconomic status. These gaps contribute to subsequent economic inequality, with the relatively poor performance of children from lower socioeconomic backgrounds reducing U.S. economic growth. Thus, closing income or class-based educational gaps would promote faster and more widely shared economic growth.

The study shows the consequences of raising the educational achievement of children from the bottom three quarters of families who are most socioeconomically disadvantaged to more closely match those of children born into the top quarter of families. Observing the impact of three different scenarios that all have 2015 as their starting date, the analysis quantifies various outcomes over the next 35 years—to 2050, when the pressure of supporting the retired baby boomers will have largely abated—and over the next 60 years—to 2075, when the benefits of narrowing achievement gaps under the three scenarios will have been fully phased in.

Specifically, the study quantifies how much greater U.S. economic growth (measured by gross domestic product, or GDP, the total value of goods and services produced in our economy) and tax revenues would be. The analysis also assesses the reductions in economic inequality that result from the narrowing of education gaps.

In all three scenarios we use the 2012 scores on the Programme for International Student Assessment, or PISA, math and science achievement tests as our indicator of academic achievement. For each scenario, a simulation model is used to estimate the economic effects of potential policy reforms that raise U.S. PISA scores—effects that improve the educational achievement of U.S. children and reduce disparities in educational outcomes among them. The results of this modeling suggest the extent to which appropriate policies could enhance economic growth, raise tax revenue, and reduce economic inequality. (See the Methodology section on page 45 of the full report for details on the simulation model and data used in this report.)

The three scenarios and the consequences for U.S. economic growth and fiscal stability

In the first and most modest scenario, we examine the consequences of simply raising the educational achievement of U.S. children so that it matches, instead of lags behind, the average of the 34 economically advanced nations who are members of the Organisation for Economic Co-operation and Development. Specifically, we raise the achievement scores of U.S. children from the bottom three quartiles of disadvantaged families just enough so that the national average educational achievement of all U.S. children on the PISA tests matches the average educational achievement of children from the OECD nations. This raises the combined U.S. math and science PISA score from 978 to 995 (the OECD average) and improves the nation’s relative ranking from 24th to 19th best out of the 34 OECD nations, or roughly to the middle of the pack on par with France. (See Table 1, and for a complete breakdown by OECD member country see table 6 on page 29 of the full report.)

In the second, middle-range scenario, we explore the effects of raising the achievement of U.S. children to match that of the children of our neighbors to the immediate north in Canada. This adjustment lifts the combined U.S. math and science PISA score from 978 to 1044 (the Canadian average) and improves the nation’s relative ranking from 24th to 7th, tied with Canada.

In the third and most ambitious scenario, the economic consequences of completely closing educational achievement gaps between U.S. children from lower and higher socioeconomic backgrounds are estimated. In particular, the PISA test scores of the bottom three quartiles of socioeconomically disadvantaged U.S. children are raised so that they match the PISA test scores of the most advantaged quartile of U.S. children. This increases the combined U.S. math and science score to 1,080 and raises the U.S. academic standing to third best among the OECD countries, behind only South Korea and Japan.

TABLE 1

The paper then summarizes the reductions in disparities in educational outcomes under each of the three scenarios. It reports the gap in outcomes on the PISA tests scores between children in the top and bottom quartile of family socioeconomic status as a percentage of the average PISA score. (See Table 2.)

TABLE 2

Under scenario one, the education gap is reduced from 18.6 percent to 16 percent, and the U.S. ranking on equity improves from 21st to 11th out of the 34 OECD nations. Under the second scenario, the gap falls to 13.2 percent and the U.S. ranking rises to 6th. The third scenario completely closes the educational achievement gap between students from different socioeconomic background, and the United States ranks first among the OECD countries in the equality of educational outcomes.

The paper then demonstrates how the reduction in educational achievement gaps in the United States translates into stronger economic growth over the next 35 years and 60 years. Tables 3 and 4 summarize the economic consequences of raising academic achievement and narrowing educational achievement gaps.

TABLE 3

Under scenario one, the inflation-adjusted size of the U.S. economy in 2050 would be 1.7 percent, or $678 billion, larger. The cumulative increase in real GDP (after factoring in inflation) between 2015 and 2050 would amount to $2.5 trillion in present value, or PV, the current dollar value that is equivalent to the future GDP increases calculated by the model, which allows for a comparison of future values of GDP to current values of GDP. This amounts to an average of over $72 billion per year. The economic effects of raising and narrowing achievement gaps build upon themselves so that over time the growth consequences are increasingly magnified. By 2075, when the effects of policy reforms required to reach this first scenario are fully phased in, the U.S. economy would be 5.8 percent, or $4.1 trillion, larger than it would otherwise be, and the cumulative increase in GDP over the 60-year period from 2015 to 2075 would amount to $14 trillion in present value, an average of $234 billion per year.

If American children matched the academic achievement of Canadian kids, then economic growth would be significantly larger. In 2050 the U.S. economy would be 6.7 percent, or $2.7 trillion, larger. The cumulative increase in GDP between 2015 and 2050 would amount to nearly $10 trillion in present value, $285 billion on average per year. In 2075, the real U.S. GDP would be 24.5 percent, or $17.3 trillion, larger, and the cumulative increase between 2015 and 2075 would sum to over $57 trillion in present value GPD, an average of $956 billion per year.

Finally, if achievement gaps between children from different socioeconomic backgrounds were completely closed, then the U.S. economy would be 10 percent, or $4 trillion, larger in 2050. The cumulative increase in GDP by 2050 would amount to $14.7 trillion in present value, or $420 billion per annum. In 2075, once policy reforms have fully taken effect, the real U.S. GDP would be 37.7 percent, or $26.7 trillion, larger, and the cumulative increase in present value GDP over 60 years would sum to $86.5 trillion, an average of over $1.4 trillion per year.

These results demonstrate that investments targeted at raising academic achievement and narrowing achievement gaps generate large returns in the form of economic growth. The increases in present value economic growth described above suggest the size of potential policy investments that would pay for themselves in the form of growth over the next 60 years and beyond.

Narrowing or closing achievement gaps also would also have significant positive consequences for future federal, state, and local revenues. Over the first 35 years, these would sum to $902 billion in PV federal, state, and local revenues under scenario one, $3.6 trillion under scenario two, and $5.3 trillion under scenario three. Over 60 years, the consequences would be significantly larger. Federal, state, and local revenues would sum to $5.2 trillion (scenario one), $21.5 trillion (scenario two), and $32.4 trillion (scenario three), all expressed in present value. (See Table 4.)

TABLE 4

Thus, public policy investments that raised academic achievement as described under the three scenarios and that cost less than an average of $87 billion, $358 billion, and $540 billion over each of the next 60 years would more than pay for themselves in budgetary terms. To put these revenue figures in perspective, consider that the entire budget for the federal Department of Education in 2013 was $72 billion. Keep in mind, as well, that these revenue increases are not a function of tax rate increases. Instead they are the additional revenues that would accrue to governments because U.S. GDP would be larger and Americans would be earning more income and paying taxes on their additional income.

The increased growth and subsequent revenue increases will enable us to more easily sustain public retirement benefit programs such as Medicare and Social Security. Improving educational outcomes, for example, would lift Social Security tax contributions by $256 billion, $1 trillion, and nearly $1.5 trillion under the three scenarios by 2050. Similarly, Medicare tax revenues for the Hospital Insurance Fund would increase by $77 billion, $306 billion, and $452 billion under the three scenarios from 2015 to 2050, providing a substantial boost to Medicare solvency. Revenues for Social Security and Medicare would be substantially larger by 2075.

The benefits of closing educational achievement gaps also would reduce income inequality. These effects are calculated under the three scenarios for children who complete their schooling 20 years from the start of the necessary policy reforms (in 2035) because it is assumed that it takes 20 years for the academic reforms to be fully phased in. Children who complete their schooling prior to 2035 would experience only a part of the increase in lifetime earnings. (See Table 5.)

TABLE 5

Under scenario one, the lifetime earnings of children from the bottom three quartiles of socioeconomic status would increase by an additional 4.3 percent. Under scenario two, all children would earn more, although the increases are smallest for children with the highest socioeconomic status and thus income inequality would be reduced. Finally, under the third scenario, the increase in lifetime earnings for children in the bottom three quartiles of socioeconomic status would be very large: 22 percent, 17 percent, and 9.3 percent respectively.

As explained in greater detail later in the report, these economic and tax benefit projections understate the impact of raising achievement gaps for at least four reasons. First, under scenarios one and three, they assume that educational achievement improvements are limited to children in the lower three quartiles of socioeconomic status, but in the real world policies that increase these children’s educational achievement are likely to improve all children’s achievement and further enhance growth.

Second, the model does not take into account any of the social benefits—such as better health outcomes—that are likely to occur as a result of educational improvement. Third, the model may be understating growth effects because it assumes that improvements in the educational achievement of children in the bottom three quartiles of socioeconomic status have the same impact on growth as do equal sized improvements in the educational achievement of the average child. Yet there is evidence that raising skills at the bottom improves growth more than raising skills at the top. Finally, the model does not calculate the potential positive effects on children born to future parents who, because of improved academic achievement, will have higher incomes and thus be able to provide them better educational opportunities.

If the model properly accounted for all of these factors, the benefits of improving educational achievement would be larger than those estimated in this study. Yet by a similar logic, the projections overstate the reductions in economic inequality. Helping the most disadvantaged students improve their educational outcomes will likely improve the educational outcomes of all children and thus raise the incomes of the most advantaged children as well as temper reductions in income inequality.

Closing the socioeconomic gaps in education

The potential economic gains described above illustrate in stark terms the waste of human talent and opportunity that we risk if achievement is not raised and gaps are not narrowed. They also suggest the magnitude of the public investments we should be willing to make now and in the decades to come to achieve these goals. Even from a narrow budgetary perspective, the tax revenue gains this study forecasts suggest that many investments to raise achievement and close educational achievement gaps could amply pay for themselves in the long run.

The report provides numerous examples of effective public policy strategies that promote equitable growth to illustrate that there are many ways of doing so, though their details are left to future research. Broadly, these public policy strategies fall into three categories:

Early childhood care and education
Criminal justice reform
Family friendly workplaces

Completely closing socioeconomic-based educational achievement gaps will not happen instantly, but we can begin to narrow them immediately. As the report details, we already know many of the reasons these gaps exist and policies that can help close them. Thus, we can begin to experience some of the economic gains described in this report as policies that successfully narrow achievement gaps are implemented. Raising achievement and closing socioeconomic-based educational gaps is about not only reducing the degree of inequality in our society and promoting more widely shared economic growth but also inducing faster economic growth. In short, it is about promoting equitable growth.

Heather Boushey on “Capital in the Twenty-First Century”

Posted on January 27, 2015April 18, 2018 by Nick Bunker

The Schwartz Center for Economic Policy Analysis hosted a panel discussion of “Capital in the Twenty-First Century” with economist Thomas Piketty on October 3, 2014. After Piketty’s remarks, the New School’s Anwar Shaikh and Equitable Growth’s Executive Director Heather Boushey gave remarks on the book. The text of Dr. Boushey’s speech is below and a video can be found here.

Speech As Prepared for Delivery

I want to use my 10 minutes to focus on a couple of points: What are the implications if Thomas Piketty is right? Where should we start looking for policy answers?

Thomas points his readers to the novels of Jane Austen, Henry James and Henri Balzac. I want to quote him – he says, “for Jane Austen’s heroes, the question of work did not arise; all that mattered was the size of one’s fortune, whether acquired through inheritance or marriage.” Reading Henry James and Jane Austen certainly made me glad to have been born in 1970, not 1800.These novels are a testament to the limited choices that women had.

Today, to some extent, anyone can create a decent standard of living – or become a millionaire – through accomplishment in this life, rather than what we inherited from our parents. Of course, Thomas presents evidence that the “upper classes instinctively abandoned idleness and invented meritocracy lest universal suffrage deprive them of everything they owned,” but let’s set that aside for a moment.

There’s been a gender revolution, although it remains fairly recent and still incomplete. When I went off to college, my mother admitted to me she was jealous of the opportunities that I had. She told me how when she was thinking about her college option, they were much more limited than mine. She felt that her options were only to study to become a nurse, teacher, or secretary. That wasn’t the array of opportunities that I faced or today’s young women face.

These changes have been good for our economy. According to Stanford economist Peter Klenow and his colleagues, the opening up of professions to women and minorities accounted for a fifth of growth in U.S. GDP between 1960 and 2008. A fifth! That’s non-trivial. In my own research with John Schmitt and Eileen Appelbaum, we found that the increase in women’s labor supply in the United States has added 11 percent to GDP since 1979.

We – all of us, no matter our age – have lived through an era where the presumption is that our society marches always towards great equality or less discrimination, even if slowly. But, if Thomas is right, then this era could be at an end. To get a feel for this, one could point to the PBS it Downton Abbey where Lord Grantham’s family will face eviction from their family manor when the Earl dies. There was no other way for Grantham’s three daughters to maintain their standard of living other than marrying well. So, the show’s first season focuses on whether the eldest daughters would concede to marry her cousin Matthew.

If Thomas is right, then once again, the rules over inheritances will make all the difference for the potential for women’s equality. Do inheritances go to the eldest child or to the eldest male child? What happens upon the death of a spouse – does the wife or the child inherit? I fear that the answers to these questions are not likely to be good for women because while the gender revolution has come a long way, it has stalled in recent decades. Thomas’s data makes me wonder if we’ll wish we’d solidified that more quickly.

In 2014, only one-in-ten U.S. billionaires were women (11.4 percent) and the female share of self-made billionaires is only 3.1 percent. While women have made progress in the workplace, the gender pay gap remains 78 cents on the dollar and this gap begins as soon as women enter the labor force and grows over time.

The gap in pay and labor force participation between men and women, especially here in the United States, is in no small part because we have no found sufficient ways to help workers with care responsibilities. For example, in the vast majority of workplaces neither women nor men have access to paid family leave. That is, except in California, New Jersey, and Rhode Island, where paid family and medical leave has been implemented.

The lack of a federal paid leave policy leaves female caregivers disadvantaged in the labor market. We see this when we compare the labor force participation rates of women in the United states to other OECD countries where the United States has fallen to 17^th out of 22 countries. Policy plays a clear role here.

Cross-national studies on the role of policies that reconcile work and family demands have found that the work hours of women in dual-earner families are similar to those of men when child care is publicly provided. Paid maternity and parental leave also increases the employment rate of mothers and more generous paid leave benefits increase the economic contributions of wives to family earnings.

If we’re on the cusp of an era where wealth becomes more important, the failure to implement these policies and achieve greater equality in the preceding era are all the more urgent to address. But, Thomas also questions whether we can raise “g.” And we know, expanding opportunities to excluded groups raises productivity. So there might be some potential there.

That leads me to two aims for policymakers that I draw from the book. First, recognizing that women are an underutilized source of growth and addressing this is extremely urgent for our economy and may be imperative if we don’t want to regress on the gender progress we have made.

In Japan, in order to boost growth in the face of declining population growth, they are pursuing “womenomics’ and implementing policies to boost female labor force participation and close the gender wage gap. When I talk to policy leaders from the United Kingdom or Canada, they will make the argument to me that addressing conflicts between work and family are critical for economic productivity. Too often, I find that I have to make that argument to U.S. policymakers.

While I fear that Thomas’s analysis predicts that women may have fewer economic opportunities moving forward, I also wonder what it means to ponder an economy where dead capital could again supersede human capital. Certainly, it would imply less innovation if economic opportunities were confined to those who started with the most capital. But, is this an overreaction?

In Capital in the Twenty-First Century, Thomas focuses on the rise of the “supermanager,” which he referenced earlier. Which brings me to a second area for policy. We must consider that some of what we’re calling labor income is actually capital income or unproductive rents. This has important policy implications. We hosted a conference last week where Alan Blinder and Emmanuel Saez debated this point, noting that we don’t have data that allows us to discern whether high incomes are rents or productive. At the end of the day, this is a key piece of information we need to inform policymakers in terms of whether and how to intervene.

I have thought a lot about your wealth tax idea, Thomas, and am very taken by remarks Michael Ettlinger made at that same conference we hosted last week where he pointed out that wealth is harder to track and harder to value than income. That’s not to say we shouldn’t not seek to pursue this or try to pull together the data, but I also want us to consider a variety of other strategies that could also be effective.

I want to end by saying that I’m really pleased we are having this conversation at the New School of Social Research. To echo what Anwar said, I think it’s encouraging and exciting to see economic research that beings by seeking to understand the real world and then uses that data to inform a theoretical framework. I think that Thomas is part of a new generation of economic asking different questions than their teachers.

Many of us who came into adulthood as the 1980s turned into the 1990s begin not from President Kennedy’s dictum that a rising tide lifts all boats, but rather from the premise articulated by presidential economics advisor Gene Sperling that “the rising tide will lift some boats, but other will run aground.”

We had to begin here.

The only economic reality we’ve ever experienced is one where productivity gains go to the top while leaving the vast majority to cope with stagnant wages, greater hours of work, and, most especially in the past decades, rising debt burdens. We’ve experienced first-hand the damage this has done to our generation and the ones that follow. The idea that the real world matters was a key idea I took from my education here at the New School and I’m glad we’ve been able to be here together to discuss this important book here today.

President Obama’s “middle-class economics”

Posted on January 21, 2015April 18, 2018 by Bridget Ansel

Equitable growth was a central theme in President Obama’s State of the Union address last night. The president’s speech laid out a vision for “middle-class economics” that is clearly meant as a rebuke to “trickle-down economics,” the philosophy which has dominated Washington policymaking for the past four decades. But what exactly is middle-class economics?

First of all, it’s good political messaging because a plurality of Americans self-identify as middle class—it’s not just for those at the middle of the income ladder. The President’s “middle class economics” vision includes policies that help those at the bottom, middle, and, yes, the top of the income and wealth spectrum in our society, and in turn aims to kick-start the U.S. economy into a new era of equitable growth.

But middle-class economics also is good economics. Boosting wages is perhaps the right place to start, given the salience of wage stagnation as a key indicator of the failures of the past several decades of trickle-down’s ill-distributed growth. The president’s speech called for boosting the minimum wage, a policy move supported by a widening circle of politicians, including prominent Republicans who recognize that it’s not only publically popular but also important to improving the livelihoods of those on the bottom and middle rungs of the income ladder as that wage increase “trickles up” the income ladder.

The declining strength of the minimum wage over the past three decades is illustrated in this great infographic. And the best evidence on the economics of the minimum wage suggests little-to-no meaningful effects on job creation or job losses. Instead we see substantial reductions in labor employee turnover and improvements in business efficiency that help business owners and shareholders alike. Moreover, recent studies using a wave of state-level minimum wage increases show that states that increased their minimum wage saw stronger job growth than those that did not—another boon to both employees and employers.

It’s also worth noting that Econ101 says putting more money in the pockets of low-wage workers is good for the economy as it boosts consumer demand. It is these individuals that are most likely to spend that extra dollar in their pocket, and that spending is part of what drives economic growth. And, despite the popular counterpoint that many minimum wage workers are teenagers working for pocket change, over half of all minimum wage workers were 25 years old or older.

The president’s speech last night also included a pitch to reduce work-family conflict, with a policy agenda including paid sick leave, paid family leave, and affordable child care. All of these are much needed updates to workplace rules designed for the Mad Men-era, when a family could maintain a comfortable middle-class standard of living on one income. An updated set of family friendly policies isn’t just good for hard-working families, whether they’re dual-earner couples or struggling single parents. What’s good for families is also good for the economy.

One recent study shows that paid parental leave is not the “job killer,” and in contrasts actually boosts labor force participation and wages, as well as job quality. For instance, in a 2009-2010 survey of California employers, 87 percent reported that the state’s paid family leave policies resulted in no cost increases. Family friendly workplace programs also help working parents stay in the labor market. These policies mean breadwinners do not face the hard choice that 41 million American workers currently must make—miss a paycheck or even lose a job to care for a sick child or taking an ailing parent to the doctor’s office.

Finally, the President’s middle-class economics includes a new set of taxes on capital to lift them closer to those already levied on wages. The focus on capital taxation makes sense in light of the new evidence on the dramatic wealth gaps in the United States. My colleague, Nick Bunker, has written elsewhere on the president’s tax-reform proposals, but it’s worth briefly noting here the key take-away: Trickle-down economic messengers contend that increasing taxes on capital is a sure-fire way to kill growth, but a wide range of thoughtful economists tells us otherwise.

Tax Policy Center director and Syracuse University economist Len Burman, for instance, concludes that top capital gains rates have no relationship to economic growth. This means raising taxes on capital would enable our nation to make the investments we need to power more broad-based economic growth that helps everyone up and down the economic ladder now and well into the future. Think new infrastructure, universal pre-kindergarten, more affordable college, and more money for basic research and development to ensure the United States remains the world’s global technology and innovation leader.

In short, middle class economics tells us we can raise capital gains tax rates back to where they were under President Ronald Reagan—and by doing so finance government programs that can serve as a springboard for more equitable growth.

An appreciation of Robert Solow

Posted on November 24, 2014April 25, 2018 by Nick Bunker

President Obama today is awarding the Presidential Medal of Freedom to a number of accomplished Americans, including Robert Solow, Institute Professor, emeritus and Professor of Economics, emeritus at the Massachusetts Institute of Technology, Nobel Laureate in Economics, and a member of Equitable Growth’s Steering Committee

Robert Solow’s name is familiar to anyone who’s taken an introductory macroeconomics course. Solow’s model of economic growth is the first, and for the vast majority of students, the only growth model they will learn. And it’s for this work that Solow won the Nobel Prize in 1987.

The Solow growth model has one key takeaway: the source of long-term economic growth is technological growth. Before Solow’s 1956 and 1957 papers outlining the model, some economists believed that a country could boost its rate of economic growth by increasing its savings rate or adding more workers to its labor force.

But Solow’s model shows something else. Increasing the savings rate could get an economy to a higher level of output after the increase, but the long-run rate of economic growth wouldn’t increase. Doubling the savings rate would increase a country’s GDP per capita, but it wouldn’t change the fact that the economy would grow at the same rate as before. But a “technological” advance boosts the long-run growth rate of the economy.

Think of it this way: an increase in the savings rate moves an economy along a line, but technological growth shifts the line out.

Now by technology Solow’s model doesn’t mean just advances in computers or robots, but rather anything that allows for a more efficient use of capital and labor. In that way, technology is essentially the same thing as total factor productivity. What determines the growth in TFP over time is still very much an open question in economics.

But Solow’s model is important for guiding how we thinking about economic growth in the real world. For example, once you understand the Solow model you realize a country like China growing much faster than the United States isn’t so surprising. China is experiencing catch-up growth as it invests more in its economy and adopts technology and other resources from richer countries. Eventually China will catch up to the technological frontier and grow at about the same rate as the United States. At least in the long-run.

As for countries already at the frontier, the model indicates that the path to sustainable long-term economic growth is to improve productivity. Rich countries can help boost the productivity of labor by improving access to and the quality of education, increasing the productivity of capital by creating institutions that allocate it more efficiently, fostering innovation, or a variety of other policy options.

Solow’s most famous work is certainly theoretical, but it has clear policy implications. Solow himself delved more directly into the world of economic policy when he served in government. He served as a senior economist for the Council of Economic Advisers during the Kennedy Administration in the early 1960s.

Though Solow officially retired from MIT in 1995, he continues to engage in the economic and policy debates of the day. He wrote one of the best received reviews of Thomas Piketty’s Capital in the 21^st Century published in the New Republic. And he does not shy away from engaging in contentious debates.

The Presidential Medal of Freedom is awarded to individuals who make especially “meritorious contributions” to society. Robert Solow’s contributions certainly have great merit. Through his groundbreaking insights into economic growth, his government service, and his role in the public debate, Solow has helped create a more prosperous United States.

Understanding economic inequality and growth at the bottom of the income ladder

Posted on November 6, 2014April 18, 2018 by Bridget Ansel

Today the official poverty rate in the United States is back to levels we haven’t seen in 20 years, and the incomes of families at or near the bottom of the income ladder are at the same level they were in the early 1970s. Studies show poverty rates on the decline since the beginning of Great Society programs in the 1960s until the late 1990s, but seeing as wages have not improved, this decrease in poverty was almost entirely due to increased government transfers.

Poverty is back up because wages at the bottom have stagnated or fallen. Over the past 40 years, workers in the bottom 40 percent of the wage spectrum experienced negligible wage growth, and wages have fallen for those in the bottom 10 percent, after accounting for inflation. The trends have been worse for men than women, in no small part because women’s increased educational attainment and on-the-job experience have boosted their wages over the past few decades.

Researchers find that the lack of wage-and-income growth for families at the bottom of the income ladder in particular results in serious economic consequences. First, the continued lack of income growth harms low-income children’s development, which affects our nation’s future human capital. Second, a growing body of evidence suggests that the lack of income gains at the bottom have macroeconomic consequences because it either reduces consumption or encourages more debt, both of which are destabilizing.

But there are remedies for these problems, such as raising the minimum wage. Research by economists Daniel Aaronson and Eric French at the Federal Reserve Bank of Chicago and Sumit Agarwal of the University of Singapore find that increasing the minimum wage boosts the consumption of affected workers.And a battery of other research shows that raising the minimum wage does not reduce local employment and reduces employee turnover.

The three essays in this section of our conference report—by Christopher Wimer, a research scientist at Columbia Population Research Center, Arindrajit Dube, an associate professor of economics at the University of Massachusetts-Amherst, and Gavin Kelley, chief executive of the Resolution Foundation in the United Kingdom—look the overall exclusion of low-wage workers from the benefits of economic growth and how that affects the future growth and stability of our economy. They also consider whether the government should focus on raising market wages though policies such as the minimum wage, anti-poverty assistance or some better combination of the two approaches.

Reversing inequality at the bottom: the role of the minimum wage

by Arindrajit Dube

There are many factors affecting the growth in wage inequality in the United States over the past four decades. When it comes to workers on the bottom rungs of the income ladder, one important factor is the minimum wage.

The federal minimum wage reached its high-water mark in 1968, when it stood at $9.59 per hour in 2014 dollars, declining to a still-respectable $8.59 by 1979. During the 1980s, however, the real (inflation-adjusted) minimum wage declined substantially. And over the past 20 years, the minimum wage has largely treaded water, reaching a historical low of $6.07 per hour in 2006 just before the last federal increase in 2009. The minimum wage now stands at $7.25 per hour in today’s dollars.

The failure of the minimum wage to keep up with inflation means that, for workers earning the minimum wage, each hour of labor purchases less goods and services today than it did in the past.

Minimum wage workers are not only (contrary to popular belief) teenagers and young adults whose low wages are supplemented by their families. In fact, between 1979 and 2011, the share of low-wage workers—defined as those with wages of $10 or less in 2011 dollars—under the age of 25 years of age fell to 35.7 percent from 47.1 percent. Instead, minimum wage workers are increasingly adults who must rely exclusively on their meager earnings to support basic household consumption. The decline in the value of the minimum wage affects female workers in particular, as they tend to be paid lower wages.

Low minimum wages are also problematic when they deviate too far from the median wage because that means minimum-wage earners are falling farther behind on the income ladder. This is why economists often use the ratio of the minimum to the median wage. The so-called 50/10 wage gap—the median wage earner compared to those with earnings in the bottom 10 percent of the income ladder— captures this type of wage inequality over time. Since 1979, around a third of the changes in the 50/10 wage gap have been driven by changes in the minimum wage.

There are two main reasons to pay attention to this measure. First, a comparison of the minimum wage to the median offers us a guide to how many workers are affected by a particular minimum wage increase, and what level of minimum wage the labor market can bear. When this ratio is low—say around 0.2—the policy is not raising wages of many workers. In contrast, a high ratio—say around 0.8—indicates a highly interventionist policy where the minimum wage is dramatically compressing differences in wages for nearly half the workforce.

Second, the median wage provides a reference point for judging what is a reasonable minimum wage level. No one expects that the minimum wage should be set equal to the median wage, but fairness concerns matter when the minimum wage falls below say, one-fourth or one-fifth of the median wage.

A natural target is to set the federal minimum wage to half of the median wage for full-time workers. This target has important precedence historically in the United States. In the 1960s, this ratio was 51 percent, reaching a high of 55 percent in 1968. Averaged over the 1960–1979 period, the ratio stood at 48 percent. Today, the ratio stands at 38 percent. Raising the federal minimum wage to around $10/hour would restore the value of the minimum to around half of the median full-time wage, yet efforts at raising the minimum wage have largely stalled in a deeply divided Congress despite widespread political support around the country.

This federal inaction has led to a flurry of activities at the state and local level. States have stepped in during periods with a stagnant federal minimum wage in the past, especially the 2000s, but for the first time in U.S. history we have many major cities establishing citywide minimum wages for all (or most) private-sector workers. The growing list of cities with such a policy now includes Albuquerque, Chicago, San Francisco, San Diego, San Jose, Santa Fe, Seattle, and Washington, DC. Other cities such as Los Angeles and New York are actively exploring possibilities.

This push to increase minimum wages in big cities coincides with organizing by workers in fast-food chains in major metro areas. The target minimum wage in most of these areas is substantially higher in nominal (non-inflation-adjusted) value— with $15/hour a focal point for these campaigns. The confluence of these factors raises the possibility of substantially altering wage standards in the U.S. labor market.

How should we think about these sizable increases in the minimum wage? First, we should be careful not to overstate the size of the increases or the levels of the minimum wages because the cost of living and overall wage levels vary tremendously by region. Setting the minimum wage to half the full-time median wage would produce $10/hour policy nationally, but much higher figures in major metro areas such as Washington, DC ($13.51), San Francisco ($13.37), Boston ($12.85), New York ($12.25), and Seattle ($11.85).

Moreover, these higher nominal wages are usually phased in gradually. In Seattle, the hourly minimum wage will eventually rise to around $14 in 2014 dollars. This constitutes around 59 percent of the median full-time wage in that metro area, which is certainly higher than historical standards but not outlandishly so.

So what we do know about the impact of minimum wages over the past few decades and the importance of particular channels for the higher, local wage standards? First, most careful recent work points to relatively small impact on employment—be it for sectors such as restaurants or retail or for groups such as teens.3 As a result of wage increases and small impact on employment, family incomes rise at the bottom. A 10 percent increase in the minimum would reduce the poverty rate among the non-elderly population by around 2 percent, and generally raises family incomes for the bottom 20 percent of the family income distribution.

It is possible that the much larger increases in minimum wage may induce greater substitution of low-skilled labor with automation, or with fewer but more high-skilled workers? If this is true then we would expect evidence of growing “disemployment” (workers out of a job due to lack of skills or education) from these higher city-wide wage standards. Yet recent research also identifies some additional benefits that may be more important than larger wage increases. A growing body of research shows that while the impact on employment stock is small, there are larger reductions in employment flows or turnover. The reduction in turnover provides additional evidence that search frictions in the low-wage labor market are quantitatively important and offer some clues as to the way cost increases may be absorbed.

Given the cost of recruiting and training new workers, for example, reduction in turnover can be expected to offset about a fifth of the labor-cost increases associated with minimum wage hikes in this range. I think the large city-wide increases will provide us with some additional evidence on this topic. In particular, I believe it should be possible to assess whether the lower turnover regimes lead to substantially different training policies as would be predicted by some models incorporating “search friction”—things that prevent or make it more difficult for workers to find the kind of jobs they want. Moreover, it will be interesting to see whether change comes from the extensive margin (growth in high-training/low-turnover firms) or the intensive margin (change within firms).

The nature of high-cost metro areas means that a substantially higher minimum wage may allow more lower-wage workers to live closer to their place of work (inside the city) and reduce commute time. The labor-supply effect from this “in-migration” also can reduce recruitment costs and improve the quality of the service work force. These additional channels will be useful to keep in mind in future research.

Evidence also suggests that, in part, cost increases associated with a higher minimum wage are passed on to customers as price increases, especially for industries that employ high levels of low-wage labor. The best evidence suggests that a 10 percent increase in minimum wage would raise fast food prices by around 0.7 percent. There are reasons to believe that the higher income customers inside major cities are better able to absorb price increases without cutting back on demand. Limited evidence from San Francisco tends to confirm this observation.

Finally, there is some evidence that low-wage workers substantially increase consumption in response to wage hikes. Daniel Aaronson and Eric French at the Federal Reserve argue that the higher marginal propensity to consume among low-wage workers is likely to lead to some short-term increases in economic growth from a minimum wage increase. My reading of the evidence is that it is somewhat difficult to accurately assess the importance of this channel, in part because the relatively small number of minimum wage workers makes any aggregate demand effect fairly small. But I do think that the size of increases and possible in-migration of low-wage workers into urban areas may increase the local demand impact of a city wage standard.

Minimum wage policies are a powerful lever for affecting wage inequality in the bottom half of the labor market. Modest increases in minimum wages can raise the bottom wage, and family incomes, without substantially affecting employment. But minimum wages are limited in their reach, and cannot be expected to solve all our problems when it comes to wage inequality. At the same time, the much higher wage standards being implemented in some of the cities offer the possibility of taking this policy “to scale.”

Along with this greater promise, however, come added risks. The reality is that we do not know very well how these policies will affect the local economy. Future researchers would do well to utilize the careful identification strategies that have been the hallmark of recent minimum wage research to study these high city-wide minimum wage increases. Doing so will deepen our understanding of the functioning of the low-wage labor market, and help us gauge the proper scope of this important public policy.

Economic inequality and growth in the United Kingdom: Insights for the United States

by Gavin Kelley

After an extraordinarily long and deep economic downturn, the United Kingdom is finally enjoying belated but comparatively strong growth. The current recovery is jobs-rich, with employment growth massively outperforming expectations relative to gross domestic product. That’s the good news. In stark contrast, however, pay growth remains unprecedentedly weak and productivity has plummeted. Real (inflation-adjusted) wages have fallen for six years straight, with even nominal wages growing at less than 1 percent in recent months—the lowest increase ever recorded.

This apparent collapse in the link between economic growth and real wage gains is more extreme than anything we have seen before. But the trend has not emerged completely out of the blue. Even as the U.K. economy continued to grow steadily prior to the financial crisis and global recession in 2007-2009, workers across the earnings distribution experienced a major slow-down in wage growth.

This unhappy story about the weakening relationship between wages and growth is all too familiar in the United States. But the U.K. experience is different in important respects—and potentially offers some relevant insights for U.S. policymakers to ponder.

First, let’s look at what happened. The simple ratio of GDP growth to growth in median wages in the United Kingdom weakened markedly in the period from 2003- 2008 compared to the 1990s and 1980s. In those earlier decades, wage inequality grew sharply—those at the top pulled away from the middle, and the middle pulled away from the bottom—but pay was rising across the board. In contrast, a big deceleration in the growth rate of earnings characterized the early 2000s. For the first time, median pay trailed way behind growth in real GDP per capita.

Between 1977 and 2002, average annual real wage growth for workers at the median was around 2 percent, but from 2003 to 2008 it fell to around 0 percent to 1 percent (depending on the measure of inflation used). This stagnation happened even while real GDP per capita had an average annual growth rate of 1.4 percent. The squeeze was broadly felt: the only earners on the income ladder who experienced stronger growth were those near the bottom rungs (buoyed by increases in the minimum wage) and those at the very top (especially due to bonus payments in finance).

In the wake of the financial crisis of 2008 and amid the Great Recession of 2007- 2009, the fall in real wages (around 8 percent) has also been relatively evenly spread across the earnings spectrum, though it is far bigger if we include the self-employed (who are excluded from official data). Younger workers have suffered the most, while older workers have been the least affected.

Wages, however, don’t give the full-picture when it comes to living standards. If we look at household income growth, from 1994-95 to 2011-12, the bottom half of households took just 16 percent of pre-tax growth. Upper-middle households (those in the 50th to 90th percentiles) took 45 percent of household income pre-tax growth (44 percent post-tax), proportionate to their population share. The richest 10 percent of households took 38 percent of pre-tax growth (29 percent post-tax) while the richest 1 percent took 14 percent pre-tax (9 percent post-tax).

In short, redistribution boosted the bottom half’s share of income growth from 16 to 26 percent.

Why has the link between economic growth and wages weakened? The share of GDP flowing to the wages of those on the low and middle part of the income spectrum has fallen markedly since the mid-1970s, from 16 percent to just 12 percent—a decline of 25 percent. In simple accounting terms, this relationship depends on three factors:

How much of GDP growth goes to profit rather than labor?
How much of that share of economic growth goes to labor in the form of non-wage benefits and how much actually gets paid out to workers in wages?
Of this wage share, how much reaches low- and middle-income earners?

It is often assumed that the United Kingdom and the United States alike face a long-term decline in the labor share of GDP as more of our national incomes are sucked up into corporate profits due to a mix of changing globalization, technology, increased financialization and, relatedly, deregulation spurred by the impact of big money on democratic politics.

From the U.K. perspective, there has been a slight shift in this direction over time, though it is an issue that is often overstated. Changes in the U.K.’s labor share of national income accounted for only a fifth of the cleavage that had opened up between pay and productivity since the early 1970s. The decline in the labor share of income has been less marked than in the United States.

Another U.K. perspective is that workers’ wages have primarily been under pressure because of the rising burdens on employers to provide more non-wage compensation such as higher national insurance and pension contributions. These employment costs have certainly risen, but again they can be overstated, with such increases accounting for a bit over a quarter of the gap between productivity and pay. That said, it is true that the rising cost of non-wage compensation appears to have played a more important role in the period of wage stagnation from 2003 in the United Kingdom.

But by far the most important factor explaining the declining share of the cake going to the bottom half of U.K. workers since the 1970s has been rising wage inequality, although this played a smaller role in the immediate pre-crisis period of 2003 to 2008.

How these three trends are likely to evolve over the next decade and beyond is far from clear. The intellectual zeitgeist expects there to be a redistribution of income over time from labor toward capital due to the “rise of the robot” (technology replacing workers) and French economist Thomas Piketty’s now famous observation that “r >g” (returns on capital are greater than the returns on economic growth).

Equally troubling is the outlook for non-wage costs. The tricky balancing act over the past decade of securing adequate pensions savings for an aging society and protecting the wages of today’s workers in the United Kingdom is unlikely to go away. Similarly, most projections anticipate that, following the recent downturn period where wage inequality remained fairly level, it is now likely to increase again as the highest earners pull away from the rest.

Yet the idea that resumed growth is pre-destined to mean ever higher inequality is bogus. It was not long ago, after all, that the United Kingdom experienced broadly shared economic growth. So what observations can we make based on the U.K.’s experience?

First, standing still takes a lot of effort when the ground is shifting. A rising minimum wage and aggressive use of tax-credits made a significant and positive difference in the United Kingdom, but policymakers were pushing against the grain and didn’t do enough to confront the structural economic challenges such as inadequate business investment, lack of employee bargaining power, and weak demand for skilled labor.

Second, successive waves of “welfare reform,” together with the long-term decline in labor union collective bargaining, appears to have shifted the wage-unemployment relationship since the early 2000s. Wages have become significantly less responsive to falling unemployment than was the case in the 1980s and 1990s. At the same time, and despite the gains from the minimum wage, working poverty has become far more pervasive. Arguably, these shifts put even more onus on aggressive monetary and fiscal policy to help generate a tight labor market and wage growth.

Third, the U.K.’s policy on the minimum wage was a success but we shouldn’t rest on our laurels. The Low Pay Commission, the body that oversees the minimum wage, is widely judged to have been highly effective if perhaps too cautious. The wage gap between the bottom and middle of the distribution has fallen (slightly) since its introduction. Fifteen years ago the whole notion of the minimum wage was highly partisan. Now each of the political parties jockey for position on this issue.

The Low Pay Commission’s blend of operational independence, technical expertise, and social partnership (employer and union representation) has worked well. And this flexibility has been an advantage; in the UK context, linking the national minimum wage to inflation would be a mistake. But there is now a sense that we need to revise our minimum wage framework to reflect learning over 15 years and to inject more ambition into the process.

Finally, policy wonks need to think hard about the political economy of tax credits. Most experts think tax credits increased the incentive to work (boosting single-parent employment rates in particular), helped bring about a major fall in child poverty, and shored up the post-tax transfer share of income going to the bottom 50 percent of society. Yet the rapid expansion of the policy (around 8 in 10 families with kids were eligible in 2010) raced ahead of popular support, making it surprisingly easy for the current governing coalition of Conservatives and Liberal Democrats to cut them. Tax credits have been characterized as “welfare” for the work-shy, whereas “tax-relief” is generally perceived more positively.

So what is the outlook for wage inequality in the United Kingdom? Broad-based economic growth is very unlikely to return by chance. Securing such an outcome will require a number of elements, including:

A more aggressive strategy for raising the wage floor during the current period of economic recovery, drawing confidence from growing research about the capacity of buoyant labor markets to absorb steady minimum wage rises
Tackling the extraordinary rents that have accrued to small numbers in the finance sector over the past decade as the link between run-away rewards, financial instability, and fiscal retrenchment is all too clear (and is toxic for those on low and modest incomes)
Ditching the notion that increasing payroll taxes (on employees and employers) are a politically cute way of raising extra revenue (not least when large and regressive tax-reliefs remain untouched)
Boosting the woefully inadequate business and public investment as there is no other path to higher labor productivity
Remedying perennial weaknesses in U.K. education policy, especially the awful wage and productivity returns to many low and intermediate level vocational qualifications (respectively, the qualification level that a 16 or 19 year old is expected to attain)

This last point is key. Education may not be the panacea that political leaders claim it to be, but the wage-penalty arising from poor quality sub-degree level vocational qualifications in the United Kingdom is particularly punitive.

More speculatively, there is a desperate need for experimentation with new labor market institutions that could offer employees some greater form of bargaining power, but in a manner that is compatible with the realities of a relatively flexible, heavily service-dominated economy. This is pretty much a policy void in the United Kingdom today.

Recreating more equitable, broad-based economic growth requires as prerequisites a tighter jobs market together with a higher wage floor. But to restore the link between economic growth and wage growth also will involve bold policy experimentation in pursuit of higher wages for those on the low- and middle-income rungs on the economy in the United Kingdom.

Inequality and the wellbeing of the poor in the United States

by Chris Wimer

How does the rise in economic inequality affect workers and their families at the bottom of the income ladder? To begin to approach an answer to such a question, it is important to first understand the facts on the ground. What have these workers and their families experienced over the past several decades? A common but deeply flawed measure of their wellbeing over the years is the official poverty rate, which fluctuates over a fairly narrow band but remained essentially flat since President Lyndon B. Johnson’s declaration of the War on Poverty in the mid-1960s.

This is not the forum to rehearse the litany of reasons why the official poverty rate is fundamentally flawed. But perhaps its biggest shortcoming is that it doesn’t count the many resources directed toward low-income families when measuring income. These resources include in-kind benefits such as supplemental nutrition assistance (what we used to call food stamps) and housing assistance, but also after-tax benefits such as the Earned Income Tax Credit and the Child Tax Credit.

When these resources are properly accounted for in a poverty measure, my colleagues and I at Columbia University demonstrate that poverty rates fell by about 40 percent over the past half century, from 26 percent in 1967 to 16 percent today. We have made more progress than we thought in fighting poverty in the United States since the 1960s. That is the good news. The bad news is that the declines I note above have come entirely because of the work of government policies and programs—not because low-income workers and families have succeeded in the workplace.

Indeed, aside from the latter half of the 1990s, low-income workers and families generally fared poorly relative to their more advantaged peers in the middle class and especially compared to the wealthy in terms of income growth. Absent resources from government programs, poverty (properly measured) would have actually increased between the 1960s and today—from 27 percent to 29 percent, equal to about 37 million people.

Focusing exclusively on numbers and percentages surrounding a specific poverty line, however, obscures other trends in income and the wellbeing of the poor. Recent data that my colleagues and I are collecting for a new longitudinal study of New York City residents tells us that actual levels of material hardship—the inability to meet one’s routine expenses—are actually quite a bit higher than poverty rates, even as properly measured. This means we need to think about those at the bottom of the income spectrum as not just those who fall below some predetermined poverty line but also those who find themselves consistently struggling to keep pace with what it costs to get by in contemporary society.

So a key question is whether the run-up in income inequality over the past five decades is a driving force of the economic woes of the less fortunate or simply another measure of it. The poor are doing better than in the past thanks to government programs that help alleviate poverty and give them the opportunity to climb the bottom rungs of the income ladder, but at the same time we know the fortunes of those at the top are far outpacing those at the bottom.

If, as some contend, the wellbeing of the poor is dampened by the rise in inequality, then we are justified in attempting to reduce income inequality in order to improve the lots of the less fortunate. But if the two are merely jointly determined—say by the rising returns on a better education that are (partially) the result of market forces—then reducing income inequality by itself is likely do little to improve the long-run wellbeing of the poor aside from helping the poor to get by and consume more from their income.

What do we know about whether rising income inequality in the United States reduces the wellbeing of the poor? Unfortunately, not very much. Cornell University economist Robert Frank argues that as inequality rises we see a pattern of so-called “expenditure cascades” as people further down the economic ladder essentially try to consume enough to “keep up with the Jones’” just above them. University of Chicago economist Marianne Bertrand finds that rising inequality leads to reductions in disposable income further down the income ladder, though she is not explicitly focused on the wellbeing of the poor.

But these studies spark very provocative questions. Does increased inequality not only lead to an increase in consumer prices but also changes in consumption patterns in a way that causes income to not go as far for the poor as it might? And do these processes have actual negative effects on the overall wellbeing of the poor? Identifying such effects using common econometric methods, however, remains challenging.

So it is still an open question whether rising levels of inequality harm less-skilled and lower-earning families. Even if government programs and policies keep disadvantaged individuals and families afloat, sociologists still might question whether income that comes once a year in the form of tax refunds or once a month in the form of a Supplemental Nutrition Assistance Program card is as useful as income from a regular paycheck, which provides benefits both remunerative and potentially cumulative, given that over time, that job may turn into a career.

What is ultimately most important is not whether people have enough resources over the course of a year to meet a somewhat arbitrary line of what experts think they need. Rather, we need to know whether people are truly able to harness their resources to meet both their daily and monthly expenses while simultaneously investing in their own and their children’s future.

In short, understanding whether and how economic inequality affects those at the bottom of the income spectrum is central to the success and wellbeing of our nation.

Stable families, prosperous economy

Posted on October 30, 2014April 18, 2018 by Casey Schoeneberger

The American Enterprise Institute published a new report earlier this week on the importance of marriage in the growth of family incomes. The topline data point that many news organizations picked up was this—“family incomes would be 44 percent higher if Americans weren’t shying away from the altar,” as U.S. News & World Report put it. The authors of the report— Urban Institute economist Robert I. Lerman and University of Virginia sociologist W. Bradford Wilcox, a visiting scholar at AEI—marshaled an impressive array of new data to examine the importance of family structure on rising income inequality in the United States.

Equally important is the need for further research on whether and how income inequality fosters the conditions that make achieving strong, stable marriages difficult for more and more Americans. Marriages do not happen in an economic vacuum, and inevitably must be sustained amid tough economic times. What’s more, the increasing diversity of family structures means these kinds of economic issues are important for all adults, regardless of marital status.

Research on how economic inequality affects the prospects for marriage among low- and middle-income Americans points to several equally telling trends. Economists Eric Gould at the Center for Economic Policy Research and Boston University’s M. Daniele Paserman detail that marriage rates fall in cities where wage inequality is highest. Economists Melissa S. Kearney at the University of Maryland and Phillip B Levine at Wellesley College find that the proportion of young women having children out of wedlock is greatest in cities with the highestincome inequality. And economist David S. Loughran at the Rand Corporation finds that rising male wage inequality explains 7 to 18 percent of the fall in marriage for white women between 1970 and 1990.

In short, growing economic uncertainty and wage stagnation among the bottom 90 percent of income earners means greater family instability. Indeed, sociologists Kathryn Edin at Johns Hopkins University and Maria Kefalas at St. Joseph’s University find that the main reason unmarried women hesitate to marry—even if they have a stable partner—is because they see family economic instability and the fear of divorce as a bigger threat than being single. What’s more, Levine and Kearney also find that out-of-wedlock teen pregnancy is often driven by economic despair.

The release of yesterday’s AEI report by Lerman and Wilcox is a timely reminder that marriage matters amid the swift-changing economic landscape for most families in the United States, but we must also keep in mind that economic inequality plays a big role in the decline in marriages. Without question, families today are more financially and socially unstable than they were 40 years ago, when the rise of economic inequality to near Roaring Twenties-levels today first began. And this instability is now part of a feedback loop that makes it more likely for the next generation of American families to be even more stressed and increasingly not married.

But there are policies that those across the political spectrum can agree on—policies that could create conditions that foster healthy relationships and family life. Lerman and Wilcox’s paper provides an excellent starting place for a conversation about an economic policy agenda that supports strong and stable families. In particular, their recommendations regarding the expansion of the earned income tax credit and the child tax credit merit more attention because they have the potential to incentivize work and stabilize the economic lives of low- and middle-class Americans. Similarly, the recommendation to expand vocational education and apprenticeship opportunities for young Americans holds promise for strengthening the employment and earnings prospects of low and moderate income Americans, especially men.

Additional ideas belong on the table as well. A higher minimum wage would boost the take-home pay of millions of young workers. Policies to address work-life conflicts (especially for young parents) would provide much-needed stability for individuals seeking to establish and maintain healthy relationship with their partner. And reliable, high-quality early child-care, preschool, and after-care would remove a major stress from many family relationships.

Then there are health and criminal issues that need addressing. Providing easy access to effective and inexpensive contraception would help prevent unintended pregnancies, allowing couples to plan stable, secure family formation. Addressing the incarceration rate and the life-long consequences of imprisonment is a key point of policy intervention as well, particularly for low-income African-American men.

On both sides of the political aisle, there are signs of a commitment to the idea of strong, stable families as a critical element of our economy’s long-term success. Yesterday’s report suggests an opening for a policy agenda that could address this challenge head-on.

Understanding economic inequality and growth at the middle of the income ladder

Posted on October 23, 2014April 18, 2018 by Heather Boushey

Recent shifts in our economy hit middle class families in ways that may directly affect both current and future productivity. Families in the middle of the income spectrum experienced very little income growth over the past several decades despite working more and often irregular hours. Between 1979 and 2007, the incomes of these families grew by just under 40 percent (after adjusting for inflation), but over that same time period their hours of work also increased.

Compared to 1979, middle class married couples in 2007 put in an average of 11 extra hours of work per week.Much of this added employment is due to the increased employment rates of women and mothers. Most dramatic is the increase in the share of mothers who work full-time, full-year (at least 50 weeks per year and at least 35 hours a week), which rose from 27.3 percent of mothers in 1979 to 46 percent of mothers in 2007 before declining somewhat to 44.1 percent, in the wake of the 2007-2009 recession.

The dramatic increase in women’s working hours certainly boosted household earnings. Middle class households would have substantially lower earnings today if women’s employment patterns had remained unchanged. And U.S. gross domestic product—the largest measure of economic growth—would have been roughly 11 percent lower in 2012 if women had not increased their working hours as they did. In today’s dollars, this translates to over $1.7 trillion less in output—roughly equivalent to total U.S. spending on Social Security, Medicare, and Medicaid combined in 2012.

But as more women enter the workforce and most men continue to work outside the home, parents are increasingly strapped for time. Given the importance of early childhood for a child and our nation’s future human capital, understanding how trends in our economy affect the next generation of workers is key to future economic growth. Economists have spilled a great deal of ink seeking to understand female employment patterns and what greater maternal employment means for families and, particularly, children’s wellbeing and development. Over the past decades, economists have begun focusing on how a child’s experiences between birth and starting kindergarten affect their future employment and earnings.

The three essays in this section of our conference report—by Stanford University sociologist Sean Reardon, Stanford’s Clayman Institute sociologist Marianne Cooper, and the Vice President and Director of the Children & Families Program at Next Generation, Ann O’Leary—explore how middle-income families are trying to balance work/life while providing their kids with the best opportunities available and how government policy can help create institutions that allow all workers to both contribute in the workplace and at home. —Heather Boushey is executive director and chief economist of the Washington Center for Equitable Growth

Download the full 2014 conference booklet, with full citations included for all of the essays, including those addressing the top of the income ladder on this page

Income inequality affects our children’s educational Opportunities

by Sean F. Reardon

One of the clearest manifestations of growing economic inequality in our nation today is the widening educational achievement gap between the children of the wealthiest and the children of everyone else. At first glance, this sounds like an obvious outcome. After all, wealthier families are able to afford expensive private schools, or homes in wealthy public school districts with more educational resources.

But a closer look at this education achievement gap over the past 50 years or so shows that the gap only began to widen in the 1970s, right about the time that wealth and income inequality in our nation also began to grow. The past 30 years have seen a sustained rise in inequality in wages, incomes, and wealth, leading to more and more income and wealth accruing to those at the top of the economic ladder, pulling the rich further away from those on the other rungs.

At the same time, the growing educational gap became ever more apparent. In the 1980s, the gap between the reading and math skills of the wealthiest 10 percent of kids and poorest 10 percent was about 90 points on an 800-point SAT-type scale. Three decades later, the gap has grown to 125 points. This widening gap is largely due to differences in how well prepared children are for school before they enter kindergarten or even pre-kindergarten. In this era of economic inequality, wealthier parents have far more resources, both in terms of time and money, to better prepare their children to succeed in school and later in life.

This widening educational achievement gap may threaten our future economic growth. With only a select few individuals receiving the best education and enrichment, we are not effectively developing the economic potential of our future workforce. To grow our economy we must provide educational and enrichment opportunities for children across the income spectrum, rather than only a select few at the top.

Wealth and income largely define the educational gap today, more so than race and ethnicity. In the 1950s and 1960s, the opposite was true. Back then, racial discrimination in all aspects of life led to deep racial inequality. Economic inequality, in contrast, was lower than at any time in U.S. history, according to extensive research done by economists Thomas Piketty at the Paris School of Economics and Emmanuel Saez at the University of California-Berkeley. But anti-discrimination and civil rights legislation and school desegregation led to improved economic, social, and educational conditions for African Americans and other minorities beginning in the late 1960s. As a result, the gap today between white and black children is about 70 points on an 800- point SAT-type scale, 40 percent smaller than it was in the 1970s, and about half the size of the gap between rich and poor children, but still unacceptable.

The growth of the socioeconomic achievement gap appears to be largely because more affluent parents are increasingly investing more time and money in their kids’ educational enrichment—and at earlier periods in their children’s lives—than hard-pressed low-income and middle class families. Indeed, surveys show that the amount of time and money parents invest in their children has grown sharply over the past four decades among both affluent and non-affluent parents. But the increase in these investments has been two to three times greater among high-income families. Economists Richard Murnane of Harvard University and Greg Duncan at the University of California-Irvine find that between 1972 and 2006 the amount high-income families spent on their children’s enrichment activities grew by 150 percent, while the amount spent by low-income families grew by 57 percent. In part, parents are spending more on their kids because they understand that educational success is increasingly important in today’s uncertain economic times, a point that sociologist Marianne Cooper at the Clayman Institute makes in her recent book “Cut Adrift.” But low- and middle-income families can’t match the resources—both the money and flexible time—of the rich.

As a result, rich and poor children score very differently on school readiness tests before they enter kindergarten. Once they are in school, however, the gap grows very little—by less than 10 percent between kindergarten and high school. Thus, it appears that the academic gap is widening because rich students are increasingly entering kindergarten much better prepared to succeed in school than low- and middle-class students. To be sure, there are important differences in the quality of schools serving low- and high-income students, but these differences do not appear to be as salient as the differences in children’s experiences prior to kindergarten.

The socioeconomic education gap is likely to affect us for decades to come. Think of it as a leading indicator of disparities in civic engagement, college enrollment, and adult success. Indeed, family income and wealth have become increasingly correlated with a variety of positive adolescent activities, such as sports participation, school leadership, extracurricular activities, and volunteer work, according to research conducted by Harvard University political scientist Robert D. Putnam and his colleagues.

Not only are the children of the rich doing better in elementary and high school than the children of the poor, they also are cornering the market on the seats in the best colleges. In a study that I conducted with several of my graduate students, we found that 15 percent of high-income students from the 2004 graduating class of high school enrolled in a highly selective college or university compared to only 5 percent of middle-income graduates and 2 percent of low-income graduates. Because these colleges provide educational opportunities and access to social networks that often lead to high-paying jobs, children from low-income families risk are being locked out of the upper end of the economic spectrum. For low-income children, the American Dream is further out of reach.

This is bad news for our future economy and society because we need well-educated workers in order to sustainably boost economic productivity and grow the economy. So how can we prepare every child, not just those most affluent ones, to be productive members of society? First of all, we must acknowledge that educational problems cannot be resolved by school alone. The achievement gap begins at an early age. To close it, we must invest in children’s early childhood educational opportunities. This means investing not only in preschool but also in parents. Specifically, we need to:

Invest in high-quality early childhood education programs (pre-schools, day care) and make them affordable for all families.
Invest in programs that help parents become their children’s first and best teacher.
Provide policy solutions to help all parents have the time to be teachers through paid leave, paid sick days, workplace flexibility, and income support programs that ensure that families can focus on their children even in hard economic times.

In short, we can narrow the socioeconomic education gap through public policies that help parents of all incomes provide enriching educational opportunities for their children in the way that only affluent parents can do today. —Sean F. Reardon is a sociologist at Stanford University

One nation under worry

by Marianne Cooper

As study after study shows, the rich are doing better than the rest of us. But surprisingly, they don’t always presume that their wealth will protect them or guarantee their children’s futures. In talking with families across the class spectrum about how they coping in an uncertain age for my new book, “Cut Adrift: Families in Insecure Times,” I learned that even the affluent families don’t think they have enough and strive to attain more. In contrast, the working- and middle-class families I spoke with realize they can’t do much to improve their situations so they lower their expectations and try to get by on less.

This is the new face of economic inequality in the United States today. Most everyone is dealing with economic insecurity, yet the ways in which families on different rungs of the income ladder are doing so may be fueling greater economic inequality.

Take Paul Mah, a technology executive with assets of more than $1 million. “We are probably in the top 1 percent of all American households,” says Mah, “so I can’t complain, but I still don’t feel rich.” Only accumulating millions more, he says, would enable him to stop feeling anxious about his financial future and the prospects of his children.

In contrast, Laura Delgado, a struggling single mother of three who works as a cashier, has zero savings, but in many ways is less concerned. “Having nothing isn’t always a bad thing,” she says, noting that things could always be worse. To cope with her financial trouble, Delgado scales back her definition of security to just the basics (food, shelter, clothing) and filters out bad news by always trying to look on the bright side of things. Her approach enables her to control the anxiety she feels about her difficult economic situation.

These are just two of the emotional stories behind the statistics documenting that we live in precarious times. As Americans scramble to hold on to jobs, deal with pay cuts, afford rising college tuition, fund retirements, manage debt, weather the costs of medical emergencies, and give their children an edge in an increasingly competitive world, there are deep psychological reverberations—for us all.

Of course these reverberations look and feel differently for different groups of Americans. As economic insecurity grows—a reflection of the many changes and challenges in our economy today—so too has the divide in our country between the haves and the have-nots. This means families face different obstacles and can overcome them, or not, depending on the resources at their disposal.

Like Laura Delgado, many middle- and working-class families I talked with are so beaten down that they are letting go of their dreams for a better life. Instead, they try to make the insecurity they face more tolerable. When Laura must choose whether to pay the power bill or put food on the table for example, she makes light of the lack of heat in her home by telling her kids it’s just “camping.”

Affluent families respond differently. Rather than trying to adjust to greater insecurity, they seek to protect their families by continuing to climb the wealth-and-income ladder. Security for some of the wealthiest families I talked with meant accumulating a net worth of more than $10 million. Such eye-popping definitions of security leave many affluent families more worried at times than their less fortunate compatriots further down the ladder.

In our go-it-alone age, we all adopt ways of coping—ways of thinking and feeling—that help us navigate through choppy and dangerous waters. These different approaches to managing insecurity reveal that in hard times the divisions among us are not just economic, they are also emotional.

Emotional disparities like these have real consequences. As the rich push for more and everyone else tries to accommodate to less, we actually make inequality worse. Because we treat economic insecurity as a personal problem rather than a social problem that we can solve collectively, we are unable to muster the will to stop it. —Marianne Cooper a sociologist at The Clayman Institute, Stanford University

Our future depends on early childhood investments

by Ann O’Leary

It is startling to think that even before a child sits down on her first day of kindergarten and reaches for her crayons, we can already reasonably predict what she will earn as an adult. Research shows that early language development, understanding of math concepts, and social emotional stability at age five are the greatest predictors of academic success in school. In fact, skills learned before age five can forecast future adult earnings, educational attainment, and employment.

These findings have real implications for our economy. Human capital—the level of education, skills, and talents of our workforce—is a main driver of economic growth, so in order to ensure we have a healthy workforce and thriving economy in the decades to come, we must begin by developing human capital during early childhood.

Yet rising economic inequality and unstable economic growth define our society today. Children have different enrichment experiences during this critical time period based on where their families sit on the income ladder. About half of children In the United States receive no early childhood education. These different experiences translate into a growing educational achievement gap between poor and rich children.

One study—often referred to as the famous “30 million word gap” study by University of Kansas child psychology professors Betty Hart and Todd R. Risley—finds that children living in poverty hear 30 million fewer words by age four than higher-income children.3 On average, a child from a low-income family knows 500 words by the age of 3, compared with 700 words for a child from a working-class family and 1,100 for a child from a professional family. Research by Stanford University infant psychology professor Anne Fernald and her colleagues found that by even age two, there is a six-month gap in language proficiency between lower-income and higher-income children.

In short, the educational achievement gap between poor and rich children begins well before kindergarten.

How can we better prepare our nation’s youngest generation for success? According to University of Chicago economist James J. Heckman, educational and enrichment investments during early childhood yield the highest return in human capital compared to other investments over time. Why? Because as the brain forms, children learn cognitive skills such as language and early math concepts as well as “soft” skills such as curiosity, self-control, and grit. Both skillsets are critical for later academic and workplace success. By the time a child enters Kindergarten, the gap in school readiness is large and well established, growing by less than 10 percent between Kindergarten and high school.

School readiness is enhanced by what happens in preschool, but the two factors that most explain the achievement gaps are parenting styles and home-learning environments. Yet many parents are unaware of the importance of early brain development and of the tremendous impact they can have in building their young child’s brain and early vocabulary with simple actions such as talking, reading and singing.

Even if parents are aware of the importance of these activities, they may have difficulty carving out time at home with their children as they juggle jobs and their children’s needs. Today, more children than ever are raised in single-parent families or in homes where both parents work. Parents today are constantly balancing work and family care often without access to family-friendly workplace policies to balance the two.

To be sure, if parents are unable to provide enriching home experiences then children can gain valuable developmental and learning support in quality child care and preschool settings. Yet many simply cannot afford childcare. In 2011, the average cost for a 4-year-old in professional childcare ranged from about $4,000 to $15,000 a year. Such costs put a major strain on family budgets, especially for low-income families, which spent nearly a third of their income on childcare (30 percent) in 2011, compared to middle- and higher-income families, which spent less than one-tenth (8 percent) of their income.

What’s more, low-income families who do strain to pay for child care often find that the care they can afford is, at best, a safe place for their child to stay while they are at work rather than an enriching environment for their young child to learn critical skills. Sadly, these families often discover that the affordable childcare provider offers poor or mediocre support to help their child in the critical stages of early childhood development.

In order to have a productive workforce and thriving economy tomorrow, we need to invest in our children today. There are viable policy solutions that could expand early childhood education and enrichment opportunities to all, rather than a select few at the top. First, voluntary home visits by child development professionals could increase awareness among working-class parents of how they can foster their children’s development at home, such as talking, reading, and singing to their children before bedtime.

Second, it is important to expand access to high-quality, affordable early childhood education. These programs better prepare children for school, putting children more than a year ahead in mathematics and other subjects. Low-income families would greatly benefit from expanded access to quality childcare, Early Head Start, and high-quality preschool programs.

Lastly, parents can only be better first teachers of their children if they have the time to be with their children. Policies such as workplace flexibility, paid family and medical leave, and paid sick days could help all working parents better manage work and family obligations and spend more time with their children. Today, professional workers are the most likely to have access to these policies, often considered additional employee “perks” by employers.

The importance of investing in early childhood matters for our overall economic competitiveness. The United States should be making smart economic investments in early childhood to ensure that all children have an equitable start before their first day of school. For the American Dream to shine well into the 21st century, it is no exaggeration to say that every American, young and old, needs our youngest ones to be the best and the brightest as adults no matter their family background and income level. —Ann O’Leary is vice president and director of the Children and Families Program at NextGeneration

Exploding wealth inequality in the United States

Posted on October 20, 2014April 18, 2018 by Ed Paisley

There is no dispute that income inequality has been on the rise in the United States for the past four decades. The share of total income earned by the top 1 percent of families was less than 10 percent in the late 1970s but now exceeds 20 percent as of the end of 2012. A large portion of this increase is due to an upsurge in the labor incomes earned by senior company executives and successful entrepreneurs. But is the rise in U.S. economic inequality purely a matter of rising labor compensation at the top, or did wealth inequality rise as well?

Before we answer that question (hint: the answer is a definitive yes, as we will demonstrate below) we need to define what we mean by wealth. Wealth is the stock of all the assets people own, including their homes, pension saving, and bank accounts, minus all debts. Wealth can be self-made out of work and saving, but it can also be inherited. Unfortunately, there is much less data available on wealth in the United States than there is on income. Income tax data exists since 1913—the first year the country collected federal income tax—but there is no comparable tax on wealth to provide information on the distribution of assets. Currently available measures of wealth inequality rely either on surveys (the Survey of Consumer Finances of the Federal Reserve Board), on estate tax return data, or on lists of wealthy individuals, such as the Forbes 400 list of wealthiest Americans.

Download the pdf version of this brief for a complete list of sources

In our new working paper, “Wealth Inequality in the United States since 1913: Evidence from Capitalized Income Tax Data,” we try to measure wealth in another way. We use comprehensive data on capital income—such as dividends, interest, rents, and business profits—that is reported on individual income tax returns since 1913. We then capitalize this income so that it matches the amount of wealth recorded in the Federal Reserve’s Flow of Funds, the national balance sheets that measure aggregate wealth of U.S. families. In this way we obtain annual estimates of U.S. wealth inequality stretching back a century.

Wealth inequality, it turns out, has followed a spectacular U-shape evolution over the past 100 years. From the Great Depression in the 1930s through the late 1970s there was a substantial democratization of wealth. The trend then inverted, with the share of total household wealth owned by the top 0.1 percent increasing to 22 percent in 2012 from 7 percent in the late 1970s. (See Figure 1.) The top 0.1 percent includes 160,000 families with total net assets of more than $20 million in 2012.

Figure 1

Figure 1 shows that wealth inequality has exploded in the United States over the past four decades. The share of wealth held by the top 0.1 percent of families is now almost as high as in the late 1920s, when “The Great Gatsby” defined an era that rested on the inherited fortunes of the robber barons of the Gilded Age.

In recent decades, only a tiny fraction of the population saw its wealth share grow. While the wealth share of the top 0.1 percent increased a lot in recent decades, that of the next 0.9 percent (families between the top 1 percent and the top 0.1 percent) did not. And the share of total wealth of the “merely rich”—families who fall in the top 10 percent but are not wealthy enough to be counted among the top 1 percent—actually decreased slightly over the past four decades. In other words, family fortunes of $20 million or more grew much faster than those of only a few millions.

The flip side of these trends at the top of the wealth ladder is the erosion of wealth among the middle class and the poor. There is a widespread public view across American society that a key structural change in the U.S. economy since the 1920s is the rise of middle-class wealth, in particular because of the development of pensions and the rise in home ownership rates. But our results show that while the share of wealth of the bottom 90 percent of families did gradually increase from 15 percent in the 1920s to a peak of 36 percent in the mid-1980, it then dramatically declined. By 2012, the bottom 90 percent collectively owns only 23 percent of total U.S. wealth, about as much as in 1940 (see Figure 2.)

Figure 2

The growing indebtedness of most Americans is the main reason behind the erosion of the wealth share of the bottom 90 percent of families. Many middle class families own homes and have pensions, but too many of these families also have much higher mortgages to repay and much higher consumer credit and student loans to service than before. For a time, rising indebtedness was compensated by the increase in the market value of the assets of middle-class families. The average wealth of bottom 90 percent of families jumped during the stock-market bubble of the late 1990s and the housing bubble of the early 2000s. But it then collapsed during and after the Great Recession of 2007-2009. (See Figure 3.)

Figure 3

Since the housing and financial crises of the late 2000s there has been no recovery in the wealth of the middle class and the poor. The average wealth of the bottom 90 percent of families is equal to $80,000 in 2012—the same level as in 1986. In contrast, the average wealth for the top 1 percent more than tripled between 1980 and 2012. In 2012, the wealth of the top 1 percent increased almost back to its peak level of 2007. The Great Recession looks only like a small bump along an upward trajectory.

How can we explain the growing disparity in American wealth? The answer is that the combination of higher income inequality alongside a growing disparity in the ability to save for most Americans is fuelling the explosion in wealth inequality. For the bottom 90 percent of families, real wage gains (after factoring in inflation) were very limited over the past three decades, but for their counterparts in the top 1 percent real wages grew fast. In addition, the saving rate of middle class and lower class families collapsed over the same period while it remained substantial at the top. Today, the top 1 percent families save about 35 percent of their income, while bottom 90 percent families save about zero.

The implications of rising wealth inequality and possible remedies

If income inequality stays high and if the saving rate of the bottom 90 percent of families remains low then wealth disparity will keep increasing. Ten or twenty years from now, all the gains in wealth democratization achieved during the New Deal and the post-war decades could be lost. While the rich would be extremely rich, ordinary families would own next to nothing, with debts almost as high as their assets. Paris School of Economics professor Thomas Piketty warns that inherited wealth could become the defining line between the haves and the have-nots in the 21^st century. This provocative prediction hit a nerve in the United States this year when Piketty’s book “Capital in the 21^st Century” became a national best seller because it outlined a direct threat to the cherished American ideals of meritocracy and opportunity.

What should be done to avoid this dystopian future? We need policies that reduce the concentration of wealth, prevent the transformation of self-made wealth into inherited fortunes, and encourage savings among the middle class. First, current preferential tax rates on capital income compared to wage income are hard to defend in light of the rise of wealth inequality and the very high savings rate of the wealthy. Second, estate taxation is the most direct tool to prevent self-made fortunes from becoming inherited wealth—the least justifiable form of inequality in the American meritocratic ideal. Progressive estate and income taxation were the key tools that reduced the concentration of wealth after the Great Depression. The same proven tools are needed again today.

There are a number of specific policy reforms needed to rebuild middle class wealth. A combination of prudent financial regulation to rein in predatory lending, incentives to help people save—nudges have been shown to be very effective in the case of 401(k) pensions—and more generally steps to boost the wages of the bottom 90 percent of workers are needed so that ordinary families can afford to save.

One final reform also needs to be on the policymaking agenda: the collection of better data on wealth in the United States. Despite our best efforts to build wealth inequality data, we want to stress that the United States is lagging behind in terms of the quality of its wealth and saving data. It would be relatively easy for the U.S. Treasury to collect more information—in particular balances on 401(k) and bank accounts—on top of what it already collects to administer the federal income tax. This information could help enforce the collection of current taxes more effectively and would be invaluable for obtaining more precise estimates of the joint distributions of income, wealth, saving, and consumption. Such information is needed to illuminate the public debate on economic inequality. It is also required to evaluate and implement alternative forms of taxation, such as progressive wealth or consumption taxes, in order to achieve broad-based and sustainable economic growth.

Emmanuel Saez is a professor of economics and director of the Center for Equitable Growth at the University of California-Berkeley. Gabriel Zucman is an assistant professor of economics at the London School of Economics.

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Category: Human Capital

The economic and fiscal consequences of improving U.S. educational outcomes

Methodology

The Economic and Fiscal Consequences of Improving U.S. Educational Outcomes

Methodology

The Economic and Fiscal Consequences of Improving U.S. Educational Outcomes

The three scenarios and the consequences for U.S. economic growth and fiscal stability

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Closing the socioeconomic gaps in education

Heather Boushey on “Capital in the Twenty-First Century”

President Obama’s “middle-class economics”

An appreciation of Robert Solow

Understanding economic inequality and growth at the bottom of the income ladder

Stable families, prosperous economy

Understanding economic inequality and growth at the middle of the income ladder

Exploding wealth inequality in the United States

The implications of rising wealth inequality and possible remedies

U.S. economic mobility trends and outcomes

U.S. income and wealth inequality are no longer increasing, but a return to the equitable levels of the mid-20th century isn’t likely anytime soon