This is a weekly post we publish on Fridays with links to articles that touch on economic inequality and growth. The first section is a round-up of what Equitable Growth published this week and the second is the work we’re highlighting from elsewhere. We won’t be the first to share these articles, but we hope by taking a look back at the whole week, we can put them in context.
Equitable Growth round-up
Senior Director for Family Economic Security Elisabeth Jacobs introduced a new comprehensive report for Equitable Growth by Columbia University economist Jane Waldfogel and MPH student Emma Liebman on family care leave, which they emphasize includes, but is not limited to, parental care leave. Waldfogel and Liebman review the evidence on the advantages and costs of family care leave and argue that there is an urgent need for policy change to help Americans remain afloat while caring for seriously ill loved ones.
Economist Kate Bahn and Research Assistant Raksha Kopparam produced our monthly data analysis on the Job Openings and Labor Turnover Survey, or JOLTS, from the U.S. Bureau of Labor Statistics. While these figures document one of the tightest labor markets of this century, improvements in recent months have been marginal, begging the question of whether there remains any slack for further tightening.
Research Assistant Somin Park discussed the findings of a new paper on heterogeneous returns to wealth by economists Andreas Fagereng of Statistics Norway, Luigi Guiso of the Einaudi Institute for Economics and Finance, Davide Malacrino of the International Monetary Fund, and Equitable Growth grantee Luigi Pistaferri. Among other findings, Park highlights that risk compensation is insufficient to explain the substantially higher returns to wealth for the wealthiest taxpayers and mentions potential implications of this paper for future research and tax policy.
Park also penned a blog this week on new research from IMF economists Jonathan D. Ostry, Prakash Loungani, and Davide Furceri on the importance of distributional considerations in economic policymaking. In particular, the authors argue that policies that reduce inequality can strengthen growth and social cohesion, and they focus on the negative impacts of capital market liberalization and excessive fiscal consolidation on inequality in many contemporary economies.
In his weekly Worthy Reads column, Brad DeLong provides his take on recent research and writing in macroeconomics. While DeLong links to Bahn and Kopparam’s analysis showing a persistently tight labor market, he also notes that bond markets are increasingly concerned about a recession in the not-too-distant future.
In honor of Fathers’ Day, Equitable Growth released a working paper today on some unexpected benefits of workplace flexibility for fathers. The paper by economists Petra Persson and Maya Rossin-Slater at Stanford University leverages a difference-in-differences regression discontinuity design to show that postpartum and mental health improved for mothers whose male partners had access to an intermittent paid leave policy in Sweden. Equitable Growth also published a blog summarizing these finding in the context of other research and policy debates.
Links from around the web
Jeff Sommer wrote a column in The New York Times to mark 10 years of growth without a recession in the United States. Despite this positive momentum, Sommer points out that the economy faces headwinds in the form of trade wars, dramatic inequality, and other uncertainties—all of which have been reflected in inverted bond yields, sluggish job growth last month, and uneasy futures markets. [nyt]
Despite having experienced a decade of economic expansion, Sarah Foster of Bankrate summarized recent survey evidence that many Americans have yet to recover to their previous financial situations. Specifically, the survey data from Bankrate shows that 25 percent of Americans report having experienced no improvement from their prerecession financial state, while 23 percent of respondents reported that their circumstances have worsened. [bankrate]
Also in The New York Times, Jenna Smialek reports on the research and advocacy efforts of a new group, Employ America, to encourage the Federal Reserve to pursue loose monetary policy. From Employ America’s perspective, this is the most effective means of maintaining employment and encouraging wage growth for disadvantaged workers as the economy begins to show signs of weakness. The founder of the group, Sam Bell, notes in the article that these efforts are aimed at changing the mindset of monetary policymakers to have an inequality-conscious response through the next recession and expansion—and beyond. [nyt]
In Reuters, Edward Hadas likewise offers policy recommendations for more innovative fiscal and monetary responses to the next recession. Hadas argues that central bankers should shift their focus exclusively from setting the right policy interest rates to engaging in effective lending that increases capital investments and job creation in the real economy, as opposed to simply inflating financial asset prices. On the other hand, Hadas posits that federal politicians should look to jumpstart private activity and consumer demand by enacting certain tax changes (including potential job creation incentives), making effective public investments, and providing debt relief (especially for low-income workers). [reuters]
As we celebrate Father’s Day this weekend, in California, Rhode Island, and other states with operating paid leave policies, you may find fathers taking time away from the construction sites, office desks, restaurant kitchens, and hospital rooms where they are employed. They may be spending time caring for their new children—with pay. Sadly, many new fathers elsewhere in the United States do not have access to guaranteed paid leave to care for a new child. But evidence from recent studies conducted in three different countries—Sweden, Denmark, and Canada—shows that a paternal set-aside in paid parental leave programs can be beneficial for both fathers and mothers.
Paid parental leave—the ability of new parents to take paid time off from work after the birth or adoption of a child—is one of the fundamental benefits a society provides to workers to help them balance the challenges of work with the responsibilities and joys of parenthood. The United States, unfortunately, has no such federal program, although severalstates have begun to implement their own paid leave programs, and some 2020 presidential candidates have begun incorporating a national paid leave program into their campaign platforms.
Workers across the United States who are able to access leave rely on a patchwork of unpaid leave, employer-provided paid leave, or paid leave from state programs. Across these programs, the vast majority of parental leave is taken by mothers, in much the same way that women do a disproportionate amount of home work—both parenting and housework. According to Equitable Growth grantee Joan C. Williams of the University of California, Hastings College of Law, men “face as many struggles [as women] when it comes to using flexible work policies—if not more—because childcare, fairly or unfairly, is still seen as being a feminine role.”
But there is considerable evidence that greater involvement in parenting by fathers benefits child development and heightens fathers’ short- and long-term engagement with their children, among other upsides. Most developed countries have national paid leave programs, with varying parameters and revenue sources, and a number of countries are zeroing in on caretaking by dads and revising their programs to designate a portion of the benefit specifically for fathers—what some experts refer to as the “daddy quota.” The purpose of setting aside time for fathers specifically is to encourage them to take leave by ensuring that their taking time does not take paid leave away from mothers—mothers are not allowed to use these weeks—and to make clear that fathers taking time is seen as a societal good.
In 2012, for example, Sweden adopted a reform of its existing paid parental leave policy that effectively made it easier for fathers to take leave. Prior to this change, Sweden provided a total of 16 months of paid parental leave, but only permitted one parent to stay at home at a time, other than the first 10 days following the birth of a child, when both parents were allowed to be home together. The reform added flexibility by granting 30 days during which both parents could take paid leave, with the timing up to the parents and no requirement that the days be consecutive. Since mothers overwhelmingly were the individual parent who was at home, it is fair to assume that these 30 days of joint time effectively were additional time for fathers.
In their 2019 paper titled “When Dad Can Stay Home: Fathers’ Workplace Flexibility and Maternal Health,” Petra Persson and Equitable Growth grantee Maya Rossin-Slater, both of Stanford University, used this change as a way of determining what impact paternal leave-taking can have on mothers’ postpartum physical and mental health. Using Sweden’s administrative data, the authors compared the use and timing of fathers’ days off with mothers’ encounters with the healthcare system, and found that fathers’ leave-taking had a significant association with mothers’ reduced medical visits for childbirth-related complications, reduced prescriptions for antibiotics in the first six months post-childbirth, and reduced prescriptions for anti-anxiety drugs in the first six months after childbirth, particularly in the first three months.
Persson and Rossin-Slater write that the results suggest that simultaneous leave allows fathers to stay home and care for infants while mothers get the medical care they need, and that it reduces health complications that require medical visits. They write that even though fathers may only take a small amount of additional leave, the simultaneous-leave reform contributed in meaningful ways to mothers’ postpartum health by enabling mothers to get care when they need it, to get preventive care, or even just to get additional hours of sleep.
Benefits of paid paternal leave were also seen in Denmark after various changes were made to the Danish parental leave program between 1989 and 2002. In a 2018 paper, “Paternity Leave and the Motherhood Penalty: New Causal Evidence,” Signe Hald Andersen of the Rockwool Foundation Research Unit studied whether incentivizing fathers to take paid parental leave affects gender pay disparities within homes—in other words, does it encourage mothers to work more and have greater earnings and stronger careers, and does it have the opposite effect on fathers? Andersen suggests that childbirth drives the household gender wage gap—that there is a “motherhood penalty,” in which mothers suffer for their time away from the workforce and their need or desire for flexible or fewer work hours, while fathers experience a so-called fatherhood premium and tend to be more successful in terms of earnings and careers than nonfathers.
In order to determine if paternal leave reduces gender pay disparities from childbirth, Andersen studied various changes to the Danish paid leave program, including increasing and then decreasing the existing “daddy quota,” as well as compensation changes that increased incentives to take paid leave, which benefitted fathers more since they tended to earn more, among other reforms. Andersen concludes that Danish fathers nearly doubled their average leave time, from eight weeks to 15 weeks, and found that the overall impact on family wages, as well as on narrowing the within-household wage gap, is positive, mainly due to increases in mothers’ wages.
Likewise, a recent study of the Quebec Parental Insurance Program, or QPIP, not only finds significant impacts on paternal leave-taking, but also uses time diaries to explore whether fathers’ leave-taking has an equalizing effect on gender roles inside the home and in work outside the home. “Reserving Time for Daddy: the Consequences of Fathers’ Quotas,” a 2018 paper by Ankita Patnaik of Mathematica, looks at Quebec’s 2006 decision to leave Canada’s national family leave program, which is housed in the country’s Employment Insurance program, and establish the QPIP, the only provincial-level family leave program in the country.
The nationwide EI program offers maternity benefits in the weeks immediately following the birth of a child, plus parental benefits to be shared, however a couple decides, between mothers and fathers. QPIP goes a few significant steps further, providing greater flexibility by permitting parents to take their overall financial benefit in a shorter period of time, imposing less stringent eligibility criteria, and providing more generous compensation by replacing a larger percentage of lost income. Finally, and crucially, QPIP includes a paternal set-aside: five weeks of leave for the father that cannot be transferred to the mother.
Patnaik found that fathers responded in fairly dramatic fashion to the offer of paid paternity leave. Additional compensation was certainly a factor, but interestingly, dads also seemed to be responding to the fact that the leave was directed specifically at them. Even in families where the two parents had not been taking their full allotment of nongender-specific leave, men still increased their leave in response to the new program. Indeed, the average father took exactly five additional weeks of leave.
Patnaik also discovered that QPIP contributed to greater equality in and out of the home. Mothers spent more time in paid work and physically in the workplace, and were more likely to be employed full time. Both fathers and, to a lesser extent, mothers increased the number of hours they contributed to responsibilities at home, with mothers spending more of this additional time with their children and fathers primarily using the additional time for housework. Patnaik concludes that paternity leave can contribute to more equitable distribution of household duties, additional time for women in the workplace, and greater time spent with children. “Paternity leave,” she writes, “may present us with a rare win-win scenario.”
These new studies, and other evidence from countries around the world and from the states with paid leave programs, suggest that establishing a federal program in the United States to provide paid parental, caregiving, and personal medical leave would benefit workers, families, businesses, and the economy. More research is needed to help policymakers structure such a program. Given the importance of the subject, what we know for certain is that we need to know more.
So, this Father’s Day, as we celebrate the fathers and father-figures in our lives, those who are lucky enough to be on parental leave can be grateful not only for the time they are spending with their new children, but also for the other benefits this leave brings to them and their families. The evidence clearly shows that paid leave policies can increase caregiving by dads, reduce gender pay disparities, and benefit society as a whole in the process.
Petra Persson, Stanford University Maya Rossin-Slater, Stanford University
While workplace flexibility is perceived to be a key determinant of maternal labor supply, less is known about fathers’ demand for flexibility or about intra-household spillover effects of flexibility initiatives. This paper examines these issues in the context of a critical period in family life—the months immediately following childbirth—and identifies the impacts of paternal access to workplace flexibility on maternal postpartum health. We model household demand for paternal presence at home as a function of domestic stochastic shocks, and use variation from a Swedish reform that granted new fathers more flexibility to take intermittent parental leave during the postpartum period in a regression discontinuity difference-in-differences (RD-DD) design. We find that increasing the father’s temporal flexibility reduces the risk of the mother experiencing physical postpartum health complications and improves her mental health. Our results suggest that mothers bear the burden from a lack of workplace flexibility—not only directly through greater career costs of family formation, as previously documented—but also indirectly, as fathers’ inability to respond to domestic shocks exacerbates the maternal health costs of childbearing.
The aging of America and the provision of illness-care workers is no longer a within-family matter, posing great problems that policymakers have not done nearly enough to think about. Read Jane Waldfogel and Emma Liebman, “Paid Family Care Leave,” in which they write: “The unmet need for leave to care for a family member with a serious illness is actually more widespread and more frequent than it is for the other types of family leave. This is why its relative neglect in research and its uneven treatment by policymakers is all the more striking. For these reasons, this paper focuses on reviewing what we know and do not know about family care leave. In particular, this paper contributes to an understanding of the need for paid leave to care for a seriously ill family member and the current state of policy and research. In doing so, we draw on the best available research on family care leave where available, but because such research is often lacking, we also draw on evidence about family and medical leave more generally when necessary.”
On the eve of the 2001 recession, the ratio of unemployed workers to job openings was higher than it is now—and yet there is still next to no upward wage pressure now. This is a puzzle. Read Raksha Kopparam and Kate Bahn, “JOLTS Day Graphs: April 2019 Report Edition,” in which they write: “The ratio of unemployed workers to job openings hit a new low of 0.78, with fewer than one person looking for a job for each open position.”
“Statement on the Passing of Our Founding Funder, Herb Sandler”: “The Washington Center for Equitable Growth … would not exist without the support and leadership of Herb and the Sandler Foundation … He was generous with the resources of the Sandler Foundation and equally demanding when it came to creating, developing, and implementing their mutual vision of a nonprofit grantmaking organization that would fund original academic research and convey the evidence and policy ideas that emerged … The sadness felt by all of us at Equitable Growth is leavened by the knowledge that Herb lived to see the organization walk and then break into a run.”
Worthy reads not from Equitable Growth:
I confess I do not understand what is to be done here—these internet platforms are not utilities (the technology is not stable and investments are not large enough), so rate regulation would seem inappropriate. The economies of scale on the production side and the economies of scope on the consumption side are very large, so it would seem inappropriate to sacrifice them to generate competition at the core services of each platform. Consumer surplus appears to be very large, so reducing the profits to successful innovators seems a very bad idea. And there is the question of whether these firms are giving their customers what they need instead of what they think they want—but do recall that, in early generations, one socialist critique of the market was that the market economy was making people unfree by failing to force them to wear identical blue overalls, drive identical utilitarian black cars, and listen to properly uplifting music: Read Ben Thompson, “Tech and Antitrust,” in which he writes: “That is not to say that tech deserves no regulation: questions of privacy, for example, are something else entirely. Nor, for that matter, is antitrust irrelevant in the United States generally: concentration has increased dramatically throughout the economy. What is driving that concentration matters, though: at the end of the day tech companies are powerful because consumers like them, not because they are the only option. Consumer welfare still matters, both in a court of law and in the court of public opinion.”
The bond market thinks a recession is likely. The National Bureau of Economic Research—if it still paid attention to anything but payroll—would now be wondering when it should call the peak. But we seem to have decided that a recession is not a recession of economic activity in general from a previous peak, but rather a sudden, sharp, significant, and asymmetric fall in employment. The key would then be found in the hearts and minds of businesses: Are things likely to be bad enough in the future that we need to start shedding labor now? Can we use the excuse of ‘hard times’ to break our implicit contracts with our workers without incurring heavy costs in terms of reduced worker morale? When the answers two those two questions become ‘yes,’ that is a recession. We are not yet there—and we have no good models of what would push us there. Read Menzie Chinn, “Recession Anxieties, June 2019,” in which he writes: “Different forward-looking models show increasing likelihood of a recession. Most recent readings of key series highlighted by the NBER’s Business Cycle Dating Committee [or BCDC] suggest a peak, although the critical indicator—nonfarm payroll employment—continues to rise, albeit slowly.”
A reminder that eliminating trade barriers and boosting trade through reducing tariffs, reducing quotas, and harmonizing regulations is one of the two things (along with deficit reduction at full employment when interest rates are high) we know how to do to materially and significantly boost prosperity in the medium run. Yes, it has an impact on income distribution. But everything has an impact on income distribution. Focusing your policies for equity on trade restrictions is counterproductive. Read Doug Irwin, “Does Trade Reform Promote Economic Growth? A Review of Recent Evidence,” in which he writes: “There appears to be a measurable economic payoff from more liberal trade policies … about 10–20 percent higher income after a decade … The gains in industry productivity from reducing tariffs on imported intermediate goods … show up time and again in country after country … As Estevadeordal and Taylor (2013, 1689) ask, ‘Is there any other single policy prescription of the past 20 years that can be argued to have contributed between 15 percent and 20 percent to developing country income?’”
I am not sure whether what is needed is for economics to “go digital” as for economics to finally recognize what John Maynard Keynes called “the end of laissez-faire.” But since he wrote about the end of laissez-faire 94 years ago, I am not holding my breath for a better economics. Read Diane Coyle, “Why Economics Must Go Digital,” in which she writes: “Drug discovery is an information industry, and information is a nonrival public good which the private sector, not surprisingly, is under-supplying … Yet the idea of nationalizing part of the pharmaceutical industry is outlandish from the perspective of the prevailing economic-policy paradigm … Should data collection by digital firms be further regulated? … The standard economic framework of individual choices made independently of one another, with no externalities, and monetary exchange for the transfer of private property, offers no help.”
In the decades following the 1980s, free market policies dominated policy agendas across the world. The gains from growth, however, were not broadly shared within countries, as evidenced by the high levels of economic inequality in the United States and most other advanced economies. In a recent paper, a group of economists at the International Monetary Fund argue for a rethinking of the rules—actual or perceived—that guide economic policies, so that the distributional consequences are considered and addressed by policymakers.
In their paper, IMF economists Jonathan D. Ostry, Prakash Loungani, and Davide Furceri argue there are four primary reasons why it is critical to pay greater attention to how economic gains are shared up and down the income ladder. First, their research shows that economic inequality leads to lower and less durable growth. Even when growth is the primary goal, attention to inequality is necessary. Second, they find that economic inequality may lead to social tension and ultimately political backlash against free market policies, including globalization. Third, redistributive policies to curb excessive inequality tend to support, not slow, economic growth. And fourth, many aspects of economic inequality are the result of policy choices made by governments, meaning policymakers should factor in the distributional consequences when designing and evaluating policies.
A disproportionate focus on growth over distribution was solidified among economists during the 1980s with the consensus view that the benefits of growth would trickle down the income ladder. Governments and institutions such as the IMF dismissed questions of distribution as secondary to growth, based on their confidence in markets to reward everyone fairly and their belief that redistributive policies hurt growth.
Ostry, Loungani, and Furceri question this conventional wisdom by showing that high inequality is bad not only for social reasons but also for growth. An increase in the so-called Gini coefficient—a standard measure of inequality that runs from zero (perfect equality) to one (perfect inequality)—from 0.37 (like the United States in 2005) to 0.42 (like Gabon in 2005) decreases economic growth by 0.5 percentage points. The authors also find that economic inequality shortens the duration of growth. An increase of 0.01 in the Gini coefficient is associated with a 7 percent decrease in expected spell length, or a 6 percentage point higher risk that a growth spell will end in the next year.
Moreover, the authors prove that concerns about the negative growth effects of redistribution are misplaced. Although excessive redistribution policies can slow growth, redistributive policies to reduce inequality actually support growth, on average, contrary to what many policymakers think. Often, policymakers are facing not a tradeoff but a win-win situation, where redistribution can reduce inequality and boost growth.
Given these findings, which build upon their earlier work, how should the rules of economic policymaking be corrected? The authors focus on two policies—fiscal consolidation and capital account liberalization—to illustrate why centering distributional considerations in the evaluation of policies can provide better guidance.
Fiscal consolidation refers to the reduction of the size of government, through spending cuts, limits on deficit levels, or the privatization of government functions. The evidence suggests that for countries with a high risk of imminent debt crises and facing pressure from financial markets, fiscal consolidation can be necessary. Yet countries with a strong fiscal track record and low risk of a crisis—with what the authors describe as “ample fiscal space”—such as the United States, it is better to live with current levels of public debt rather than pay down the debt or ramp it up further. In the U.S. context, the authors find that it is better to live with significant amounts of federal debt and let future growth reduce the debt-to-Gross Domestic Product ratio, even with a framework that is biased toward consolidation.
Other research shows that moving from a debt ratio of 120 percent of GDP to 100 percent of GDP over a few years reduces the probability of a crisis marginally, but has a significant welfare cost due to the distortionary taxation needed to service the debt. In this scenario, the likelihood of a negative fiscal event, such as a government debt default or a spike in inflation, decreases minimally from an already unlikely 2.6 percent to only 2.4 percent. But the benefit is about 0.5 percent of GDP—just one-tenth of the welfare cost of paying down the debt through distortionary taxation.
Even in the short run, fiscal consolidation reduces output and raises economic inequality. Looking at fiscal consolidation policies across 17 advanced economies of the Organisation for Economic Co-operation and Development, Ostry, Loungani, and Furceri find that fiscal consolidation has been followed by a significant drop in economic output—about 2 percent 2 years after the policy change. And economic inequality rises simultaneously—the Gini coefficient increases by more than 3 percent 2 years after the policy.
The authors’ other policy focus—capital account liberalization, or the opening up of economies to foreign capital and investments—boosts growth minimally but worsens economic inequality significantly. Standard economic theory indicates that capital account liberalization is beneficial for economies because savings across the world can flow to their most productive uses through freer capital markets. But the authors find that, on average, capital account liberalization has little impact on economic output, confirming the results of other empiricalstudies. While national economies experience moderate increases in GDP when there are no crises, liberalization leads to significant declines in output when followed by crises.
Moreover, capital account liberalization policies lead to higher economic inequality, depending on whether there is a crisis after the policy change. In another paper, Furceri and Loungani find that capital account liberalization typically leads to an increase in the Gini coefficient of about 0.8 percent 1 year after the policy change, and about 1.4 percent 5 years after.
Based on their findings about fiscal consolidation and capital account liberalization, the authors ask “why support them if there are scarce efficiency benefits for them but palpable equity costs?” The answer is important because fiscal consolidation and capital account liberalization are two policies that have historically been at the center of the IMF’s economic reform agenda. This paper is one illustration of a shift in policy priorities at the IMF, where leaders increasingly recognize that liberalization and tight fiscal policy are not always suited for sustainable economic growth.
As the IMF marks its 75th anniversary, Managing Director Christine Lagarde has argued for a renewed approach that tackles economic inequality, as well as climate change and corruption. Inequality affects economies through various channels, whether it blocks opportunity and innovation for those not at the top of the income and wealth ladders, destabilizes growth by distorting demand, and disables political systems through the influence of the economic elite. The research from the IMF shows that inequality itself has a direct economic impact of lower and less durable growth.
This new body of research matters because it shows that many of the negative distributional outcomes stem from intentional policy choices, not just from technological developments or factors beyond the control of governments. The authors note that even with better designed policies, there will be a need for the redistribution of the gains from overall economic growth, which the evidence shows can be both pro-growth and pro-equality, through spending on education and taxes on activities with negative externalities such as excessive risk-taking in the financial sector. But, first and foremost, policymakers can support sustainable growth by paying more attention to the distributional consequences of economic policies.
Wealth inequality has soared in the United States over the past three decades. Today, the top 1 percent own about 40 percent of the nation’s wealth, levels last seen during the Roaring Twenties. A growing body of research now suggests that those at the top not only own much more wealth, but also register higher rates of return from their wealth. Although there are conflicting findings on why the wealthy earn higher returns, these studies open the door to an important line of research that could give us insight into wealth inequality in the United States.
A recent working paper using Norwegian data shows that higher returns for wealthier individuals are persistent over time for the same individual and across generations—and not just because they are compensated for risk-taking. The paper (funded in part by Equitable Growth) by economists Andreas Fagereng of Statistics Norway, Luigi Guiso of the Einaudi Institute for Economics and Finance, Davide Malacrino of the International Monetary Fund, and Equitable Growth grantee Luigi Pistaferri of Stanford University studies individual returns to wealth over the entire wealth distribution, both within and across generations.
The authors use 12 years of tax records on the wealth and capital income of all taxpayers in Norway from 2004 to 2015. These exhaustive tax records are available in Norway because of a wealth tax that requires assets to be reported—often done by employers, banks, or other third parties, thereby reducing errors that arise from self-reporting. The authors also are able to match parents with their children, and thus look at intergenerational patterns in returns to wealth.
Individuals earn substantially different returns on their wealth. The four co-authors find 3.8 percent average returns on overall wealth (financial assets plus housing minus debt) with a standard deviation of 8.6 percent. The difference between the average return at the 10th percentile and 90th percentile of overall wealth is about 18 percentage points. Given that Norwegians in the bottom 20 percent of their nation’s wealth distribution have negative wealth—they have more debts than assets—the authors measure returns as a share of gross wealth to ensure that people with debt costs exceeding their asset incomes are counted as having negative returns.
Why do the wealthy get higher returns from their wealth? In part, it’s because they invest a higher share of their assets in the stock market and other risky assets, and therefore are rewarded for their risk tolerance with higher average returns. Wealthier investors also benefit from the scale of their wealth, for example, by using checking accounts that pay higher rates for larger deposits and buying financial advice that leads to higher returns—what the authors call “economies of scale in wealth management.”
Yet the authors also find that risk compensation and scale, while important, are not enough to fully account for the variation in returns, or, in economic parlance, “return heterogeneity.” Bank deposit accounts are safe assets that bear essentially no risk. If return heterogeneity were explained by compensation for risk-taking, then there should be no variation in the returns that people get from deposit accounts holding the same amount of wealth. The authors find, however, that there is sizable heterogeneity: People with more education tend to deposit at high-return banks. Persistent variation in returns is therefore also explained, in part, by differences in financial sophistication and differences in ability to access and use superior information about investment opportunities. (See Figure 1.)
Returns to wealth persist across time when looking at the same individuals, but do they also persist across generations? The intergenerational transmission of wealth is well-documented: It is widely understood that the children of wealthy families are likely to have a lot of wealth as adults. The authors find that, like wealth, returns to wealth are correlated intergenerationally, though there are important differences in how returns to wealth accrue across generations.
At the top of the wealth distribution, the intergenerational correlation is higher, while at the top of the returns-to-wealth distribution, the intergenerational correlation is lower. So, a child of Amazon.com Inc. CEO Jeff Bezos will hypothetically own an extremely high level of wealth later in life, but will not generate returns from that wealth as high as did Bezos himself. In economic terms, those returns for Bezos’ child “revert to the mean.”
Some of the intergenerational correlation in returns to wealth is explained by scale dependence in wealth (higher levels of wealth getting higher returns), but correlation can also come from children imitating their parents’ investment strategies or inheriting traits related to risk preferences or talent in investing. Returns also are correlated when parents and children share a private business or they live close to each other and so earn similar returns on housing.
Compared to the United States, income is much more evenly distributed in Norway, but wealth is similarly concentrated. Another study by Laurent Bach at ESSEC Business School and his co-authors using Swedish administrative data also finds substantial heterogeneity in returns to wealth and a correlation between returns and level of wealth. These authors, however, find that the higher returns earned by the wealthy are compensation for taking higher systematic risk, not the result of exceptional investment skill or privileged access to information.
Even if the reasons behind the variation in returns to wealth have not yet been fully explained, these studies improve our understanding of how returns to wealth differ across the wealth spectrum. On the policy front, return heterogeneity could mean that a wealth tax would be more efficient than a capital income tax. Replacing a capital income tax with a wealth tax reduces the burden on high-return investors and thus may motivate more wealth accumulation. But a wealth tax might also widen the disparities in rates of return.
An ancillary benefit of a wealth tax in the United States would be the collection of more accurate data to estimate and track the wealth of the wealthiest Americans—just as the Norwegian wealth tax enabled Fagereng and his co-authors to do their data-driven research. Their findings are an important contribution to the empirical literature on the variation in returns to wealth, which can help policymakers understand the trends and dynamics of the extreme concentration in wealth and design policies that ensure that wealth disparities aren’t deepening generation after generation.
Every month the U.S. Bureau of Labor Statistics releases data on hiring, firing, and other labor market flows from the Job Openings and Labor Turnover Survey, better known as JOLTS. Today, the BLS released the latest data for April 2019. This report doesn’t get as much attention as the monthly Employment Situation Report, but it contains useful information about the state of the U.S. labor market. Below are a few key graphs using data from the report.
The quit rate has held steady at 2.3% for 11 months, signaling worker confidence in the labor market.
The ratio of hires to job openings increased slightly in April, as hires reached a series high of 5.9 million.
The ratio of unemployed workers to job openings hit a new low of 0.78, with fewer than one person looking for a job for each open position.
The Beveridge Curve continues its expansion, hovering around the same level for the past year.
The aging of the baby-boom generation means that millions of working families are part of a growing “sandwich generation,” juggling care for young children and aging parents. Many will need time off work to care for a seriously ill child, an ailing spouse, or an elderly family member, and the cost of caregiving is far more expensive than most realize. For instance, the cost of “informal caregiving” for a loved one with ovarian cancer averages more than $66,000, while caregiving for lung cancer costs nearly $73,000.
The federal Family and Medical Leave Act of 1993 provides job-protected unpaid leave to some workers, yet many are either unable to take unpaid leave or not covered by the law at all due to eligibility restrictions that disproportionately impact low-income workers and their families. But momentum continues to build around a national solution to make paid family and medical leave broadly available to American workers, understanding the need for family caregiving leave is all the more critical.
A newly published Washington Center for Equitable Growth report by Columbia University professor Jane Waldfogel and Columbia master of Public Health graduate student Emma Leibman summarizes why paid family care leave is a policy with important economic, social, and health implications for U.S. employers, employees, and their family members. Building on new research that draws on the experience of the growing number of states with paid family and medical leave policies in place—all of which include not only paid parental leave but also paid family caregiving leave—the evidence for the impact of such policies on not only families but also the economy as a whole is increasingly difficult to ignore.
This is a weekly post we publish on Fridays with links to articles that touch on economic inequality and growth. The first section is a round-up of what Equitable Growth published this week and the second is the work we’re highlighting from elsewhere. We won’t be the first to share these articles, but we hope by taking a look back at the whole week, we can put them in context.
Equitable Growth round-up
Earlier this morning, the U.S. Bureau of Labor Statistics released new data on the U.S. labor market during the month of May. Kate Bahn, Will McGrew, and I compiled five graphs highlighting important trends in the data.
This week, we mourn the loss of Herb Sandler, who supported the mission of equitable growth even before the creation of our organization. As our founding funder and head of the Sandler Foundation, Herb was committed to reshaping the economic policy debate to prioritize the elimination of inequality.
Brad DeLong compiles his most recent worthy reads on equitable growth both from Equitable Growth and outside press and academics.
Fatih Karahan, Benjamin Pugsley, and Aysegül Sahin propose a simple explanation for the long-run decline in the rate of start-up companies: It was caused by a slowdown in labor supply growth since the late 1970s, largely pre-determined by demographics. The authors find this channel explains roughly two-thirds of the decline.
Links from around the web
A new study by the Federal Reserve Bank of New York finds that people’s attachment to their communities contributes to their willingness to move for higher-paying jobs. Richard Florida looked at the variety of explanations for declining mobility and saw that those who identify as “rooted” (people who have the resources to move yet prefer to say where they are) make up almost 50 percent of survey respondents. Approximately 15 percent of respondents identify as “stuck,” meaning they want to move for better opportunities but don’t have the resources, and these individuals have less educational attainment or poor health conditions. [citylab]
Eric Ravenscraft delves into competing definitions of the term “living wage” this week in The New York Times. While he concedes that having “enough” money can be a nebulous concept, he points to helpful tools like the Massachusetts Institute of Technology’s “Living Wage Calculator” that help paint the picture of the minimum required to cover basic expenses in different communities.[nyt]
In ProPublica, Justin Elliot follows up on a previous story that U.S. congressional leaders had agreed to include a provision in the Taxpayer First Act that would prohibit the IRS from developing its own tax filing assistance service. After public backlash claiming the bill favors the often predatory practices of private tax-filing firms, Elliot reports that the provision has been removed from the bill. [propublica]
The House Judiciary Committee announced the launch of a “top-to-bottom” antitrust investigation of Silicon Valley’s largest tech firms, including Apple Inc., Alphabet Inc.’s Google unit, Facebook Inc., and Amazon.com Inc. The Federal Trade Commission and the U.S. Department of Justice will be investigating the tech industry’s impact on local journalism, consumer protection and privacy, and barriers to entry. [cnn]
Economists at the U.S. Department of Agriculture find that the Supplemental Nutrition Assistance Program helped stimulate economic growth, especially in rural America, after the Great Recession. Every $22,000 in taxpayer dollars spent on nutrition assistance between 2001 to 2014 led to the creation of about one job. Researchers found that spending on these benefits helped the U.S. economy more than any other government spending program in the years following the recession. [vox]