Poverty and Income Distribution

Edward Wolff received his Ph.D. from Yale University in 1974 and is professor of economics at New York University, where he has taught since 1974, and a Senior Scholar at the Levy Economics Institute of Bard College. He is also a Research Associate at the National Bureau of Economic Research and a council member of the International Association for Research in Income and Wealth since 1987. He served as Managing Editor of the Review of Income and Wealth from 1987 to 2004 and was a Visiting Scholar at the Russell Sage Foundation in New York (2003-04), President of the Eastern Economics Association (2002-2003), and a council member of the International Input-Output Association (1995-2003), and has acted as a consultant with the Economic Policy Institute, the World Bank, the United Nations, the WIDER Institute, and Mathematica Policy Research. His principal research areas are productivity growth and income and wealth distribution. He is the author (or co-author) of 10 books, and the editor of 8. He is also the author of many articles published in books and professional journals and provides frequent commentary on radio and television

"I regularly teach a course on inequality, most recently using the developing manuscript of Ed Wolff's revised text. This work comprehensively (and fascinatingly) covers the central topics of poverty and of income and wealth distribution. I plan to use it for years to come." Frank Thompson, University of Michigan-Ann Arbor "The text is clearly written, with a comprehensive and up-to-date coverage and summarization of a very wide range of literature." Lars Osberg, Dalhousie University“I would certainly use this text in my income distribution course. It is much more comprehensive and useful than anything else on the market, and provides the foundation for an engaging and interesting course.” Michael Sattinger, SUNY Albany“Students will benefit from this text’s broad coverage of empirical evidence on the distribution of income and wealth, its clear description of the technical measures of inequality, and its easily accessible language.” Dean Lillard, Cornell University"The quality of this text is outstanding, both as a textbook and as a reference for professional economists." Keith Bender, University of Wisconsin-Milwaukee"Wolff’s expertise in the study of wealth and inequality is evident in his meticulous provision of interesting and informative footnotes and the comprehensive nature of the coverage. The textbook has enough introductory material for the typical sophomore in college. At the same time, Wolff provides a substantial dose of more advanced material to satisfy and challenge upper-level students with superior background or capability in economics." Wendy Rayack, Wesleyan University

• Preface xivChapter 1 Introduction: Issues and Scope of Book 11.1 Recent trends in living standards 11.1.1 Income and earnings stagnate while poverty remains unchanged 11.1.2 Inequality rises sharply 41.1.3 Middle-class debt explodes 51.1.4 What has happened to tax rates? 61.1.5 Rising profits is the key 71.1.6 Yet schooling has continued to rise 81.1.7 Some conclusions 111.2 Causes of rising inequality 121.2.1 Skill-biased technology change 121.2.2 The shift to services 131.2.3 Declining unionization 131.2.4 Globalization 131.2.5 Downsizing and outsourcing 131.2.6 Public policy changes 141.3 General description of the textbook 14Notes 17Part I Inequality, Poverty, and Mobility: Measurement and Trends 19Chapter 2 Income, Earnings, and the Standard of Living 212.1 Introduction 212.2 The composition of personal income in the United States 222.3 The standard of living 242.3.1 Real versus nominal 252.3.2 Trends in living standards in the United States 262.4 Factor shares 292.4.1 Historical studies on factor shares* 312.5 International comparisons of living standards 322.5.1 Per capita income 322.5.2 The Human Development Index 332.6 Household production and well-being 352.6.1 Defining household work 372.6.2 The market cost approach 372.6.3 The opportunity cost approach 382.6.4 Empirical work on household production 382.7 Summary 392.8 References, bibliography, and data sources 402.9 Discussion questions and problem set 42Appendix 2.1 An introduction to the National Income and Product Accounts* 44A2.1.1 The relation to the national accounts 46A2.1.2 The sources of personal income 47A2.1.3 The derivation of factor shares 48A2.1.4 Miscellaneous issues in national accounting 49A2.1.4.1 Treatment of international trade 49A2.1.4.2 National income at factor costs 51A2.1.4.3 The treatment of capital gains 51Notes 52Chapter 3 Income Inequality: Its Measurement, Historical Trends, and International Comparisons 553.1 Introduction 553.2 A review of basic statistics 553.2.1 Mean, variance, and standard deviation 563.2.2 Distributions 563.2.3 Percentile ranking 593.3 Inequality measures 603.3.1 Concentration measures 613.3.2 Coefficient of variation 613.3.3 The Lorenz curve 633.3.4 Gini coefficient 643.3.5 Log variance of income* 663.3.6 The Theil entropy index* 673.3.7 Atkinson’s measure* 693.3.8 Lorenz dominance* 703.4 Time trends in income inequality in the United States 703.5 International comparisons of inequality 743.5.1 Inequality comparisons among high-income countries 743.5.2 The Kuznets curve 803.5.3 The world distribution of income* 843.6 Summary 853.7 References and bibliography 863.8 Discussion questions and problem set 90Notes 91Chapter 4 Poverty: Definitions and Historical Trends 934.1 Introduction 934.2 The measurement of poverty 934.2.1 The official U.S. poverty standard 944.2.2 Absolute versus relative poverty thresholds 954.2.3 Subjective poverty lines 964.2.4 Other concepts of poverty 994.3 Measurement of poverty incidence 994.3.1 The poverty rate and the poverty gap ratio 994.3.2 Composite measures of poverty* 1004.4 Poverty trends in the United States 1014.4.1 Composition of the poor 1034.5 Other dimensions of poverty 1074.5.1 Poverty spells and the permanence of poverty 1074.5.2 The underclass 1084.5.3 International comparisons of poverty rates 1094.6 Other issues in the measurement of poverty 1124.6.1 Equivalence scales 1134.6.2 Choice of a price index 1144.6.3 The treatment of taxes 1154.6.4 The treatment of noncash government benefits 1164.6.5 The role of household wealth 1194.6.6 Consumption-based measures of poverty 1204.6.7 The accounting period 1214.6.8 Other issues 1224.7 Summary 1234.8 References and bibliography 1254.9 Discussion questions and problem set 130Notes 132Chapter 5 Household Wealth 1345.1 Introduction 1345.2 What is household wealth? 1355.2.1 Wealth and well-being 1355.2.2 Marketable wealth 1365.2.3 Other definitions of household wealth 1405.3 Historical time-series data on household wealth and its composition 1415.3.1 Trends in average wealth 1425.3.2 Changes in wealth composition 1435.3.3 Homeownership rates 1465.4 Wealth inequality in the United States 1475.4.1 Methods used to estimate wealth inequality 1485.4.2 Long-term trends in household wealth inequality in the United States 1505.4.3 Changes in wealth inequality, 1962–2004 1545.4.4 The Forbes 400 1665.5 International comparisons of household wealth distribution 1675.5.1 Comparisons of long-term time trends 1675.5.2 Comparisons of recent trends 1685.6 Summary 1715.7 References and bibliography 1725.8 Discussion questions and problem set 176Notes 177Chapter 6 Economic Mobility 1806.1 Introduction 1806.2 Mobility measures 1806.2.1 Measuring intergenerational mobility 1806.2.2 The Shorrocks measure and other measures of lifetime mobility 1816.3 Mobility over the time 1846.3.1 Income mobility 1846.3.2 Earnings mobility 1886.3.3 Other dimensions of mobility 1896.4 Intergenerational mobility 1896.4.1 Results for the United States 1906.4.2 Mechanisms of transmission 1946.4.3 International comparisons 1956.5 Wealth mobility 1976.6 Summary 1986.7 References and bibliography 200Notes 204Part II Explanations of Inequality and Poverty 205Chapter 7 The Labor Force, Employment, and Unemployment 2077.1 Introduction 2077.2 Basic concepts of the labor force, employment, and unemployment 2087.2.1 Employment 2087.2.2 Unemployment 2097.2.3 The labor force 2097.2.4 Estimating employment statistics 2097.3 Labor force participation rates 2107.3.1 LFPR by gender, race, and age 2117.3.2 Two-earner households 2167.3.3 Educational attainment of the labor force 2177.4 The industrial and occupational composition of employment 2197.5 Measures of unemployment and historical trends 2217.6 The incidence of unemployment 2267.6.1 Jobless rates by demographic characteristic 2267.6.2 Unemployment by industry, occupation, and region 2297.7 Types of unemployment 2327.7.1 Frictional unemployment 2327.7.2 Seasonal unemployment 2337.7.3 Structural unemployment 2347.7.4 Deficient demand (Keynesian) unemployment 2357.7.5 The debate over the causes of unemployment 2367.8 Summary 2387.9 References and bibliography 2407.10 Discussion questions 243Notes 243Chapter 8 The Role of Education and Skills 2468.1 Introduction 2468.2 The human capital model 2478.2.1 The rate of return to human capital 2488.2.2 On-the-job training 2518.2.3 Additional implications of the human capital model 2548.3 Earnings, schooling, and experience 2588.3.1 Rates of return to schooling 2608.3.2 Lifetime earnings 2678.4 The schooling–earnings function* 2698.4.1 The extended earnings function* 2728.5 Ability and earnings 2738.5.1 Estimates of the ability effect* 2758.5.2 The nature vs. nurture controversy 2768.6 Productivity and earnings 2798.6.1 Experience, productivity, and earnings 2798.6.2 Other interpretations of the relation between schooling and earnings 2818.7 Earnings inequality and human capital* 2868.8 Summary and concluding remarks 2888.9 References and bibliography 2918.10 Discussion questions and problem set 296Notes 297Chapter 9 Unions, Dual Labor Markets, and Structural Models of Earnings 3019.1 Introduction 3019.2 The role of labor unions 3039.2.1 A brief history of trade unionism in the United States 3039.2.2 Trends in union membership 3059.2.3 The economic role of labor unions 3109.2.4 The effect of unions on wages: The evidence 3159.3 Segmented labor markets 3199.3.1 Internal labor markets 3199.3.2 The dual labor market model 3229.3.3 An evaluation of labor market segmentation 3259.4 Industrial composition and earnings inequality* 3269.4.1 State and regional differences in inequality 3269.4.2 Regional differences in income levels 3289.4.3 Industrial composition and rising earnings inequality of the 1980s 3299.5 Industry wage differentials* 3319.5.1 Explanations of inter-industry wage differences 3319.5.2 Recent trends and efficiency wage theory 3369.6 Occupational wage differentials 3399.6.1 Historical studies 3399.6.2 Trends in the United States in the twentieth century 3409.6.3 Rising skewness at the top 3429.7 Summary and concluding remarks 3439.8 References and bibliography 3469.9 Discussion questions 352Notes 353Chapter 10 The Role of Savings and Intergenerational Transfers in Explaining Wealth Inequality 35510.1 Introduction 35510.2 The basic lifecycle model 35610.2.1 Age–wealth profiles 35710.2.2 Longitudinal analyses* 35910.2.3 Simulation and regression analysis* 36110.3 Extensions of the lifecycle model 36310.3.1 The role of uncertainty about death and lifetime annuities 36410.3.2 The role of pension and social security wealth 36410.3.3 The bequest motive 36610.3.4 Precautionary savings and liquidity constraints 37110.4 Intergenerational equity 37210.4.1 Social security annuity and transfer wealth 37210.4.2 Private intergenerational transfers 37510.4.3 Generational accounting 37610.5 Summary and overall assessment 37710.6 References and bibliography 37910.7 Discussion questions 385Notes 385Chapter 11 Sources of Rising Earnings Inequality* 38611.1 Introduction 38611.2 Skill-biased technological change 38711.3 The IT “revolution” 38911.4 Growing international trade and immigration 39011.5 The shift to services 39311.6 Institutional factors 39411.7 Outsourcing and downsizing 39511.8 Changes in the distribution of schooling and ability 39511.9 Time trends in key explanatory variables 39611.10 Econometric results 40511.11 Summary and concluding remarks 40811.12 References and bibliography 410Appendix 11.1 Data sources and methods 416Notes 417Part III Discrimination 419Chapter 12 Discrimination: Meaning, Measurement, and Theory 42112.1 Introduction 42112.2 The meaning of discrimination 42312.2.1 The Blinder–Oaxaca decomposition* 42412.2.2 Pre-labor market discrimination 42512.3 Theories of discrimination: an overview 42912.4 Taste for discrimination 43012.5 Statistical discrimination 43412.6 The racial stigma model 43612.7 The Marxian model 43712.8 Overcrowding model of occupational segregation 43812.9 Summary 44012.10 References and bibliography 441Notes 443Chapter 13 Racial Discrimination: Progress and Reversal for Black Americans 44513.1 Introduction 44513.2 Trends and status report on racial inequality 44613.2.1 The earnings gap: have African American workers made gains on whites? 44613.2.2 Labor force participation and unemployment 44913.2.3 Family income, poverty, and wealth 45313.2.4 Hispanics 45713.3 Migration from the South 46013.4 Progress in educational attainment 46113.4.1 The role of educational gains on the earnings gap* 46313.4.2 Quality of schooling* 46413.4.3 Returns to schooling for blacks and whites 46513.4.4 Hispanic Americans 46813.5 Changes in family structure among black Americans 46913.6 Public policy and discrimination 47113.6.1 Public policy programs 47213.6.2 The effectiveness of the anti-discrimination programs 47413.7 Summary and conclusion 47813.8 References and bibliography 48013.9 Discussion questions and problem set 485Notes 486Chapter 14 The Gender–Wage Gap and Occupational Segregation 48814.1 Introduction 48814.2 The wage gap and labor force participation trends 48814.2.1 Time trends 49014.2.2 Labor force participation patterns 49114.2.3 Explanations of the rising LFPR of women* 49214.3 Explanations of the wage gap 49414.3.1 Human capital differences 49414.3.2 Occupational segregation 50314.4 The role of public policy 50914.4.1 The effectiveness of the anti-discrimination programs 50914.4.2 Comparable worth 51114.5 Other issues* 51314.5.1 Effects of wives’ earnings on family income inequality 51314.5.2 The feminization of poverty 51414.5.3 International comparisons 51614.6 Summary 51714.7 References and bibliography 51814.8 Discussion questions and problem set 525Notes 525Part IV The Role of Public Policy on Poverty and Inequality 527Chapter 15 Public Policy and Poverty Alleviation 52915.1 Introduction 52915.2 A brief history of income maintenance programs 52915.2.1 Early developments 53015.2.2 The New Deal 53015.2.3 Post-war developments 53215.2.4 Housing assistance 53315.2.5 Public expenditures on major federal programs 53415.3 Unemployment insurance (UI) 53615.3.1 A brief description of the UI system 53615.3.2 Time trends in UI benefits 53815.3.3 Incentive effects of the UI system 54015.4 The social security system 54115.4.1 Determination of the social security benefit 54215.4.2 Incentive effects on labor supply 54615.5 The welfare system 54615.5.1 The workings of AFDC and TANF 54715.5.2 Incentive effects of the welfare system 55015.6 Work programs 55415.6.1 Effectiveness of the work programs 55515.7 The minimum wage 55615.8 Conclusion and overall assessment of government programs 55915.8.1 Effects on poverty 56015.8.2 Proposals for reform 56215.9 References and bibliography 56415.10 Discussion questions and problem set 570Notes 571Chapter 16 The Redistributional Effects of Public Policy 57416.1 Introduction 57416.2 Equality as a social goal 57416.2.1 Arguments in favor of promoting equality 57416.2.2 Arguments against promoting equality 57716.3 The structure of tax systems 57916.3.1 Proportional, progressive, and regressive tax structures 57916.3.2 Inequality measures and the tax system 58316.3.3 Vertical versus horizontal equity 58616.4 Distributional consequences of the U.S. tax system 58716.4.1 Tax schedules for the personal income tax 58716.4.2 Effective tax rates for the personal income tax 59116.4.3 The payroll tax 59316.4.4 Other federal taxes 59416.4.5 State and local government taxes 59516.4.6 The overall tax bite? 59616.4.7 International comparisons of taxation 59816.4.8 The overall effective tax rate structure in the United States 60016.5 The negative income tax and the EITC 60816.6 The distributional effects of government expenditures 61116.7 Summary and conclusion 61616.8 References and bibliography 61916.9 Discussion questions and problem set 622Notes 623Index 627