Inequality and OccupyJerry DavisRoss School of BusinessRoss School of BusinessFebruary 8, 2012
Roadmap
• What do we mean by “inequality”?• Is inequality bad?q y• How does inequality vary across countries?• How has it changed over time?• What causes inequality?• How does finance fit in?
WHAT DO WE MEAN BYWHAT DO WE MEAN BY “INEQUALITY”?
A measure of income inequality: The Gini coefficient
• Measures the extent to which the distribution of income (or consumption) among individuals (or households) deviates fromhouseholds) deviates from a perfectly equal distribution– The percentage of area that
lies between the Lorenzlies between the Lorenz curve and a line of perfectly equalityVaries between 0 (perfect– Varies between 0 (perfect equality) and 1 (perfect inequality)
4
IS INEQUALITY BAD?IS INEQUALITY BAD?
6
Is inequality just the price we pay for prosperity?
Brazil
Chile
Colombia
HondurasPanama
South Africa
60
Opposite: equality generally increases with Argentina
China
Guatemala
Malaysia
Mexico
Peru
Uruguay
Venezuela
50
GDP per capita (and with greater democracy)
Cameroon
Congo
Cote d'Ivoire
Ghana
Hong Kong
IsraelJordanMali
Morocco
Philippines
Portugal
Russian Fed
SenegalSingapore
Sri Lanka
Thailand
Tunisia
Turkey
United States
Uruguay
Vietnam
40ni
Coe
ffici
ent
AlgeriaAustralia
Austria
Belarus
Bulgaria
Burundi Canada
C ti
Egypt
France
Greece
India
IndonesiaIreland
Italy
South KoreaNetherlands
New Zealand
Pakistan
Poland
Serbia
Spain
SwitzerlandTogo
Ukraine
United Kingdom
30G
in
Austria
Belarus
Croatia
Czech Republic
Denmark
FinlandGermany
HungaryIceland
Japan
Norway
Romania
Slovakia
Slovenia
Sweden
0
13
20
0 10,000 20,000 30,000 40,000GDP per capita (constant 2000 US$)
HOW DO COUNTRIES DIFFER INHOW DO COUNTRIES DIFFER IN THEIR LEVELS OF INEQUALITY?
Inequality varies among different “flavors” of capitalism
United States
45
Portugal
40
nt
United KingdomGreece
Italy
Spain
35
ni C
oeffi
cien
Continental Europe
Market Based
Mediterranean
Australia
CanadaSouth Korea
Austria
BelgiumFrance
Ireland
Netherlands
Norway
Spain
30
Gi Co t e ta u ope
Asia
Japan Denmark
Finland
Sweden
Austria
Germany
25
0 5 10 15 20 25
Social Democratic
16
0 5 10 15 20 25
Ratio of Top 10 Employers to Labor Force
HOW HAS INEQUALITY CHANGEDHOW HAS INEQUALITY CHANGED OVER TIME IN THE US?
% of the nation’s annual income going to the top 1%
Income gains in the U.S. since 1979
19
Q: Hasn’t this happened everywhere else (e.g., because of the Internet)?
4535
40oe
ffici
ent
303
Gin
i Co
25
1955 1965 1975 1985 1995 2005A: No. There is
1955 1965 1975 1985 1995 2005Year
Canada United KingdomUnited States
no general trend toward greater inequalityinequality
WHAT CAUSES INEQUALITY?WHAT CAUSES INEQUALITY?
Is it just the decline of unions?Inequality and Union Density, 1950 – 2006
48
035
Forc
e
44ci
ent
2530
s to
Tot
al L
abor
NO: union density has
40G
ini C
oeffi
c
20on
ized
Wor
kers density has
declined every year since 1958 (almost)
36
15R
atio
of U
nio ( )
As of Jan. 2010, most union
3210
1950 1960 1970 1980 1990 2000 2010Year
members are public employees
22
Union Density Income Inequality
U.S. income inequality and 10-firm employment concentration, 1950 - 2008
488
rce
44
cien
t
6
ers
to L
abor
For
c
r = -.89
40
Gin
i Coe
ffic
4
Top
10 E
mpl
oye r .89
362
Rat
io o
f T
320
1950 1960 1970 1980 1990 2000 2010Year
Employment Concentration Income Inequality
23
Income inequality and employment concentration by year, 1950 – 2006
1994
199719992000
2001 20022003
2004
20054619611992
19931994
199519961998 2006
44
The 90s: quest for shareholder value induces downsizing, outsourcing
1950
19511952
1953
1954
1955
19561957
1958
1959 1960
1961
19621963 1964
1965
19661985
1986
1987 1988
1989
1990 1991
199242
Gin
i Coe
ffici
ent
The 60s: Conglomerate mergers increase concentration; inequality declines
1967
19691970
19711972
1973
19751976
19771978
19791980
1981
19821983
1984
40
The 80s: bust-up takeovers split conglomerates back into
1968
196919741975
38
3 3.5 4 4.5 5% Employed by 10 Largest Firms
parts; inequality increases
24
% Employed by 10 Largest Firms
Around the world, big employers are associated with low inequality
South AfricaBrazil
Chil
Colombia60
L ti Q t
Zimbabwe
China
Malaysia
Argentina
Chile
Peru
Venezuela
50
Asia Alley
Latin Quarter
North North America
United States
Cote d'IvorieCameroon
Ghana
Morocco
Senegal
TunisiaSri Lanka
Philippines
SingaporeThailand
Russian Federation
Mexico
Portugal
Turkey
40
Coe
ffici
ent
Old Europe
Canada
Australia
New ZealandAlgeria
Egypt
Indonesia
India
S KoreaBulgaria
Croatia
Poland
Serbia
Ukraine
BelgiumSwitzerlandSpain
France
United Kingdom
GreeceIreland
Italy
Netherlands30
Gin
i
Nordic Niche
Japan
Belarus
Czech Rep
Croatia
Hungary
RomaniaSerbia
Slovenia
Slovakia Denmark
FinlandIceland
Norway Sweden
AustriaGermany
3 Nordic Niche
Commie Corner
20
0 5 10 15 20 25 30 35Ratio of Top 10 Employers to Total Labor Force
Employment concentration: Colombia vs. Denmark
COLOMBIA DENMARK
Company Name Industry Class Employees Company Name Industry Class Employees
BANCOLOMBIA SA BANK 7,027 ISS AS INDUSTRIAL 273,534
INVERALIMENTICIAS SA INDUSTRIAL 6 798 GROUP 4 FALCK AS INDUSTRIAL 246 366 INVERALIMENTICIAS SA INDUSTRIAL 6,798 GROUP 4 FALCK AS INDUSTRIAL 246,366
TEXTILES FABRICATO TEJICONDOR INDUSTRIAL 5,744 A.P. MOLLER-MAERSK A/S TRANSPORT. 62,300
BANCO DE BOGOTA SA BANK 4,800 CARLSBERG AS INDUSTRIAL 31,703
SURAMERICANA DE INVERSIONES SOTH FINANCIAL 4 325 TDC AS UTILITY 20 573 SURAMERICANA DE INVERSIONES S. FINANCIAL 4,325 TDC AS UTILITY 20,573
CIA COLOMBIANA DE TEJIDOS - CO INDUSTRIAL 3,435 NOVO NORDISK AS INDUSTRIAL 20,285
ACERIAS PAZ DEL RIO S.A. INDUSTRIAL 2,834 DANFOSS AS INDUSTRIAL 17,543
BAVARIA SA INDUSTRIAL 2 729 DANSKE BANK AS BANK 15 382 BAVARIA SA INDUSTRIAL 2,729 DANSKE BANK AS BANK 15,382
COMPANIA DE CEMENTO ARGOS S.A. INDUSTRIAL 1,798 DANISCO AS INDUSTRIAL 10,634
CARTON DE COLOMBIA INDUSTRIAL 1,464 FALCK A/S INDUSTRIAL 10,241
Total 40,954 Total 708,561
Labor Force 22,771,433 Labor Force 2,834,422
26
Emp Concentration 0.18% Emp Concentration 25.00%
HOW DOES FINANCE FIT IN?HOW DOES FINANCE FIT IN?
1. Finance was responsible for corporate restructuring favoring “vertical dis-integration”favoring vertical dis integration– Hostile takeovers in the 1980s– Downsizing and outsourcing in the 1990s ff.
I th d W ll St t i t i f D k i t– In other words: Wall Street is turning us from Denmark into Colombia
2. Financiers are disproportionately represented at the p p y ptop of the 1%– Kaplan and Rauh: The top 25 hedge fund managers in 2004 earned
more than all the CEOs of the S&P500 combinedmore than all the CEOs of the S&P500 combined– “By 2007, the top five investors likely made more than the combined
five hundred executives at publicly-traded companies in the U.S.”
Oops…make that 101 jobs
BUT DON’T PEOPLE MOVE UP INBUT DON T PEOPLE MOVE UP IN THE WORLD ALL THE TIME?
The path to a comfortable middle-class life
To do list Go to college so that you can get a corporate job in
a growth sector (e.g., high tech)
Buy the biggest house you can afford
Invest your 401(k) in a low-cost index fund
Retire to Boca in financial comfort
32
Jobs in “Computer and electronic products manufacturing” in the US have declined by 750,000 since 2001
1900 0
2000.0
Computer and electronic products
1700.0
1800.0
1900.0
1400 0
1500.0
1600.0
Computer and electronic products
1200.0
1300.0
1400.0
1000.0
1100.0
Source: US Bureau of Labor Statistics
The number of jobs in the U.S. “Information” service sector has declined by 1 million since 2001
3500
4000
2500
3000
Information sector (total)
1500
2000
Publishing (except Internet)
Motion picture and sound recording
Broadcasting
Telecomms
Data processing and hosting
1000
1500 Data processing and hosting
Other information services
0
500
Source: US Bureau of Labor Statistics
America’s most innovative companies do not employ very many people
• Apple: 60,400• Google: 32 467
• Kroger: 338,000• Google: 32,467• Facebook: 3000• Amazon com: 33 700
• Jobs lost in Jan. 2009: 598 000• Amazon.com: 33,700
• Cisco: 71,825Mi ft 90 000
598,000[That’s 200 Facebooks]
• Microsoft: 90,000
TOTAL 291 392TOTAL: 291,392
Oops
Thankfully, markets always go up eventually…
S&P500S&P500 01/03/2000: $1469.25
Today:$1349.96
The path to a comfortable middle-class life
To do list Go to college so that you can get a corporate job in
a growth sector (e.g., high tech)
Buy the biggest house you can afford
Invest your 401(k) in a low-cost index fund
Retire to Boca in financial comfort
39