FINANCIAL DEVELOPMENT AND WAGE INEQUALITY: THEORY AND EVIDENCE

We argue that financial market development contributed to the rise in the skill premium and residual wage inequality in the United States since the 1980s. We present an endogenous growth model with imperfect credit markets and establish how improving the efficiency of these markets affects modes of production, innovation, and wage dispersion between skilled and unskilled workers. The experience of U.S. states following banking deregulation provides empirical support for our hypothesis. We find that wages of skilled workers increased by between 0.5% and 6.3% following deregulation while those of unskilled workers fell by between 3.5% and 8.7%. Similarly, residual (or within‐group) inequality increased; the 90–50 percentile ratio of residuals from a Mincerian wage regression and their standard deviation increased by 4.2% and 1.7%, respectively. (JEL E25, J31, G24)     

IS THERE A “DOUBLE BONUS” FROM REDUCING INEQUALITY?

We study the effect of inequality on growth in an overlapping generations (OLG) model where inequality affects growth through accumulation of human capital and endogenous fertility. In contrast to much of the existing literature, we argue that the effect of inequality on growth might be non‐monotonic. Our model suggests that the effect depends on the demographic stage of development: inequality impedes growth in low‐fertility (high human capital) economies, but enhances growth in high‐fertility (low human capital) economies. Our finding casts doubt on a “double bonus” from reducing inequality in developing countries which are typically characterized by high fertility. (JEL O40, J13, O15)     

INCOME INEQUALITY: THE CONSEQUENCES OF SKILL‐UPGRADING WHEN FIRMS HAVE HIERARCHICAL ORGANIZATIONAL STRUCTURES

During the last three decades, most developed countries have experienced increasing income inequality. Using Danish register data from 1992 to 2007 for all private‐sector employees, we confirm that income inequality has increased in Denmark. We also observe an increase in the relative employment of highly educated individuals, as well as differential income growth rates across employee subgroups where, in particular, managers experienced significant real income progression. We use an equilibrium search framework with on‐the‐job search to study the interplay between skill‐upgrading, management compensation, and income inequality. In this model we can determine the management and education premia. We can also show that when our model is exposed to skill‐upgrading, it is capable of producing income dynamics similar to those observed in the Danish income distribution. (JEL J3, J6, M5)     

ON THE EVOLUTION OF TOTAL FACTOR PRODUCTIVITY IN LATIN AMERICA

Because of several policy distortions, including import‐substitution industrialization, widespread government intervention, and both domestic and international competitive barriers, there has been a general presumption that Latin America has been much less productive than the leading economies in the last decades. In this paper we show, however, that until the late 1970s Latin American countries had high productivity levels relative to the United States. It is only after the late 1970s that we observe a fast decrease of relative total factor productivity (TFP) in Latin America. We also show that the inclusion of human capital in the production function makes a crucial difference in the TFP calculations for Latin America. (JEL O11, O47, O54)     

The Persistence of Workplace Gender Segregation in the US

Occupational gender segregation remains one of the defining elements of gender inequality in modern societies. Recent trends for the United States show that occupational segregation remains high and did not substantially decline in the decade of the 2000s for the first time since 1960. Men and women work in different occupations because of a combination of forces, including culturally defined choices by workers themselves, discrimination by employers, and differences in skill levels and qualities. Research has shown that occupational segregation is an important aspect of gender inequality in earnings and contributes to other forms of inequality as well. The prospects for reducing gender segregation in the short term appear slim, based on the weak effects of educational attainment, cultural attitudes, and state intervention in the current period.     

States,elites, and inequality in Latin America

In this article, I review the literature on elites and inequality in Latin America with a focus on the emergence of uneven state structures and how they came to foster the needs of elites for protection. States in Latin America are traditionally thought of as facilitating processes of top‐down modernization that transformed traditional agrarian economies into complex urban polities, while maintaining extreme inequality. The state is thus central in the genealogy of inequality and elite privilege in Latin America. The synergy between states and elites continues to mark Latin American societies, and it helps us to understand how major economic and political changes occur without significant changes in inequality. For the most part, Latin America's current uneven states emerged as the result of exclusionary projects of citizenship during the first half of the 20th century and were advanced by the advent of repressive regimes during the 1960s and 1970s. After democratic transitions during the 1980s and 1990s, Latin American states came to be characterized, on the one hand, by procedural democratic institutions and on the other, by high levels of state violence, exclusion, and segmented citizenship. The present situation is one of a problematic equilibrium between states, elites, and inequality.     

SOFT SKILLS,HARD SKILLS,AND THE BLACK/WHITE WAGE GAP

This study examines the relative importance of soft skills versus hard skills across occupations and its impact on the observed wage gap between Blacks and Whites in the United States. It posits that the Black/White pay gap may vary across occupations that require the use of different types of skills. We classify occupations into hard‐skill intensive versus soft‐skill intensive jobs using the skill content measures of different occupations from the Occupational Information Network (O*Net). We then use data from the National Longitudinal Survey of Youth (NLSY) and Current Population Survey (CPS) to investigate the impact of job skill type on the wage gap. Consistent with our theoretical predictions, we show that this wage gap in white‐collar jobs is smaller for hard‐skills jobs than it is for soft‐skills jobs. Moreover, we demonstrate that, in response to variations in the wage gap across different occupations, Blacks are more likely to self‐select themselves into hard‐skills jobs, ceteris paribus. This shows not only that discrimination against Blacks varies across occupations, but also that such discrimination induces the self‐selection of Blacks into certain occupations. Moreover, this finding highlights the role played by co‐worker/customer discrimination in explaining the racial wage gap in the U.S. labor market. (JEL J15, J31)     

DOES FINANCE ALTER THE RELATION BETWEEN INEQUALITY AND GROWTH?

This paper introduces a model in which greater inequality reduces growth in economies with low levels of financial development but that this effect is attenuated in economies with more developed systems. The model also predicts that individuals in economies with developed financial markets have a higher tolerance to inequality. Using a panel dataset that covers a large number of countries, this paper shows empirical evidence that is consistent with the main predictions of the model. Overall, this paper's major findings highlight that some of the pernicious effects of inequality can be attenuated by improving access to credit. (JEL D3, E6, P1, O4, I2)     

Cross-country disparities in skill premium and skill acquisition

Skilled individuals are rewarded more in poor than in rich countries. Why aren't more individuals acquiring skills in poor countries? We document that the unemployment rate of the skilled net of that of the unskilled decreases with a country's level of development. Using a matching model of occupational choice and skill acquisition, we quantify the role of barriers to enter entrepreneurship for these unemployment rates, skill premium and acquisition. The cross-country correlation between skill premium and acquisition decreases by 45% when each country's gap to the US in the entrepreneurship barrier is decreased enough to even the unemployment differential.     

The Conundrum of Low Saving Rates in Latin America

Despite extensive economic reforms during the late 1980s/early 1990s, Latin America's saving rates remain low. This article examines the saving behaviour of 18 Latin American countries in the 1976‐2000 period and compares it with that of 25 other developing countries. It finds that lower inflation, income growth and increased real interest rates on deposits have not had the expected effects on saving rates in Latin America. Instead, the determinants of saving behaviour appear to differ between the two groups of countries, and saving rates are affected by a degree of inertia. Although more research is needed, this indicates that the focus of the neoliberal economic reforms of the 1980s was misplaced.     

IDENTIFYING THE ROLE OF RISK SHOCKS IN THE BUSINESS CYCLE USING STOCK PRICE DATA

I analyze the sources of U.S. business cycle fluctuations in an estimated Dynamic Stochastic General Equilibrium model with a rich set of nominal and real rigidities and various exogenous disturbances. The model includes a shock to the expected risk‐premium, which introduces a time‐varying wedge between the policy rate set by the central bank and the cost‐of‐capital of firms. In the aggregate data, most U.S. corporations finance their investment using internal funds, and stock prices reveal the opportunity cost of this type of financing. I therefore use corporate market value and dividend data in the Bayesian estimation of the model to identify risk shocks. Variance decomposition exercises show that these shocks account for a substantial part of the variation in the stock market, as well as the variation in output and investment, especially at short forecast horizons. The variation of these variables at longer forecast horizons are mainly captured by shocks to investment‐specific technological change. Historical decomposition points to the important role played by risk shocks in the run up of stock prices and output in the late 90s, and in the reversal of these variables in the early 2000s and during the recent recession. (JEL E32, E44)     

The Evolution of Skill-Biased Effects on American Wages in the 1980s and 1990s

This study estimates the contributions of skill-biased technological change and international trade to the rise in the skill premium during the 1980s and 90s using the Feenstra and Hanson (Q J Econ 114(3):907–940, 1999) two-stage methodology. Newly available data on high-technology capital provide separate measures of computer and software investment. New estimates suggest that investment in software contributed to a substantial portion of the observed increase in the skill premium while investment in computers lead to a reduction in the rate of skill premium growth. Contrary to the findings of Feenstra and Hanson for the 1980s, neither software nor computers had a significant effect on wages during the 1980s. Foreign outsourcing does not appear to have significantly affected wages during the 1990s. The contribution to theory is that software is more complementary to increases in worker productivity due to human skills. Computers, on the other hand, reduced the growth of wage inequality by giving unskilled labor a more efficient set of tools with which to work.

Migration Policy and Industrial Structure: The Case of Switzerland

Structural change in OECD countries, emphasizing knowledge‐based sectors, has led to an increasing demand for highly skilled labour. One means of meeting this demand has been to implement a selective immigration policy. Such policies, however, have been criticized for channelling labour into low‐producing sectors and occupations, hampering structural change. Proponents of such criticism point to Switzerland's former policy of channelling immigrants into so‐called seasonal sectors, a practice abandoned in the early 1990s, as having contributed to Switzerland's low growth rates. To assess this, we here analyse the amended migration policy's effects on skill structure and sectoral distribution of immigration flows using data from the Swiss Census of 1990 and 2000 to determine whether the new policy has led to an immigrant inflow more adapted to the processes of structural change. We find that the share of highly skilled immigrants has increased notably under the new migration policy. Our analysis also shows an important change in the sectoral focus of the new arrival inflow. Not only have fewer immigrants been entering declining sectors, but the majority of migrants arriving under the new policy regime have been absorbed into growing and knowledge‐based sectors, meaning they are employed primarily in service and knowledge‐intensive sectors. Overall, the analysis provides ample evidence that the current admission policy as ositively contributed to tructural change in Switzerland.     

Baby booming inequality? Demographic change and earnings inequality in Norway, 1967�C2000

In this paper, we demonstrate how age-adjusted inequality measures can be used to evaluate whether changes in inequality over time are due to changes in the age-structure. To this end, we use administrative data on earnings for every male Norwegian over the period 1967–2000. We find that the substantial rise in earnings inequality over the 1980s and into the early 1990s, is to some extent driven by the fact that the large baby boom cohorts are approaching the peak of the age–earnings profile. We further demonstrate that the impact of age-adjustments on the trend in inequality during the period 1993–2000 is highly sensitive to the method used: While the most widely used age-adjusted inequality measure indicates little change in inequality over this period, a new and improved age-adjusted measure suggests a decline in inequality.     

The regional distribution of skill premia in urban China: Implications for growth and inequality

Based on urban household survey data, the authors find that skill premia increased significantly across all regions of China between 1995 and 2002, but only in coastal regions between 2002 and 2007. By then, these regions also displayed much wider wage inequality and thus contributed more to overall urban wage inequality than non‐coastal regions. While privatization was the main driver of skill premia in 1995–2002, China's (regionally uneven) integration into the global economy became the dominant influence in 2002–07. Reducing skill premia and inequality, the authors argue, calls for reform of the Hukou registration system which impedes skilled labour mobility and possibly also growth.     

Reconsidering the Unusual Suspect: Immigration and the 1990s Crime Decline

The United States experienced a dramatic decline in crime during the 1990s. A number of explanations for this decline have been put forth, including demographic shifts, economic trends, stricter gun control laws, and changes in drug markets. A widely reported explanation is that the surge of immigration during the 1990s was the main cause for that decade's crime decline. Although the claim has received considerable attention, it has yet to be tested empirically using national‐level data. In order to fully test the immigration‐1990s crime decline relationship, we use national‐level homicide and Census data from 1990 to 2000. Our results reveal four key findings: (1) crime declined for nearly all groups during the 1990s; (2) non‐Latino blacks contributed the most to the crime decline, by a wide margin; (3) both overall and black homicide declined the least in areas with the highest levels of immigration; and (4) we find no evidence that immigration indirectly lowered non‐immigrant crime rates by revitalizing communities. We conclude by discussing the implications of our findings.     

Informality and Contributory and Non‐Contributory Programmes. Recent Reforms of the Social‐Protection System in Uruguay

Several countries in Latin America are expanding their social‐protection systems. There is an on‐going debate about the trade‐offs implied by these expansions, and by the resulting interactions between contributory and non‐contributory programmes with informality in the labour market. This article analyses the potential incentive effects for formal and informal employment from a set of social‐protection reforms implemented in Uruguay in the 1990s and 2000s. It presents empirical evidence of the expansion of health insurance to formal workers' dependants, and finds that this reform significantly increased formal employment. Finally, it discusses possible alternatives to extend social‐protection systems while maintaining incentives for formal work in Latin America's labour markets.     

Gender Asymmetry in Family Migration: Occupational Inequality or Interspousal Comparative Advantage?

This paper examines gender inequality in the determinants of job‐related long‐distance migration among married dual‐earner couples during the 1980s and 1990s. The analysis tested the structural explanation, which attributes gender asymmetry in family migration to structural inequality in the labor market, and the comparative advantage explanation derived from relative resource theory. The analysis used individual‐ and family‐level data from 5,504 Panel Study of Income Dynamics families, occupation‐level data from the 1980–2000 U.S. Decennial Censuses Integrated Public Use Micro Samples, and discrete‐time event history models. Gender differences in the determinants of family migration were not explained by gender differences in occupational characteristics, but the results partially support the relative resource theory by illustrating the conditioning influence of interspousal comparative advantage.     

All about ideology? Reading Piketty´s with Latin American lenses

This review essay evaluates Capital and Ideology in light of the Latin American experience. Given its history of exploitation and high levels of inequality, the region constitutes an essential case study. By considering the Latin America case, we can also benefit from the many insights coming from within the region and often overlooked by the Anglo‐Saxon (dominant) literature. The paper makes two different arguments. First, asymmetries in economic and political power are the main drivers of long‐term inequality. Following insights from structuralism, I show how the organization of the global economy has shaped domestic patterns of income distribution in many parts of the world. The dependent character of economic development together with the power of domestic elites explain Latin America's stubborn inequality; ideology has historically been more an instrument than an underlying driver. Second, we cannot understand the evolution of income distribution without considering the role of dictatorships. While Capital and Ideology explains convincingly why liberal democracies are not working, it never properly considers the risk and costs of (conservative) authoritarian regimes. In thinking about policy responses, the essay also highlights the importance of strengthening democracy, fighting dictatorships, and enhancing the influence of social movements.     

PITFALLS IN TESTING FOR COINTEGRATION BETWEEN INEQUALITY AND THE REAL INCOME

Frank (2009) constructed a comprehensive panel of state‐level income inequality measures using individual tax filing data from the Internal Revenue Service. Employing an array of cointegration exercises for the data, he reported a positive long‐run relationship between income inequality and the real income per capita in the United States. This article questions the validity of his findings. First, we suggest a misspecification problem in his approach regarding the order of integration in the inequality index, which shows evidence of nonstationarity only for the post‐1980 data. Second, we demonstrate that his findings are not reliable because the panel cointegration test he used requires cross‐section independence, which is inappropriate for the U.S. state‐level data. Employing panel tests that allow cross‐section dependence, we find no evidence of cointegration between inequality and the real income. (JEL D31, O40)