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December 09, 2014

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paulc156

Except that inequality is often compared against that in the US, the most unequal of the advanced economies and surely their productivity is substantially above ours, and has been for most of the time since these things were measured. Is the US just an outlier, a statistical anomaly or are there specific factors countervailing the above mechanisms and hence neutralising the negative effects of inequality?

Luis Enrique

the other side of 4. is that I imagine greater inequality is associated with larger, more concentrated 'bad' neighbourhoods, and you can tell stories about negative agglomeration effects, intergenerational transfer etc.

Luis Enrique

I have cited this paper here before, but one could extend the efficiency arguments about talented women and ethnic minorities being overlooked, from this paper

http://klenow.com/HHJK.pdf

to talented people born poor in highly unequal societies.

gastro george

7. High inequality should correspond to a plentiful supply of low-paid workers, so investment in mechanisation/automation is lower.

An Alien Visitor

George makes a good point, plentiful supplies of cheap labour motivate capitalists to employ them over more productive machines.

But isn't the question itself wrong, who gives a shit about productivity when the products are going to a few? Less productivity and more equality could mean the majority get more.

Martin S

Might inequality depress entrepreneurialism among the non-rich and encourage rent-seeking among the rich?

rogerh

"....how does a larger gap of outturn income reduce productivity growth?". Indeed how? Whilst we do have income gaps and we do have reduced productivity I am not sure the one causes the other. Hard to see how a zero-hour delivery driver's productivity is much affected by her reading the FT and misery and job dissatisfaction is and was pretty common. The suggested mechanisms seem pretty weak to me.

The question arises 'what is so great about productivity (in the UK)' when seen from the viewpoint of a global capitalist. From this perspective the UK is a place to hire hot shot financiers and lawyers and a competent distribution network and nothing else. Given this it hires from the upper decile and the mid-range and ignores the rest. No need to train or improve either group - just hire better when needed. Essentially cherry-picking which suggests to me some element of old-style employment markets has disappeared. Given a government attitude - leave it to the market - the result is unsurprising - a market with big empty spaces.

Noah Carl

The latest evidence suggests inequality does not reduce trust: http://www.ncbi.nlm.nih.gov/pubmed/23347481

chris

@ Carl - Thanks for that. However, other international panel evidence suggests it does, at least for developed economies:
http://www.rcfea.org/RePEc/pdf/wp25_14.pdf
@paulc156 - this is a huge issue. Remember, though, that in the 50s and 60s (when the US's economic performance was good), income inequality in the US was not especially high.

Icarus Green

I think the US anamoly may be explained by the fact that the parts of the US which contribute to growth most are relatively more equal 'societies' than the rest of the country.

I don't have the stats to hand but the coasts contribute more to US GDP than the south. And certainly a lot more in terms of productivity.

I would be very interested to see if New York and California had more equal gini coeffs than Louisiana and Mississippi.

If we were to do a hypothetical experiment and lop off the coasts from the south we'd end up having one country looking a lot more like other Western countries and a Republican midwest and south which would have a lot more in common with Central Asia.

Icarus Green

More generally to the point of the article, I suspect societies that are highly unequal have an establishment that are a lot more able to stop the state from redistribution e.g. Thailand. This is a bad thing.

People tend to see redistribution as an efficiency and productivity killer. I have no idea why. Maybe at a micro level I suppose, but at a macro level its indisputable that societies that redistribute more tend to do better than those that don't (with the exception of communist countries where state ownership of everything kills off incentives completely).

Why? Here are some reasons I've considered:

1. Redistribution takes money away from those unwilling to spend or invest it and gives to to people with high marginal propensities to consume. The multiplier effects from this consumption stimulus boost economic activity. Much like a car, the engine is now running, and of course the car (economy) will eventually cover distance (economic development).

2. It eliminates poverty traps. People stuck in poverty cannot escape it even with hard work and the best of intentions. They need to be able to build up a stock of capital to leverage into a productivity enhancing investment like education or a tractor for their farm or something - this is obviously good for society as a whole. (Microfinance is an alternative to this).

3. Redistribution is a great way to raise money for more neutral public investments like schools, roads, bridges, R&D, university funding etc. You are simply not going to raise much money taxing the poor and the middle class. Thats why a lot of the tax take is collected from the rich - they just have more money. Rolling out free primary and secondary education to the peasants probably did more to boost long term growth than most other policies - that had to be paid for by the rich at the start.

4. Redistribution greatly reduces the risk of plutocracy. A political elite that caters to the interests of a minority obviously does not have incentives to improve outcomes for the majority, particularly when the interests of the minority clash with the majority e.g. climate change.

Of course, since the 70s we havent had any real redistribution. We've basically been taking money from upper middle class bankers and lawyers and giving it to the poor. The people that make most of their income from land, financial assets or rents hardly pay any taxes. Thats why offshore tax havens and places like Luxembourg exist where a 1/3 of the world's wealth lies. These could easily be closed down by politicians but the aristocracy would castrate them if they did. We need to tax wealth/property not income and eliminate the use of shell companies, offshore trusts and the like. The serve no social purpose other than to enable tax evasion. Its a joke.

davidjc

Not sure about the more equal US coasts theory. New York City and Silicon Valley must have most of the mega rich and the poorest get similar levels of welfare all over.

magistra

Yesterday I was at a seminar about peasant technology and productivity in the High Middle Ages (1000-1300), which is a seriously unequal type of society. The speakers were arguing that peasant productivity was higher on their own smallholdings than on the lord’s demense that they were required to work on. The reason wasn’t just higher labour input on the smallholdings, but also more effective techniques. In particular, they were arguing that there were a lot of micro-developments of tools made “on the ground” by the people using them. Lords, who were just interested in grain crops that they could sell off for profit, didn’t much care about such hand tools. (They also didn’t think much of the peasants generally).

In an unequal society, the people at the top are more prone to thinking that they know everything and that the workers at the bottom are just stupid, ignorant and lazy. If most innovation and improvements in productivity in fact result from cumulative minor changes by those doing the work, you’re losing a lot of know-how by ignoring them. And that also fits in with the managerialism that says that you need to import overpaid consultants to tell you what your workforce could already say if you’d listen to them.

gastro george

@magistra +1

c.f. also the classic Toyota method of bottom-up product development.

marcel proust

1) calls to mind the Chicago Bulls basketball team in the 1980s and 1990s, i.e., the Michael Jordan years. The story is that it wasn't until Coach Phil Jackson was able to persuade MJ that he, MJ, had to get everyone on the team to engage and stop trying to do everything himself, that the team became dominant. Further, even after that, in games where MJ took over, it was clear that his teammates stood back, and did little, expecting him to do it more. Typically in those games, the team did not to so well.

(I lived in Chicago for most of the MJ years, so ... It was a good location in space-time to be a basketball fan.)

Mary

When a fairly sizable portion of your population is working 2 or 3 minimum wage part-time jobs, which are very difficult to juggle and leave people exposed to high risk of financial disaster, productivity is not going to be high. People's health is affected. People's mood is affected. Their ability to deal with the usual small misfortunes is greatly reduced. It's a scandal that in 2014 America that any adult working 40 hours a week can't afford a small apartment, a car, insurance and utilities.

Ken Schulz

George and the Alien are on the track here. Technology is the principal factor in productivity, compared to which trust, motivation, effort, etc are rounding errors. Introduction of more productive technologies is attractive when the cost of labor is relatively high, and when the fixed costs can be amortized over large production runs, i.e. there is a mass market, i.e. lots of well-paid workers. (Though I am using the language of goods manufacture, the same factors operate in the provision of services.) On the other hand, "who gives a shit about productivity when the products are going to a few?" - the rich don't buy yachts because they are cheap transportation (...positional goods, Veblen goods, take your pick).
(Later) Not being of the yachting set, I did a little looking around; found a yacht-show report in which all the builders were touting features. Only one mentioned production efficiency and automation; that one (Cheoy Lee) has a significant business in commercial vessels, where costs no doubt are a significant element.

Simon Halliday

On the technology point, there are some good papers coming out looking at how workers will resist adoption of more productive technologies when the distribution of the benefits of those technologies is opaque. For example, the work by Eric Verhoogen (and others) here on soccer ball manufacturing in Pakistan. http://www.columbia.edu/~ev2124/research/ACCKV20140528.pdf

Noah Carl

@ Chris -- Interesting, thanks.

Bob

Excellent post. My question is - if CEO pay must be high to get the best talent - and assuming talent is important up and down the organization - why is it not also important to pay more at the median even if this brings down top incomes?

For my money the puffery is coming from corporate flacks who beat their breast while saying "our people are our most important asset" and then F%^k them at every opportunity.

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