Preface xiv
Chapter 1 Introduction: Issues and Scope of Book 1
1.1 Recent trends in living standards 1
1.1.1 Income and earnings stagnate while poverty remains unchanged 1
1.1.2 Inequality rises sharply 4
1.1.3 Middle-class debt explodes 5
1.1.4 What has happened to tax rates? 6
1.1.5 Rising profits is the key 7
1.1.6 Yet schooling has continued to rise 8
1.1.7 Some conclusions 11
1.2 Causes of rising inequality 12
1.2.1 Skill-biased technology change 12
1.2.2 The shift to services 13
1.2.3 Declining unionization 13
1.2.4 Globalization 13
1.2.5 Downsizing and outsourcing 13
1.2.6 Public policy changes 14
1.3 General description of the textbook 14
Notes 17
Part I Inequality, Poverty, and Mobility: Measurement and Trends 19
Chapter 2 Income, Earnings, and the Standard of Living 21
2.1 Introduction 21
2.2 The composition of personal income in the United States 22
2.3 The standard of living 24
2.3.1 Real versus nominal 25
2.3.2 Trends in living standards in the United States 26
2.4 Factor shares 29
2.4.1 Historical studies on factor shares* 31
2.5 International comparisons of living standards 32
2.5.1 Per capita income 32
2.5.2 The Human Development Index 33
2.6 Household production and well-being 35
2.6.1 Defining household work 37
2.6.2 The market cost approach 37
2.6.3 The opportunity cost approach 38
2.6.4 Empirical work on household production 38
2.7 Summary 39
2.8 References, bibliography, and data sources 40
2.9 Discussion questions and problem set 42
Appendix 2.1 An introduction to the National Income and Product Accounts* 44
A2.1.1 The relation to the national accounts 46
A2.1.2 The sources of personal income 47
A2.1.3 The derivation of factor shares 48
A2.1.4 Miscellaneous issues in national accounting 49
A2.1.4.1 Treatment of international trade 49
A2.1.4.2 National income at factor costs 51
A2.1.4.3 The treatment of capital gains 51
Notes 52
Chapter 3 Income Inequality: Its Measurement, Historical Trends, and International Comparisons 55
3.1 Introduction 55
3.2 A review of basic statistics 55
3.2.1 Mean, variance, and standard deviation 56
3.2.2 Distributions 56
3.2.3 Percentile ranking 59
3.3 Inequality measures 60
3.3.1 Concentration measures 61
3.3.2 Coefficient of variation 61
3.3.3 The Lorenz curve 63
3.3.4 Gini coefficient 64
3.3.5 Log variance of income* 66
3.3.6 The Theil entropy index* 67
3.3.7 Atkinson's measure* 69
3.3.8 Lorenz dominance* 70
3.4 Time trends in income inequality in the United States 70
3.5 International comparisons of inequality 74
3.5.1 Inequality comparisons among high-income countries 74
3.5.2 The Kuznets curve 80
3.5.3 The world distribution of income* 84
3.6 Summary 85
3.7 References and bibliography 86
3.8 Discussion questions and problem set 90
Notes 91
Chapter 4 Poverty: Definitions and Historical Trends 93
4.1 Introduction 93
4.2 The measurement of poverty 93
4.2.1 The official U.S. poverty standard 94
4.2.2 Absolute versus relative poverty thresholds 95
4.2.3 Subjective poverty lines 96
4.2.4 Other concepts of poverty 99
4.3 Measurement of poverty incidence 99
4.3.1 The poverty rate and the poverty gap ratio 99
4.3.2 Composite measures of poverty* 100
4.4 Poverty trends in the United States 101
4.4.1 Composition of the poor 103
4.5 Other dimensions of poverty 107
4.5.1 Poverty spells and the permanence of poverty 107
4.5.2 The underclass 108
4.5.3 International comparisons of poverty rates 109
4.6 Other issues in the measurement of poverty 112
4.6.1 Equivalence scales 113
4.6.2 Choice of a price index 114
4.6.3 The treatment of taxes 115
4.6.4 The treatment of noncash government benefits 116
4.6.5 The role of household wealth 119
4.6.6 Consumption-based measures of poverty 120
4.6.7 The accounting period 121
4.6.8 Other issues 122
4.7 Summary 123
4.8 References and bibliography 125
4.9 Discussion questions and problem set 130
Notes 132
Chapter 5 Household Wealth 134
5.1 Introduction 134
5.2 What is household wealth? 135
5.2.1 Wealth and well-being 135
5.2.2 Marketable wealth 136
5.2.3 Other definitions of household wealth 140
5.3 Historical time-series data on household wealth and its composition 141
5.3.1 Trends in average wealth 142
5.3.2 Changes in wealth composition 143
5.3.3 Homeownership rates 146
5.4 Wealth inequality in the United States 147
5.4.1 Methods used to estimate wealth inequality 148
5.4.2 Long-term trends in household wealth inequality in the United States 150
5.4.3 Changes in wealth inequality, 1962-2004 154
5.4.4 The Forbes 400 166
5.5 International comparisons of household wealth distribution 167
5.5.1 Comparisons of long-term time trends 167
5.5.2 Comparisons of recent trends 168
5.6 Summary 171
5.7 References and bibliography 172
5.8 Discussion questions and problem set 176
Notes 177
Chapter 6 Economic Mobility 180
6.1 Introduction 180
6.2 Mobility measures 180
6.2.1 Measuring intergenerational mobility 180
6.2.2 The Shorrocks measure and other measures of lifetime mobility 181
6.3 Mobility over the time 184
6.3.1 Income mobility 184
6.3.2 Earnings mobility 188
6.3.3 Other dimensions of mobility 189
6.4 Intergenerational mobility 189
6.4.1 Results for the United States 190
6.4.2 Mechanisms of transmission 194
6.4.3 International comparisons 195
6.5 Wealth mobility 197
6.6 Summary 198
6.7 References and bibliography 200
Notes 204
Part II Explanations of Inequality and Poverty 205
Chapter 7 The Labor Force, Employment, and Unemployment 207
7.1 Introduction 207
7.2 Basic concepts of the labor force, employment, and unemployment 208
7.2.1 Employment 208
7.2.2 Unemployment 209
7.2.3 The labor force 209
7.2.4 Estimating employment statistics 209
7.3 Labor force participation rates 210
7.3.1 LFPR by gender, race, and age 211
7.3.2 Two-earner households 216
7.3.3 Educational attainment of the labor force 217
7.4 The industrial and occupational composition of employment 219
7.5 Measures of unemployment and historical trends 221
7.6 The incidence of unemployment 226
7.6.1 Jobless rates by demographic characteristic 226
7.6.2 Unemployment by industry, occupation, and region 229
7.7 Types of unemployment 232
7.7.1 Frictional unemployment 232
7.7.2 Seasonal unemployment 233
7.7.3 Structural unemployment 234
7.7.4 Deficient demand (Keynesian) unemployment 235
7.7.5 The debate over the causes of unemployment 236
7.8 Summary 238
7.9 References and bibliography 240
7.10 Discussion questions 243
Notes 243
Chapter 8 The Role of Education and Skills 246
8.1 Introduction 246
8.2 The human capital model 247
8.2.1 The rate of return to human capital 248
8.2.2 On-the-job training 251
8.2.3 Additional implications of the human capital model 254
8.3 Earnings, schooling, and experience 258
8.3.1 Rates of return to schooling 260
8.3.2 Lifetime earnings 267
8.4 The schooling-earnings function* 269
8.4.1 The extended earnings function* 272
8.5 Ability and earnings 273
8.5.1 Estimates of the ability effect* 275
8.5.2 The nature vs. nurture controversy 276
8.6 Productivity and earnings 279
8.6.1 Experience, productivity, and earnings 279
8.6.2 Other interpretations of the relation between schooling and earnings 281
8.7 Earnings inequality and human capital* 286
8.8 Summary and concluding remarks 288
8.9 References and bibliography 291
8.10 Discussion questions and problem set 296
Notes 297
Chapter 9 Unions, Dual Labor Markets, and Structural Models of Earnings 301
9.1 Introduction 301
9.2 The role of labor unions 303
9.2.1 A brief history of trade unionism in the United States 303
9.2.2 Trends in union membership 305
9.2.3 The economic role of labor unions 310
9.2.4 The effect of unions on wages: The evidence 315
9.3 Segmented labor markets 319
9.3.1 Internal labor markets 319
9.3.2 The dual labor market model 322
9.3.3 An evaluation of labor market segmentation 325
9.4 Industrial composition and earnings inequality* 326
9.4.1 State and regional differences in inequality 326
9.4.2 Regional differences in income levels 328
9.4.3 Industrial composition and rising earnings inequality of the 1980s 329
9.5 Industry wage differentials* 331
9.5.1 Explanations of inter-industry wage differences 331
9.5.2 Recent trends and efficiency wage theory 336
9.6 Occupational wage differentials 339
9.6.1 Historical studies 339
9.6.2 Trends in the United States in the twentieth century 340
9.6.3 Rising skewness at the top 342
9.7 Summary and concluding remarks 343
9.8 References and bibliography 346
9.9 Discussion questions 352
Notes 353
Chapter 10 The Role of Savings and Intergenerational Transfers in Explaining Wealth Inequality 355
10.1 Introduction 355
10.2 The basic lifecycle model 356
10.2.1 Age-wealth profiles 357
10.2.2 Longitudinal analyses* 359
10.2.3 Simulation and regression analysis* 361
10.3 Extensions of the lifecycle model 363
10.3.1 The role of uncertainty about death and lifetime annuities 364
10.3.2 The role of pension and social security wealth 364
10.3.3 The bequest motive 366
10.3.4 Precautionary savings and liquidity constraints 371
10.4 Intergenerational equity 372
10.4.1 Social security annuity and transfer wealth 372
10.4.2 Private intergenerational transfers 375
10.4.3 Generational accounting 376
10.5 Summary and overall assessment 377
10.6 References and bibliography 379
10.7 Discussion questions 385
Notes 385
Chapter 11 Sources of Rising Earnings Inequality* 386
11.1 Introduction 386
11.2 Skill-biased technological change 387
11.3 The IT revolution 389
11.4 Growing international trade and immigration 390
11.5 The shift to services 393
11.6 Institutional factors 394
11.7 Outsourcing and downsizing 395
11.8 Changes in the distribution of schooling and ability 395
11.9 Time trends in key explanatory variables 396
11.10 Econometric results 405
11.11 Summary and concluding remarks 408
11.12 References and bibliography 410
Appendix 11.1 Data sources and methods 416
Notes 417
Part III Discrimination 419
Chapter 12 Discrimination: Meaning, Measurement, and Theory 421
12.1 Introduction 421
12.2 The meaning of discrimination 423
12.2.1 The Blinder-Oaxaca decomposition* 424
12.2.2 Pre-labor market discrimination 425
12.3 Theories of discrimination: an overview 429
12.4 Taste for discrimination 430
12.5 Statistical discrimination 434
12.6 The racial stigma model 436
12.7 The Marxian model 437
12.8 Overcrowding model of occupational segregation 438
12.9 Summary 440
12.10 References and bibliography 441
Notes 443
Chapter 13 Racial Discrimination: Progress and Reversal for Black Americans 445
13.1 Introduction 445
13.2 Trends and status report on racial inequality 446
13.2.1 The earnings gap: have African American workers made gains on whites? 446
13.2.2 Labor force participation and unemployment 449
13.2.3 Family income, poverty, and wealth 453
13.2.4 Hispanics 457
13.3 Migration from the South 460
13.4 Progress in educational attainment 461
13.4.1 The role of educational gains on the earnings gap* 463
13.4.2 Quality of schooling* 464
13.4.3 Returns to schooling for blacks and whites 465
13.4.4 Hispanic Americans 468
13.5 Changes in family structure among black Americans 469
13.6 Public policy and discrimination 471
13.6.1 Public policy programs 472
13.6.2 The effectiveness of the anti-discrimination programs 474
13.7 Summary and conclusion 478
13.8 References and bibliography 480
13.9 Discussion questions and problem set 485
Notes 486
Chapter 14 The Gender-Wage Gap and Occupational Segregation 488
14.1 Introduction 488
14.2 The wage gap and labor force participation trends 488
14.2.1 Time trends 490
14.2.2 Labor force participation patterns 491
14.2.3 Explanations of the rising LFPR of women* 492
14.3 Explanations of the wage gap 494
14.3.1 Human capital differences 494
14.3.2 Occupational segregation 503
14.4 The role of public policy 509
14.4.1 The effectiveness of the anti-discrimination programs 509
14.4.2 Comparable worth 511
14.5 Other issues* 513
14.5.1 Effects of wives' earnings on family income inequality 513
14.5.2 The feminization of poverty 514
14.5.3 International comparisons 516
14.6 Summary 517
14.7 References and bibliography 518
14.8 Discussion questions and problem set 525
Notes 525
Part IV The Role of Public Policy on Poverty and Inequality 527
Chapter 15 Public Policy and Poverty Alleviation 529
15.1 Introduction 529
15.2 A brief history of income maintenance programs 529
15.2.1 Early developments 530
15.2.2 The New Deal 530
15.2.3 Post-war developments 532
15.2.4 Housing assistance 533
15.2.5 Public expenditures on major federal programs 534
15.3 Unemployment insurance (UI) 536
15.3.1 A brief description of the UI system 536
15.3.2 Time trends in UI benefits 538
15.3.3 Incentive effects of the UI system 540
15.4 The social security system 541
15.4.1 Determination of the social security benefit 542
15.4.2 Incentive effects on labor supply 546
15.5 The welfare system 546
15.5.1 The workings of AFDC and TANF 547
15.5.2 Incentive effects of the welfare system 550
15.6 Work programs 554
15.6.1 Effectiveness of the work programs 555
15.7 The minimum wage 556
15.8 Conclusion and overall assessment of government programs 559
15.8.1 Effects on poverty 560
15.8.2 Proposals for reform 562
15.9 References and bibliography 564
15.10 Discussion questions and problem set 570
Notes 571
Chapter 16 The Redistributional Effects of Public Policy 574
16.1 Introduction 574
16.2 Equality as a social goal 574
16.2.1 Arguments in favor of promoting equality 574
16.2.2 Arguments against promoting equality 577
16.3 The structure of tax systems 579
16.3.1 Proportional, progressive, and regressive tax structures 579
16.3.2 Inequality measures and the tax system 583
16.3.3 Vertical versus horizontal equity 586
16.4 Distributional consequences of the U.S. tax system 587
16.4.1 Tax schedules for the personal income tax 587
16.4.2 Effective tax rates for the personal income tax 591
16.4.3 The payroll tax 593
16.4.4 Other federal taxes 594
16.4.5 State and local government taxes 595
16.4.6 The overall tax bite? 596
16.4.7 International comparisons of taxation 598
16.4.8 The overall effective tax rate structure in the United States 600
16.5 The negative income tax and the EITC 608
16.6 The distributional effects of government expenditures 611
16.7 Summary and conclusion 616
16.8 References and bibliography 619
16.9 Discussion questions and problem set 622
Notes 623
Index 627
