The Economics of Inequality – Thomas Piketty

Chapter 1: The Measurement of Inequality and Its 

  • The fact that inequality of household income is greater than wage inequality is quite common. Nonwage income and especially capital income are much more unequally distributed than wages.
  • the logic of the capitalist system was to increase inequality between social classes— between capitalists and proletarians— constantly.

Chapter 2: Capital-Labour inequality

  • A nation produces what it produces using a certain quantity of capital (machinery, infrastructure, etc.) and a certain quantity of labor (hours worked). What determines the share of output going, respectively, to capital (in the form of dividends and interest paid to the owners of capital) and labor (in the form of wages paid to workers), and what can government do to redistribute these shares?
  • The capital-labor split is a purely distributive matter. Economists call it fixed coefficients: in order to produce 1 unit of output, exactly 1 unit of capital and n units of labor are required.
  • Redistribution: difference between the two types of redistribution, direct or fiscal, is that the contribution of firms is not calculated in the same way: direct redistribution requires firms to contribute to redistribution in proportion to the number of workers they employ, whereas fiscal redistribution requires firms to contribute only in proportion to their profits.
  • The intellectual and political conflict over redistribution is about more than just the measurement of elasticities.
  • a low price of labor and high price of capital may not be the worst way of encouraging firms to use less capital and more labor and encouraging consumers to consume more labor-intensive goods and fewer capital-intensive goods.

Chapter 3. Inequality of Labour Income

  • The instruments suitable for dealing with labor income inequality go by other names: taxation of top incomes and fiscal transfers to those with lower incomes; policies to improve education and training; minimum wages; and measures to prevent employment discrimination, strengthen unions, and establish wage schedules, to name a few.
  • Different workers contribute different amounts to a firm’s output. Different individuals are characterized by different endowments of human capital, that is, by different capacities to contribute to the production of goods and services demanded by consumers.  Then the laws of supply and demand determine the wages associated with each level of human capital and thus the distribution of labor income. Changes in the relative supply of and demand for different levels of human capital provide reasonably satisfactory explanations.
  • Inequality has risen not simply because the educational system has not kept up with the demand for human capital from new sectors and new technologies (as was the case in the first half of the nineteenth century), but rather because technological progress has placed a premium on individual qualities that have always been unequally distributed. These innate inequalities went unnoticed earlier, however, because traditional technologies made more routine demands and did not require these higher-level talents. This hypothesis goes by the name “skill-biased technological change”.
  • if doctors were not allowed to earn ten times as much as workers to compensate them for their long years of study, there would be fewer doctors to care for the workers and pay taxes. The theory of human capital investments
  • the growth of wage inequality stems from internal structural changes in the production process within the developed countries
  • the best remedy for inequality is to make fiscal transfers to social groups whose human capital endowments are too low while of course avoiding any interference in the process of production.
  • unions use to increase total labor income and decrease inequality between workers are not tools of efficient redistribution.
  • But unions do not have the power to levy taxes and make transfers. Historically, the role of unions has been to intervene in conflicts of this type: when the state fails to play the redistributive role that the unions believe it should play, they step in and use the resources at their disposal: direct redistribution through struggle in the workplace.
  • low-skilled jobs can become so unattractive that an increase in the minimum wage can increase the labor supply and the level of employment.
  • Individual judgments of fairness are frequently quite important in the wage-setting process
  • wage inequality increases when workers believe that employers are highly likely to evaluate their productivity correctly, because those who score low accept their fate, while those who score high will threaten to quit as a tactic to pressure their employer for higher pay.
  • France suffers from an extreme form of “republican elitism”: the French tend to overestimate the actual difference in productivity between a top manager who has graduated from an elite school and an ordinary worker.  Any difference in pay is justified by the fact that both had access to l’école républicaine, the supposedly egalitarian public educational system— perceived as egalitarian despite the fact that the state spends ten times as much on a graduate of the elite École Polytechnique as on an average student. The French belief in educational meritocracy is also reflected in the relative stability of pay differences after graduation, compared with a much higher degree of variability in Germany (Morrisson, 1996, p. 111). Although the German system is less inegalitarian, it is probably just as good at offering incentives.

Chapter 4. Instruments of Redistribution

  • modern fiscal redistribution depends on a variety of taxes (such as income tax, value-added tax, social charges), transfers (such as family allowances, unemployment insurance, guaranteed minimum income, and pensions), and expenses paid directly by the government (for health, education, and so on).
  • As noted previously, typical examples include discrimination and monopsony power in the labor market. It is not only insulting but also inefficient to offer fiscal compensation to the victim of unjust discrimination or exploitation by an employer. Inequality of this kind requires redistributive instruments capable not only of redistributing income but also of correcting the market failures responsible for them. Such instruments include affirmative action, minimum wage legislation, and other direct labor market interventions. Education and training policies can also serve as powerful instruments of efficient redistribution

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